Third-party funding (TPF) has emerged as a significant force in the world of international arbitration, fundamentally altering the landscape of dispute resolution. In essence, TPF is a financial arrangement where an external entity, typically a specialized litigation funder, provides financial resources to a party involved in arbitration or litigation proceedings. In return for this financial support, the funder receives a pre-agreed portion of any potential award or settlement obtained by the funded party. This practice has gained considerable traction in recent years, particularly within the realm of international arbitration, primarily due to the ever-increasing costs associated with resolving complex cross-border disputes.

The emergence of TPF has ignited lively debates and discussions across legal, ethical, and regulatory spheres. Proponents champion TPF as a means of enhancing access to justice, enabling parties with limited financial resources to pursue legitimate claims. Conversely, critics raise concerns regarding potential conflicts of interest, the concentration of power in the hands of funders, and the need for robust regulatory frameworks to safeguard the integrity of arbitration proceedings. This comprehensive analysis delves into the intricacies of TPF, exploring its evolution, key players, legal and regulatory landscape, advantages, challenges, and future trends, providing a nuanced understanding of its impact on international arbitration.

Understanding Third-Party Funding:

The genesis of TPF can be traced back to commercial litigation, where it initially evolved as an innovative alternative for financing legal disputes. Over time, its application broadened to encompass arbitration, particularly international arbitration, where the sums involved and the complexity of cases often present significant financial barriers to entry. In the context of arbitration, third-party funders provide capital to claimants who may lack the financial capacity to adequately pursue their claims. This funding can be utilized to cover a wide array of expenses, including legal fees for external counsel, expert witness costs, administrative fees levied by arbitral institutions, and other essential expenditures associated with the arbitration process.

The cornerstone of TPF lies in the allocation of risk. The funder assumes the substantial financial risk of non-recovery, which means that if the claim ultimately fails, the funded party generally bears no obligation to repay the funder the invested capital. This feature makes TPF an attractive option for claimants who are unwilling or unable to risk their own resources on potentially uncertain legal outcomes. In return for assuming this risk, if the claim succeeds and an award or settlement is obtained, the funder receives a pre-negotiated percentage of the recovered amount or a pre-agreed sum. This percentage or sum is typically designed to compensate the funder for the risk undertaken, the capital invested, and the anticipated profit margin.

The terms of TPF agreements can vary considerably depending on the specific circumstances of the case, the financial strength of the claimant, and the risk assessment conducted by the funder. Key elements of TPF agreements typically include the scope of funding, the decision-making authority over litigation strategy, the agreed-upon return for the funder, and the circumstances under which the funder can terminate the agreement.

Types of Third-Party Funders:

The TPF market is comprised of a diverse range of actors, each with their own specific investment strategies and risk appetites. These include:

• Specialized Litigation Funders: These are entities that focus exclusively on investing in legal claims, including arbitration and litigation. They possess specialized expertise in assessing the merits of legal claims, managing litigation risks, and negotiating funding agreements. Prominent examples include Burford Capital, Omni Bridgeway, and Therium Capital Management. These funders typically have a team of legal professionals and financial analysts who evaluate potential cases and manage their investments.
• Insurance Companies: Some insurance companies offer policies that cover litigation risks, often in the form of legal expense insurance or after-the-event insurance. These policies provide coverage for legal costs incurred in pursuing or defending legal claims. While not strictly considered TPF, these insurance products serve a similar function by mitigating the financial risks associated with litigation.
• Private Investors and Hedge Funds: In recent years, private investors and hedge funds have increasingly recognized the potential return on investment offered by arbitration claims. These financial institutions view arbitration claims as alternative investment opportunities and may allocate a portion of their portfolio to funding legal disputes. Their involvement has brought additional capital into the TPF market, further fueling its growth.
• Law Firms: In certain jurisdictions, law firms are permitted to engage in conditional fee arrangements or contingency-based financing. Under these arrangements, the law firm's fees are contingent upon the successful outcome of the case. While these arrangements are not strictly TPF, they share similarities in that the law firm assumes some of the financial risk associated with the litigation.

Legal and Regulatory Framework

The legal and regulatory landscape governing TPF varies significantly across jurisdictions, reflecting differing legal traditions, policy priorities, and attitudes towards the practice. This lack of uniformity creates challenges for parties involved in cross-border arbitration proceedings and necessitates a careful consideration of the applicable legal rules and regulations.

• United Kingdom: The UK has a relatively well-established legal framework for TPF based on common law principles. The practice is generally permitted, and the Association of Litigation Funders (ALF) provides self-regulatory oversight. The ALF has established a code of conduct for its members, which aims to promote ethical and responsible funding practices.
• United States: In the United States, the regulation of TPF is primarily a matter of state law. While contingency fees are widely accepted for attorneys, TPF remains largely unregulated at the federal level. Different states have adopted varying stances on TPF, with some states explicitly permitting the practice and others imposing restrictions or prohibitions.
• European Union: The European Parliament has engaged in discussions regarding the need for stricter regulations on litigation funding, particularly in the context of class actions and collective redress mechanisms. Transparency concerns and potential conflicts of interest have been key drivers of these discussions.
• Singapore and Hong Kong: Both Singapore and Hong Kong have legalized TPF in international arbitration through legislative reforms. These reforms aim to promote Singapore and Hong Kong as leading arbitration hubs and to enhance access to justice for parties involved in international disputes. However, both jurisdictions impose regulatory constraints to prevent conflicts of interest and to ensure the integrity of the arbitration process. These constraints typically include disclosure requirements and limitations on the funder's control over the arbitration.
• India: While TPF is not explicitly regulated under Indian law, Indian courts have recognized its validity, particularly in commercial disputes. The courts have generally adopted a pragmatic approach, recognizing the potential benefits of TPF in facilitating access to justice and promoting the efficient resolution of disputes.
   

Advantages of Third-Party Funding

TPF offers a range of potential benefits to parties involved in international arbitration, including:

• Access to Justice: TPF can enable financially weaker parties to pursue legitimate claims that they would otherwise be unable to afford. By providing the necessary financial resources, TPF levels the playing field and ensures that access to justice is not solely dependent on financial strength.
• Risk Mitigation: Claimants can shift the financial risk of losing a case to the funder. This is particularly valuable in complex and high-stakes arbitrations where the outcome is uncertain. By transferring the risk, claimants can protect their own financial resources and avoid potentially crippling losses.
• Levelling the Playing Field: TPF allows claimants to stand on equal footing with well-resourced opponents. In many international arbitrations, one party may have significantly greater financial resources than the other, giving them an unfair advantage. TPF can help to redress this imbalance by providing the claimant with the resources necessary to effectively present their case.
• Encouragement of Meritorious Claims: Funders typically conduct thorough due diligence before financing a claim, assessing its merits and likelihood of success. This due diligence process can discourage frivolous lawsuits and promote the pursuit of meritorious claims. Funders are incentivized to invest only in cases with a high probability of success, as their return on investment depends on the claim being successful.
• Economic Benefits for Businesses: Companies can pursue legal claims without affecting their balance sheets or diverting operational funds. TPF allows companies to pursue claims without tying up their own capital, freeing up resources for other business activities. This can be particularly beneficial for small and medium-sized enterprises that may not have the financial resources to pursue costly legal disputes.

Challenges and Criticisms

Despite its potential benefits, TPF has also attracted criticism and raises a number of important challenges. These include:

• Conflict of Interest: Funders may exert influence over litigation strategies, creating ethical dilemmas for lawyers who owe a duty of loyalty to their client. The funder's interests may not always align with the client's best interests, leading to potential conflicts. For example, a funder may prioritize a quick settlement over a potentially larger award if it is less risky.
• Transparency and Disclosure: The involvement of third-party funders may not always be disclosed, raising concerns about impartiality and fairness. Lack of transparency can make it difficult for opposing parties and arbitral tribunals to assess potential conflicts of interest and to ensure that the arbitration proceedings are fair.
• Excessive Control by Funders: Some agreements grant funders significant decision-making power over settlement negotiations and other key aspects of the arbitration. This can undermine the client's autonomy and potentially lead to outcomes that are not in their best interests.
• Regulatory Uncertainty: The lack of uniform global regulations leads to inconsistencies in enforcement and creates uncertainty for parties involved in TPF arrangements. This uncertainty can make it difficult for parties to assess the risks and benefits of TPF and can discourage its use in some jurisdictions.
• High Costs and Returns for Funders: Claimants often pay a significant portion of their award to funders, sometimes reducing their net recovery. The high cost of TPF can make it less attractive for some claimants, particularly those with smaller claims.

Notable Case Studies

Several high-profile cases have helped to shape the legal and regulatory landscape of TPF:

• Essar v. Norscot (2016, UK): In a landmark ruling, the English High Court affirmed the arbitral tribunal's ruling, compelling Essar to reimburse Norscot's third-party funding (TPF) expenses as part of the recoverable arbitration costs. This decision establishes a significant precedent within English law regarding the recoverability of TPF costs in arbitration proceedings. By explicitly recognizing TPF as a legitimate expense eligible for reimbursement, the court's judgment potentially alters the landscape of arbitration financing. This ruling encourages greater access to justice for parties with limited resources, as they can now pursue claims with the understanding that their funding costs may be recovered if successful.
• RSM Production Corporation v. Saint Lucia (ICSID Case No. ARB/12/10): In a landmark decision, the ICSID tribunal mandated that RSM reveal the specifics of its third-party funding agreement, underscoring the growing emphasis on transparency within international arbitration proceedings. This ruling acknowledges the potential influence of external financial backing on a case. Simultaneously, the tribunal rejected RSM's petition for security for costs, a decision influenced, in part, by the presence of the third-party funder. This dual outcome draws attention to the complexities surrounding fairness and equitable treatment in arbitration. The case brings into sharper focus the procedures tribunals employ when addressing disclosure requests related to third-party funding and its wider implications for the integrity of the arbitral process.
• Mick Haigh v. Brent Latham (Australia, 2018): The High Court of Australia's landmark decision in Campbell's Cash and Carry Pty Ltd v. Fostif Pty Ltd (2006) legitimized third-party litigation funding (TPF) by finding it not an abuse of process, even when funders exerted substantial control over the proceedings. This ruling, which effectively legalized litigation funding in Australia, had a significant global impact on TPF, influencing international arbitration regulations and solidifying the acceptability of external financial backing in legal disputes, despite not being directly an arbitration case itself.

Recent Developments and Future Trends

The TPF market is constantly evolving, driven by factors such as increasing globalization, the rising costs of international arbitration, and advancements in technology.
Some key trends include:

• Increased Regulation: Governments and arbitral institutions are considering stricter disclosure requirements for funded claims. This reflects a growing recognition of the need for greater transparency in TPF arrangements.
• Rise in Investment Arbitration: Investors increasingly use TPF in treaty-based arbitration claims. TPF can enable investors to pursue claims against states for breaches of investment treaties, even if they lack the financial resources to do so.
• Expansion to New Jurisdictions: Countries like India and China are gradually opening up to TPF in commercial arbitration. This reflects a growing recognition of the potential benefits of TPF in promoting access to justice and facilitating the resolution of disputes.
• Technological Integration: AI-driven analytics are being used to assess the viability of claims for funding. This helps funders to make more informed investment decisions and to identify claims with a high probability of success.

Conclusion:
Third-party funding has undeniably reshaped the landscape of international arbitration, making dispute resolution more accessible and financially viable for a wider range of parties. While it offers numerous advantages in terms of access to justice, risk mitigation, and levelling the playing field, it also presents significant challenges, particularly with regard to transparency, funder influence, and regulatory inconsistencies.

A balanced regulatory framework is therefore crucial to ensure that TPF continues to support access to justice while simultaneously maintaining the integrity and fairness of arbitration proceedings. This framework should address issues such as disclosure requirements, limitations on funder control, and safeguards against conflicts of interest. As the TPF market continues to evolve, ongoing dialogue and collaboration between stakeholders, including governments, arbitral institutions, funders, and legal professionals, will be essential to ensure that TPF is utilized responsibly and effectively in the context of international arbitration.

Written By: Md.Imran Wahab, IPS, IGP, Provisioning, West Bengal
Email: imranwahab216@gmail.com, Ph no: 9836576565