Developments in key jurisdictions show third-party funding integral in international arbitration

Arbitration finance, or TPF, is becoming an integral part of arbitration practice across the world. It can help claimants overcome financial barriers, share risks and optimise their balance sheets. It can also promote access to justice and enhance the quality of arbitration.

The latest data on arbitration finance from the annual Global Arbitration Review (GAR) 100 survey shows that there were an average of 196 funded arbitrations per year between 2019 and 2023, with 208 funded arbitrations in 2023. The number of firms reporting funded arbitrations has also increased, from 54 in 2019 to 72 in 2023.

The growing phenomenon of monetisation of arbitration awards, whereby a finance provider advances capital to the award creditor in return for a portion or assignment of the award, is another sign of the rapidly developing TPF of international arbitration landscape. For example, in January 2023, steel manufacturers Tenaris and Talta reported in their financial statements that they had entered into a purchase agreement with an unaffiliated purchaser to sell their rights, title and interests in two ICSID awards against Venezuela, with a total value of approximately $538.4 million.

Funders predict that such transactions are not outliers, and monetisation of arbitration awards is likely to continue to rise, along with the continuing rise of funded arbitrations.

While TPF is becoming an integral part of arbitration practice across the world, the legal and regulatory regimes governing TPF in different jurisdictions vary widely and are still developing. The developments in England & Wales, the EU, Ireland, Nigeria and India illustrate the varied stages of development and the unique challenges arbitration parties and funders are facing in different jurisdictions.

England & Wales

In 2023, a landmark UK Supreme Court ruling on third-party litigation funding rules have posed challenges for the litigation funding market. While the decision was given in litigation proceedings rather than arbitration, it may also be of relevance to English seated arbitrations.

The UK Supreme Court, in the PACCAR case, ruled that litigation funding agreements (LFAs) that entitle funders to payment based on the amount of damages recovered are damages-based agreements (DBAs) and are unenforceable unless they comply with the relevant regulatory regime.

The ruling has ramifications for third party funders and funded parties, as it may have invalidated many existing LFAs and forced funders to restructure their arrangements or face difficulties in recovering their returns. The decision means that any LFA which provides for a return based on a proportion of the damages recovered, will be classified as a DBA, and so must comply with the 2013 Damages Based Agreements Regulations to be enforceable. While not relevant to arbitration, the categorisation of these types of LFA and DBAs also mean that they are completely prohibited in “opt-out” competition class actions (CPOs) before the Competition Appeal Tribunal (CAT). However, any LFA where the return is simply calculated as a multiple of the amount invested will not be a DBA and will not be impacted.

The precise implications of the PACAAR decision are still being worked through by courts and funders. In addition, legislative solutions are being considered. In particular, the Digital Markets, Competition and Consumers (“DMCC”) Bill, which is currently going through the UK parliament, has been amended to provide that the 1998 Competition Act should be amended so that a litigation funding agreement would not count as a DBA in the context of CPOs in the CAT. The government announced on 4 March that it would introduce legislation to "restore the position that existed before [PACCAR]". It is also considering a wider review of third party litigation funding, which may include "whether there is a need for increased regulation or safeguards for people bringing claims to court, particularly given the growth of the litigation funding sector over the past decade". Meanwhile, funders will be considering the terms of their LFAs carefully and may also be more selective in the types of claims they are willing to fund, focusing on cases that have a higher prospect of success and lower regulatory hurdles.

European Union

TPF also continues to grow and develop in the EU, with accompanying calls for increased regulation of the sector. The European Parliament has adopted a resolution (26 page PDF/216KB) with recommendations to the Commission on responsible private funding of litigation. The resolution covers TPF in various areas of law including arbitration, collective redress, insolvency, and antitrust. It aims to provide EU-wide rules that ensure access to justice and protect the rights of claimants and beneficiaries from potentially abusive or unethical practices by third-party funders.

The resolution calls for a directive that would introduce common minimum standards for funders, such as an authorisation system, a duty of loyalty, a requirement of sufficient own funds, safeguards against conflicts of interest, prohibition of abandonment, limits on the share of the award, and disclosure of the funding agreement to the courts.

The Commission has acknowledged the resolution and committed to assessing the need for further regulation of TPF after the implementation of the Representative Actions Directive, which already addresses TPF in the area of collective redress. Following the submission of a report by the International Legal Finance Association highlighting a lack of evidence and consultation with relevant stakeholders, the European Commission now plans to conduct a mapping study of the existing European funding landscape before green lighting any new rules. Further developments can be expected in the coming year.

Ireland

Until recently, parties involved in disputes were prohibited from obtaining third party funding to help them fund the cost of taking their case through formal dispute resolution channels in Ireland. However, on 5 July 2023, The Courts and Civil Law (Miscellaneous Provisions) Act 2023 was signed into law, amending the Arbitration Act 2010 to permit third party funding of international commercial arbitration and any court proceedings or mediation arising out of that arbitration in Ireland for the first time.

Apart from arbitration, the Irish Law Reform Commission (LRC) is seeking views on whether to allow third-party funding of litigation in Ireland, which is currently prohibited by the torts and criminal offences of maintenance and champerty.

The LRC has outlined the potential benefits and drawbacks of third-party funding, such as expanding access to justice, increasing the pool of assets for creditors, encouraging vexatious litigation, reducing the compensation for funded parties, and raising legal costs and insurance premiums. The LRC has proposed three possible models of legislation for third-party funding: abolishing the torts and offences of maintenance and champerty; partially abolishing them with some exceptions for public policy and illegality; or creating a statutory exception for third-party funding with some conditions and safeguards.

India

In May 2023, in Tomorrow Sales Agency Private Limited v SBS Holdings Inc & Ors, the Delhi High Court ruled that a third-party funder could not be liable for adverse costs in an arbitration in circumstances where the funding agreement did not provide for any obligation on the third-party funder to fund an award of adverse costs. This important judgment brings greater certainty to funders of arbitrations in India, which is likely to promote investment.

The High Court of Delhi overturned a previous ruling from 2019 that ordered a funder to pay the costs of an unsuccessful arbitration claim, stating that funders are not bound by the arbitration agreement or the award unless they consent to it. In coming to its decision, the court noted that "third-party funding is essential to ensure access to justice", highlighting that India is beginning to embrace the concept of TPF.

This ruling also reinforces the strong commitment India's executive and judiciary have shown in recent years to promoting arbitration as a means of resolving disputes. The third-party funding sector should watch closely the applicability and reliance on this judgment by stakeholders in future cases.

Nigeria

The Arbitration and Mediation Act, signed by the president of Nigeria in May 2023, allows third-party funding in Nigeria-seated arbitrations and arbitration-related court proceedings. The Act makes Nigeria only the third jurisdiction to directly adopt such express legislation in relation to TPF, following Singapore and Hong Kong in 2017.