Third-Party Funding in International Arbitration: Contemporary Discussions

International arbitration has increasingly become a preferred method for resolving commercial disputes due to its efficiency, flexibility, and the ease of enforcement of arbitral awards. However, the high costs associated with arbitration proceedings can limit access to justice, particularly for financially weaker parties. As a solution, third-party funding (TPF) has emerged as a popular mechanism, allowing external financiers to cover litigation costs in exchange for a share of the awarded amount. Nevertheless, TPF has also raised complex legal and ethical debates.

One major concern is the potential encouragement of frivolous claims by funders. Although it is argued that funders usually conduct rigorous due diligence and invest only in meritorious cases[1], there is a possibility that some funders might finance weak claims to enhance settlement pressure against respondents[2]. Thus, while TPF can promote access to justice, it also necessitates careful procedural safeguards.

Another critical issue is the impact of TPF on security for costs. Arbitrators generally have the authority to order security for costs, but the presence of TPF raises the question of whether such orders should become more frequent. Although the existence of TPF alone should not automatically justify a security for costs order, tribunals should assess various factors, including the claimant’s financial situation and the funder’s commitments[3]. This nuanced approach aims to balance the claimant’s access to justice with the respondent’s right to recover costs if successful.

Disclosure of TPF arrangements is another hotly debated topic. The potential conflict of interest between arbitrators and funders makes it crucial to disclose the existence and identity of funders[4]. However, disclosure should be limited to information necessary to ensure the independence and impartiality of the tribunal. Full disclosure of funding agreements could breach confidentiality and privilege rules, especially considering doctrines like “work product privilege” and “common interest privilege” recognized in various jurisdictions.

Moreover, discussions have arisen regarding whether the funder’s share should be considered part of recoverable arbitration costs. Prevailing opinion suggests that such recovery should generally be rejected, as the funder’s share is a product of a private contractual arrangement between the claimant and the funder, independent of the respondent[5]. However, in exceptional cases where the respondent’s misconduct forced the claimant into third-party funding, the funder’s fee might be considered a consequential loss.

Finally, under Turkish law, there have been concerns whether TPF could constitute illegal “usury” under Article 241 of the Turkish Penal Code. However, it is generally accepted that TPF is not usury since it involves a business relationship based on risk-sharing rather than a simple high-interest loan[6].

Conclusion

Third-party funding plays a vital role in facilitating access to arbitration for financially disadvantaged parties. Nevertheless, its introduction into arbitral proceedings demands a delicate balance between promoting justice and safeguarding the integrity of the process. Proper disclosure, cautious consideration of security for costs, and respect for privilege and confidentiality are essential to maintaining this balance.

References

[1] Bench Nieuwveld, Lisa/ Sahani, Victoria Shannon, Third-Party Funding in International Arbitration, Second Edition, Wolters Kluwer, 2017, p. 45.

[2] von Goeler, Jonas, Third-Party Funding in International Arbitration and its Impact on Procedure, Kluwer Law International, 2016, p. 98.

[3] Süral Efeçınar, Ceyda, “Uluslararası Tahkimde Üçüncü Kişi Finansmanının Masraflar İçin Teminat Gösterilmesi Kararının Verilmesine Etkileri”, DEÜHF Dergisi, 2018, p. 55.

[4] Alrashid, Meriam N./Wessel, Jane/Laird, John, “Impact of Third Party Funding on Privilege in Litigation and International Arbitration,” Dispute Resolution International, Vol. 6, No. 2, 2012, p. 120.

[5] Mert, Baver Mazlum, Milletlerarası Tahkimde Üçüncü Kişi Finansmanı, On İki Levha Yayıncılık, 2019, p. 122.

[6] Günay, Erhan, Tefecilik Suçu, 2. Baskı, Seçkin Yayıncılık, 2014, p. 97.