Third-Party Funding In International Arbitration
Over the past few years third-party funding, where an individual who is not a party to an arbitration provides funds to a party to that arbitration in exchange for an agreed return has become increasingly popular in international arbitration. The funding will cover the funded party's legal costs and expenses incurred in the arbitration; the funder may also agree to pay the other side's costs if the funded party is so ordered thereby providing security for the opponent's costs.
This development has given rise to a number of potential issues and concerns. Although third-party funding brings considerable benefits, such as improving access to justice, it also carries certain risks and challenges, for example, those relating to conflicts of interest, disclosure and security for costs. Third-party funding is often criticised due to the vague manner in which it is defined. The exact definition of third-party funding can be seen as ambiguous and its legal and ethical implications within international arbitration remain uncertain for some individuals. This uncertainly is exacerbated by the fact that it is often utilised by parties through choice, rather than necessity, as it decreases the level of risk if a claim is unsuccessful.
The recent expansion of third-party funding in international arbitration and the associated uncertainty has driven an increase in regulation, both on a national and an international level. As the market has developed, the range and sophistication of funding products and structures available has broadened. In addition to funding one-off cases, third-party funding is now being used for a broader range of purposes, with the proceeds of the litigation or arbitration being used as collateral. Another recent trend is the development of portfolio funding, where funders provide a funding package that covers a portfolio of cases.
It appears that third-party funding is likely to increase in popularity. As the services of these financiers are better communicated and understood by those in the ADR and the legal industry and its clients interest will continues to grow. As the use of third-party funding has increased, so have the number and range of institutions that are prepared to finance litigation and arbitration. In addition to specialised third party funders, insurance companies, investment banks, hedge funds and law firms have entered the market at the same time as the legal industry is increasingly looking to lessen the financial pressures on litigants and law firms. Prime Dispute will be working closely with these organisations to provide awareness of the benefits.
Prime Dispute, Global Strategy and Corporate Services Director, Yvonne Hanly said: "The need for arbitration finance has attracted a number of providers into the market. Third-party funding is one of the means by which financial hurdles can be overcome. It is now developing into an industry with an increasing number of international corporations embracing this option with a view to freeing up their cash flow. This is a positive development for the commercial world but it requires the industry to recognise the associated strengths, weakness, and opportunities as part of the due diligence process".
Prime Dispute, Operations & Global Dispute Resolution Services Director, Waj Khan said: "It is often the case that the costs incurred with litigation or arbitral proceedings are rather high and can discourage parties from pursuing their claims. The rise in popularity of Third-party funding is also due to the funders’ subject matter expertise which makes the process more efficient, providing for a comprehensive risk assessment as well as a better understanding of pricing. It seems inevitable that the Third-party funding industry as a whole will continue to innovate and evolve, providing valuable opportunities for those involved in arbitration".
Over the past few years third-party funding, where an individual who is not a party to an arbitration provides funds to a party to that arbitration in exchange for an agreed return has become increasingly popular in international arbitration. The funding will cover the funded party's legal costs and expenses incurred in the arbitration; the funder may also agree to pay the other side's costs if the funded party is so ordered thereby providing security for the opponent's costs.
This development has given rise to a number of potential issues and concerns. Although third-party funding brings considerable benefits, such as improving access to justice, it also carries certain risks and challenges, for example, those relating to conflicts of interest, disclosure and security for costs. Third-party funding is often criticised due to the vague manner in which it is defined. The exact definition of third-party funding can be seen as ambiguous and its legal and ethical implications within international arbitration remain uncertain for some individuals. This uncertainly is exacerbated by the fact that it is often utilised by parties through choice, rather than necessity, as it decreases the level of risk if a claim is unsuccessful.
The recent expansion of third-party funding in international arbitration and the associated uncertainty has driven an increase in regulation, both on a national and an international level. As the market has developed, the range and sophistication of funding products and structures available has broadened. In addition to funding one-off cases, third-party funding is now being used for a broader range of purposes, with the proceeds of the litigation or arbitration being used as collateral. Another recent trend is the development of portfolio funding, where funders provide a funding package that covers a portfolio of cases.
It appears that third-party funding is likely to increase in popularity. As the services of these financiers are better communicated and understood by those in the ADR and the legal industry and its clients interest will continues to grow. As the use of third-party funding has increased, so have the number and range of institutions that are prepared to finance litigation and arbitration. In addition to specialised third party funders, insurance companies, investment banks, hedge funds and law firms have entered the market at the same time as the legal industry is increasingly looking to lessen the financial pressures on litigants and law firms. Prime Dispute will be working closely with these organisations to provide awareness of the benefits.
Prime Dispute, Global Strategy and Corporate Services Director, Yvonne Hanly said: "The need for arbitration finance has attracted a number of providers into the market. Third-party funding is one of the means by which financial hurdles can be overcome. It is now developing into an industry with an increasing number of international corporations embracing this option with a view to freeing up their cash flow. This is a positive development for the commercial world but it requires the industry to recognise the associated strengths, weakness, and opportunities as part of the due diligence process".
Prime Dispute, Operations & Global Dispute Resolution Services Director, Waj Khan said: "It is often the case that the costs incurred with litigation or arbitral proceedings are rather high and can discourage parties from pursuing their claims. The rise in popularity of Third-party funding is also due to the funders’ subject matter expertise which makes the process more efficient, providing for a comprehensive risk assessment as well as a better understanding of pricing. It seems inevitable that the Third-party funding industry as a whole will continue to innovate and evolve, providing valuable opportunities for those involved in arbitration".
