Controlling costs and managing legal risk: Third party funding 

While there has been significant increase in the use of third party funding for disputes across a number of jurisdictions (including the UK and the US), there has been little uptake in the Middle East. The primary reasons for this are a lack of awareness of third party funding as an option by claimants and defendants and a cautious approach taken by funders to investment opportunities in the region. However, as confidence in the enforceability of arbitral awards and court judgments increases and the benefits of third party funding become more apparent, we expect third party funding to become a more widely used means of funding claims in the region. 

 

In this briefing, Dyfan Owen and James MacDonald discuss five key points you need to know about third party funding. 

 

Traditionally, third party funding (also known as litigation funding and litigation financing) involved a funder paying a party's legal costs, in return for an entitlement to receive a share of the proceeds from the litigation. Typically, the funder would cover lawyers' and expert fees, and also provide an indemnity against any liability for adverse costs.

 

Increasingly, third party funding is seen as a legitimate financing tool in international arbitration. For funders, international arbitration is particularly attractive due to the high value of claims and the limited scope for appeal. Third party funding in arbitration is permitted in most major arbitration hubs  (including the UAE).

 

Traditionally, funders have been cautious in funding arbitrations involving Middle Eastern counterparties because of the uncertainty and unpredictability associated with enforcement of awards through the local courts. However, as jurisdictions, such as the UAE, build a track record of successful enforcement of arbitration awards, the incentive for funders to invest in arbitrations is likely to increase. 

 

Although third party funding is increasingly used in arbitration, its use has raised several issues, in particular in relation to the potential conflicts of interest that can arise where an arbitrator has a relationship or connection with a funder involved in a case. This in turn can give rise to other procedural and ethical issues, and in particular, the issue of whether parties should be required to disclose any funding arrangement. For example, the ICC issued guidance which confirms that an arbitrator should disclose any relationship with a third party funder. However, the arbitrator will only be aware of the funding arrangement if it is first disclosed. According to a 2015 Queen Mary School of International Arbitration survey, most practitioners believe that it should be mandatory to disclose the use of third party funding. 

 

However, disclosure is not currently mandatory under the most commonly used arbitration rules or arbitration laws, although it has been ordered by tribunals when the issue has been raised.

 

2. It can be used as a form of corporate financing

The market for third party funding has matured and the range and sophistication of funding products and structures has broadened. 

Funders now offer bespoke solutions for corporates which can include:

Funding is also not limited to entire proceedings ¬third party funding can be used for distinct aspects of a proceeding, for example meeting a security for costs order or enforcing a judgment or award.

3. It can be used to defend claims

Traditionally, third party funding has been associated with financing proceedings brought by claimants. However, funding arrangements can also be used to finance the cost of defending claims, as part of a portfolio of claims or if the defendant has a counterclaim. That said, appetite for funding from defendants remains low. 

4. There can be financial and strategic benefits to funding a claim

The on-going costs of litigation or arbitration and the risk of an adverse costs order can be a disincentive for parties to pursue a claim. In arbitration, where an advance on tribunal and institution fees is generally required, the upfront costs of bringing a claim can be significant. If prepared to give up a proportion of any recoveries, a party can shift costs to a funder, and alleviate the pressure on a company's cash flow and in-house legal budget. In addition, as noted above, third party funding arrangements will typically include an indemnity against any liability for adverse costs allowing a company to pursue a claim while protecting itself against the financial downside.

Funding can also even the playing field against a well-capitalised defendant. In some cases, this can encourage earlier settlement by removing the perceived advantage of engaging in delaying tactics to increase the costs pressure on a claimant. Early settlement can also be encouraged by the fact that a third party, having conducted its own due diligence, is prepared to invest in the claim.

5. There are some limitations and it is not suitable in all cases 

A claim must have a good prospect of success to be attractive to funders, both in terms of the merits of the case and the prospect of enforcing any award or judgment. Enforcement risk is one of the key factors a funder will consider and, as noted above, to date Middle Eastern jurisdictions have not provided the level of certainty and predictability that third party funders require. However, that may well change given the pro-arbitration and enforcement stance now being adopted by many Middle Eastern courts. In addition, as the case load of the DIFC Court increases and confidence in the quality and enforceability of its judgments grows, litigation through that Court is likely to become more attractive for funders.

Costs will also be incurred when packaging a case for presentation to funders. These costs may be wasted if the funding application is unsuccessful.

Funders are unlikely to provide funding for cases that do not involve damages. Given that funders receive their return by reference to recoveries made, they are primarily interested in claims with a damages outcome, with a minimum likely recovery of over US$10 million.

Although the market for third party funding has grown and there is increased competition, there is no comprehensive or uniform regime for the regulation of third party funding across jurisdictions. Therefore, parties seeking funding need to satisfy themselves about the creditworthiness of the proposed funder by, for example, checking to see if the funder is a member of the UK's Association of Litigation Funders. 

Further information 

Ashurst's Tom Cummins recently sat down with Nick Rowles-Davies, MD of Burford (London) to discuss third party funding. The interview focuses on the increased use of funding in arbitration, and offers an insight into funding from a funder's perspective.

Furthermore, our Quickguide on third party funding in international arbitration explains in more detail what third party funding is and how to secure it, and the particular issues that its use in arbitration give rise to.