North Carolina Journal of International Law

"Connecting North Carolina to the World of International Law"

THIRD PARTY FUNDING: A Q&A WITH BÉATRICE CASTELLANE, CABINET CASTELLANE AVOCATS

Madam Castellane

 

Béatrice Castellane, Avocat and International Arbitrator

Founder of the firm “Cabinet Castellane Avocats”[†] and lawyer at the Paris Bar since 1983, Béatrice Castellane is an international arbitrator and former member of the Paris Bar Council. Counsel to both French and foreign companies, she participates in advisory boards and arbitrations, primarily in the fields of business and investment in cases related to mining and raw materials, telecommunications, aviation matters, agriculture and general trade matters. Active as both an arbitrator and lawyer in matters arising in Africa, Europe, Asia and the United States, Béatrice is particularly familiar with the practices and regulations of the ICC, OHADA CCJA, KLRCA and HKIAC as well as ad hoc arbitrations.

 

 

 

 

Litigation/arbitration can be costly. From the outset, a party must therefore consider whether it has the budget necessary to fund the litigation, whether or not it is bringing the litigation or defending it. This is less problematic for many larger companies who have the resources and indeed incentives, to adopt costly litigation strategies. However, for smaller/medium sized companies and individual Claimants, the costs of funding large or complex cases can put off even the most meritorious Claimant.

This is where third party funding (“TPF”) comes in. According to the International Bar Association Rules, a third party funder refers to any person or entity that is contributing funds, or other material support, to the prosecution or defence of the case and that has a direct economic interest in, or a duty to indemnify a party for, the award to be rendered in the arbitration[1].

TPF is therefore akin to corporate finance. It aims to provide funds or indeed make funds available for either Claimants or Defendants, whether for the whole case or part of a case (e.g. in relation to specific applications such as security for costs, or for a whole case) or for a portfolio of cases. The idea being that the risk of losing and all that it entails is moved from the Claimant/Defendant to the TPF if the case is unsuccessful up to the limit of its agreed cover.

 

  1. How does third party funding work? Do attorneys or clients seek funding through third party sources? Is it common for third parties to seek out cases to which they can contribute? Without violating any confidential attorney-client privilege, can you say if you have any personal experience working with third party? If so, how did it affect your ability to act as counsel or arbitrator?

How does third party funding work?

The basic principal is that a third party funder agrees to make a certain amount of money available in view of a particular claim/claims. This money can be used to fund all/part of a case or funds can simply be ringfenced for future use (i.e. made available in the event needed, for example, if there are any adverse costs orders to be met).

  • If the funded party wins its case, so does the third party funder – a “premium” will usually become payable to the third party funder. The premium is in effect a percentage to be paid to the third party funder calculated on the amount of damages recovered. The premium is either payable by the funded party from its damages, or may be recovered directly from the losing party.
  • If the funded party loses, so does the third party funder – in this case the third party funder is required to pay out the funds agreed to cover the costs/damages of the adverse party. Often however, TPF only provides limited funds. Thus, when the TPF is insufficient to cover adverse costs, the remainder must be sought from the losing party directly. In the case of impecunious losers, this inevitably means that such costs may never be recovered.
  • Who are the third party funders? Third party funders are effectively investors and can therefore be any entity willing to provide funding for a case. Some countries have associations of third party funders and it is often advisable to use a third party funder who is a member of such an association. This is because there is relatively little legislation to regulate TPF and such associations often have codes of conduct, complaints procedures and clear guidance on the funder/client relationship which helps to protect parties using TPF[2].

 

Figure 1: Illustration of third party funding in practice

 

 

How is third party funding obtained?

  • The process begins when the TPF is presented with details of the case for which funding is sought. In order to secure funding, the TPF will need to be convinced that the case it is presented with has realistic prospects of success (circa 60% or more) and that it can recover its costs if it wins, from either the client’s damages or its adversary.
  • Each request for TPF will therefore be subject to a number of internal checks by the funder. Such checks may include an internal review of the case’s prospects of success, the amount sought, the assets of the adversary and where such assets are located, the identity of the party requesting the funding and the firm who represents them.
  • Once the prospects of success have been determined, the third party litigation funder will agree to a certain level of cover, in exchange for a premium that will be paid to it at the end of the case in the event the funded party is successful. The cover may be for the whole claim or for a certain aspect of the case, such as to cover an order for security for costs[3]. Depending on the rules of the jurisdiction, the premium may be recovered from the adversary as costs or may be deducted from the damages obtained by the successful party.

 

Do attorneys or clients seek funding through third party sources? Is it common for third parties to seek out cases to which they can contribute?

  • In practice, lawyers arrange litigation/arbitration funding, rather than the client. This is appropriate as to arrange such funding, the third party litigation funder must be convinced as to the realistic prospects of success. A company/individual facing litigation is unlikely to have an impartial point of view as to its case. Therefore lawyers tend to be best placed to convince third party funders to back a case, not least because they have experience of similar cases and are best placed to assess the probable prospects of success.
  • Indeed, more often than not, lawyers build up a relationship with a preferred third party litigation funder. This may result in the third party litigation funder being more willing to invest or even increase the cover if necessary during the course of the litigation/arbitration. This does not, however, prevent third party funders from contacting firms directly. Ultimately third party funders are investors who are seeking to make investments and therefore advertise and contact firms to propose their services. As the premiums may be paid from any damages obtained, it is nevertheless important for lawyers arranging cover to ensure they obtain competitive rates which are, above all, in their client’s best interests.

 

Without violating any confidential attorney-client privilege, can you say if you have any personal experience working with third party? If so, how did it affect your ability to act as counsel or arbitrator?

  • When acting as counsel using TPF, doing so creates additional work in some respects. This is because lawyers are required to update the funder regularly as to the progress of the dispute. Following on from this, any judgments or key developments must also be notified to the funder immediately according to the terms of the funding arranged. The updates are commonly the most challenging aspect; third party funders are not lawyers and may not fully understand the intricate nature of complex litigation which can make such updates a delicate and time consuming matter.

 

  1. How does the International Chamber of Commerce view third party funding? Has the organization enacted any regulations to address third party funding? If so, when did the ICC begin to address the issue of third party funding?

I am not aware of any rules being enacted in response to TPF arrangements although in 2014 the ICC published what was described as practical guidance on third party funding. The guidance contains definitions and ethical considerations amongst other things. The ICC therefore recognises the expansion of this area and the importance of arbitrators understanding the same.

I can’t comment on the view of the ICC itself but from my point of view, TPF seems to be a way of facilitating litigation/arbitration for a variety of business structures and commercial reasons. In any event, the continued growth of this area in a difficult market is somewhat inevitable internationally and so we must adapt to the same. Today obtaining such funding certainly doesn’t mean someone is in financial difficulty, and the disclosure of such a funding arrangement by a party wouldn’t therefore have any impact on the impartiality of the arbitrator.

Nevertheless, in my opinion the existence of a TPF arrangement should be disclosed at the outset of an arbitration by the parties, in order to enable an arbitrator to declare whether any potential conflicts of interest may exist (in the event that the arbitrator has an interest in the fund).

 

  1. Given the current status of international arbitration and the rising costs of seeking a private resolution, third party funding appears to be a new reality for this sector of law. While Anglo-Saxon countries generally accepted third party funding and have already begun gaining experience in the process, continental countries seem to view third party funding with more hesitation. What is your opinion of the concern that this could be a possible hindrance to international arbitration on a truly global scale, creating a divide between international practices?

When it comes to litigation, the true divide is the one created by an inequality of funds and resources. Litigation funding is an important resource which permits parties to redress the balance and should, therefore, be encouraged. It also allows parties to obtain tailor made finance according to the needs of a particular case. For example in arbitration, TPF may be used not only for the arbitration costs but also in the enforcement of arbitral awards[4].

The increasing trend of using third party funders was noted by a funder recently: “Another change driving capital deployment is the funding of international arbitration. It was relatively unknown in 2012, whereas now it makes up roughly 50 per cent of our business and is the fastest growing area for our industry.[5] In England and Wales, litigation funding is not only generally accepted, but is also on the rise not least as a result of the Jackson reforms (which for example limited the recoverability of success fees and reduced the availability of legal aid). There is also a trend at present for group actions and in such cases, TPF can be an important means of funding such complex and often costly claims.

According to recent figures, investments in litigation in the UK increased by more than 25% in the UK during the past year with research suggesting that third party funder litigation funders committed £723m to legal claims in 2016[6]. Additionally, it is also said that large corporates are also increasingly using litigation funding as pressure grows on legal budgets[7]. Using such a model of funding undoubtedly avoids tying up cashflow for a business for significant periods of time and indeed avoids companies/individuals risking their own resources with third party funders being prepared to make that longer-term investment.

Nevertheless, as you have rightly noted, TPF is viewed with more reticence in France. Although third party funding was created in 1990 in Australia before spreading to America and the UK[8], it was not until 2006 that French courts were confronted with the issue[9]. Indeed in 2013, only a dozen or so companies offered TPF on the French market sharing approximately 90% of the market with the majority of these being foreign[10].

From an ethical perspective, there is concern amongst practitioners in France that a breach of the secret professionel may occur when divulging privileged information to the funder, even if the client authorises such a communication[11]. In arbitrations conducted under French law, there is also some concern as to whether any form of disclosure obligation (whereby the parties would be required to disclose the existence of TPF) should exist. The worry however, is that should there be a requirement to disclose such funding arrangements by default, that this could lead to an increase of procedural issues during the case such as applications to disclose terms of the funding which have indeed been encountered by English courts[12]. This would increase both costs and delays which French courts are keen to avoid.

The existence of TPF arrangements may also lead to concerns regarding the arbitrator’s independence. It goes without saying that arbitrators must be independent and must, therefore, disclose any potential conflicts of interest. If the existence of a TPF arrangement is not disclosed by the parties to the arbitration, this may lead to the arbitrator’s recusal despite proceedings having already started. In the most extreme scenario, it may also lead to applications to set aside the arbitrator’s award. On this basis, one could reasonably assume that the onus is on the parties to inform the arbitrator of the existence of a TPF arrangement. This is arguably in their interest given that it reduces the prospect of applications to set aside the arbitral award. This issue is considered by the ethical code of conduct provided by the French Arbitration Association (“AFA”) which notes that the existence of TPF arrangements should be disclosed by parties, that the third party funder should avoid to put the arbitrator in a position of conflict and should also not be involved in the selection of the same[13].

The key therefore in international arbitration, irrespective of a party’s legal culture, is to provide arbitrators with sufficient information so as to enable them to act independently.

 

  1. During my summer at your Paris office, you attended a conference in Singapore, which is a rising hotspot for international arbitration. Currently, in Singapore, proposed Civil Law (Amendment) Bill 2016 will allow third-party funding of international commercial arbitrators and also provides regulations for funders. This bill specifically requires third party entities to meet certain criteria before being allowed to act as funders.  It also says lawyers may not refer funders to their clients if they receive a financial benefit from the introduction or referral. Are these regulations similar to those that are already in place in other countries?  Does the creation of bills in different countries addressing third party funding create a problem for international arbitration organizations, like the ICC? How will the ICC have to adjust current practices to meet the standards of the country in which the arbitration takes places?

Singapore and Hong Kong are two of the fastest growing arbitration seats in the world. However, while TPF is generally on the increase in litigation/arbitration, it remained illegal in these jurisdictions. Singapore’s Ministry of Laws recognised that to remain competitive with other jurisdictions where TPF was permitted, it would have to consider allowing TPF arrangements. Similarly, the Law Reform Commission of Hong Kong also recommended that TPF be permitted and recommended that ethical and financial standards for the same be developed[14]. It seems therefore that legislation will be introduced with the aim of abolishing barriers to arbitration funding and introducing light touch regulation[15]. Turning to legislation in place in other countries, there is no standard approach to legislating (or not) on TPF. For example, there are at present no plans to regulate third party funders in England and Wales albeit contracts relating to TPF can be struck down if contrary to public policy, illegal or otherwise improper[16].

As long as a TPF arrangement is made in accordance with the rules of the procedure encompassing the arbitration, I do not envisage it being a problem for ICC arbitrations. TPF arrangement are seemingly recognised in Hong Kong, New Zealand, Russia, Germany, Austria, the Czech Republic and Spain in addition to Australia, America and the UK. Whilst not expressly recognised they are said to be permitted in countries such as India, Japan, Vietnam, Belgium, Switzerland, France and Italy [17]. In my opinion, parties must be mindful of ensuring, in my view, that their funding arrangements are therefore permissible in the context of the arbitration.

With regards to lawyers receiving referral fees for TPF arrangements it is easy to see why the receipt of such referral fees may be seen to impact the impartiality of the instructing lawyer. Nevertheless, it is key to understand that all actions of a lawyer must be taken in their client’s best interest which includes making funding arrangements.

 

  1. Third party funding is a relatively new practice with many logistical unknowns. On a global scale, the development of investments of third-party funders in law firms is controversial. Many worry about the potential for third-party funders, who often have no legal education, being partners in law or even creating law firms.  Based on your experience, do you see this worry as a valid concern for international arbitration?  What potential problems could arise from nonlawyers partnering with law firms?

TPF has existed for some time but its use is becoming more and more widespread in some countries. Legal funders such as Burford are now even listed on London’s AIM market providing a strong indication of success in this sector. Third party funders are ultimately investors who provide specific finance in the legal sphere as returns are often more generous than on the stock market. However, this doesn’t make them lawyers. The niche, specialist services they provide are a long way from being compatible with opening or partnering with a law firm. This is not least the case as lawyers are required to act in their clients’ best interests at all times and such actions may not be compatible with the strategy of a TPF. For example, some TPFs may aim to achieve the speedy resolution of cases as opposed to financing longer cases, even if the result could be less favourable for the client.

 

  1. Some scholars have proposed that third party funding arrangements be disclosed in official international arbitration paperwork? From your experience as an arbitrator, how would that affect your view of a case? Could disclosing third party funding create a bias against either party of the arbitration case?

From my point of view, the disclosure by parties of the existence of TPF in official international arbitration paperwork would be useful. Firstly, it would allow those who face litigation involving TPF to assess the full potential extent of their liability should the premiums be recoverable. Indeed, some TPF arrangements include incremental staged premiums which increase according to key stages of the litigation being reached (e.g. upon issue of the claim or once the matter reaches trial). Understanding when staged premiums take effect may in fact encourage early negotiation with an adversary looking to save costs on a case it anticipates losing. Secondly, the disclosure of such arrangements allows arbitrators to verify their independence.

The disclosure of TPF may however result in the adversary being keen to know the contents of the litigation funding documentation. Full disclosure of such documentation is controversial. It reveals the lawyer’s assessment of the prospects of success, key risks, the calculation of the premiums and most importantly, the litigation strategy. For this reason, it is often argued that such documentation should be treated as privileged and should not be disclosed to the adversary. That is not to say that certain key elements should not be made known to the adversary. The breakdown of litigation funding is important in the event that the cover is staged or if part of the cover is reserved for the payment of the instructing lawyers’ disbursements – what realistically remains once such disbursements have been reimbursed?

In terms of any bias, the mere fact that a party has obtained TPF is unlikely from my point of view, to cause any bias to arbitrators. On the contrary, should any bias be possible, the arbitrator would immediately be required to recuse himself/herself.

Questions By Charlotte Smith


[†] http://www.cabinet-castellane-avocats.fr/en/

[1] Guidelines on Conflicts of Interest in International Arbitration (2014), Explanation to General Standard 6(b)

[2] See for example, The Association of Litigation Funders, http://associationoflitigationfunders.com/ or the Charter of Ethics of the French Arbitration Association http://www.afa-arbitrage.com/afa/uploads/2016/05/Charte_ethique_de_la-Federation_des_Centres_d-Arbitrage.pdf

[3] The evolution of litigation finance, Burford Capital, http://www.burfordcapital.com/wp-content/uploads/2016/01/Corporate-finance-and-litigation-funding-Issue-3-FINAL-sm.pdf

[4] Le Third Party Funding: atout ou danger? Table ronde “wake up (with) arbitration!”, Cahiers de l’arbitrage, 01/04/2013, n°2, p. 527

[5] Litigation funding report: Broader appeal, 6 June 2016, https://www.thelawyer.com/issues/6-june-2016/litigation-funding-report-broader-appeal/

[6] Litigation funder launches $200m US investment vehicle, The Law Society Gazette, 15 February 2017

[7] Litigation funding report: Broader appeal, 6 June 2016, https://www.thelawyer.com/issues/6-june-2016/litigation-funding-report-broader-appeal/

[8] Les sociétés de financement de procès dans le paysage juridique français, Revue des sociétés 2012, p. 279

[9] Versailles, 1 juin 2006, Véolia Propreté c/ Foris AG

[10] Third party funding —Financement du procès par les tiers, LexbaseHebdo édition professions n˚207du7 janvier 2016

[11] Commentary: French Think Tank Releases Noteworthy Report on Third Party Litigation Funding, Cahiers de l’arbitrage, 01/12/2014, n°4, p. 687

[12] Pedro Emiro Florez Arroyo and Others and BP Exploration Company (Colombia) Limited (OCENSA PILPELINE GROUP LITIGATION) [2010] EWHC 1643 (QB)

[13] Op Cit, Charter of Ethics of the French Arbitration Association, Article 6

[14] Singapore and Hong Kong open their doors to arbitration funders, 21 July 2016, http://blogs.lexisnexis.co.uk/dr/singapore-and-hong-kong-open-their-doors-to-arbitration-funders/

[15] MoJ not minded to regulate third-party litigation funding, 25 January 2017, https://www.lawgazette.co.uk/law/moj-not-minded-to-regulate-third-party-litigation-funding/5059536.article

[16] Op cit, Singapore and Hong Kong open their doors to arbitration funders

[17] Les « nouveaux » coûts dans l’arbitrage international, Cahiers de l’arbitrage, 01/10/2013, n°4, p. 899

 

 

 

 

 

 

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