Transparency and Third-Party Funding: Desirable Siamese Twins?

Once upon a time, arbitration was praised for its confidentiality. But modern trends are in favour of transparency and openness.

James Hope, Vinge, Stockholm, Sweden.

Introduction

In recent years, transparency has become one of the major topics of discussion and interest within the global arbitration community.[1] Developments such as the adoption of the UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration and the related Mauritius Convention, as well as their incorporation into the draft texts of the Transatlantic Trade and Investment Partnership and the EU-Canada Free Trade Agreement, show that the importance of transparency in international arbitration is burgeoning. Meanwhile, given the growth of third-party funding (TPF) in international arbitration, a policy debate has arisen on its potential risks, including transparency concerns. The transparency issues implicated by TPF are intertwined with the political debate on the legitimacy of investor-State dispute settlement (ISDS) more broadly, and TPF is regarded by some as exacerbating the matter. The concern is that TPF not only increases the number of investment arbitrations, but also incentivizes the filing of frivolous and speculative claims.[2] Many also argue that it is inappropriate for what are essentially specialized hedge funds to profit from arbitrations, especially when the profits they recover from successful claims come at the expense of developing states. The UNCITRAL Working Group III commissioned to consider possible reforms of ISDS has identified as one challenge the transparency issues implicated by TPF and the need for urgent regulation.

This article discusses the importance of disclosure in obviating the transparency concerns that TPF poses to the integrity of arbitral proceedings. It ultimately concludes that proper disclosure will insulate arbitral awards from frivolous challenges that would add cost and delays and undermine confidence in the arbitral process.

Disclosure and TPF

One of the leitmotifs of arbitration is the independence and impartiality of the arbitrator. This is true for all arbitrators regardless of whether the arbitrator is sitting as a sole arbitrator, or a member or chair of the arbitration tribunal. The test for removing an arbitrator under most arbitration rules, including the UNCITRAL Model Law, is “justifiable doubts as to impartiality and independence.”[3] The test for impartiality and independence[4] is an objective one; it encompasses direct or indirect relationships between the arbitrator and the parties, their counsel, or witnesses.[5] As it relates to TPF in international arbitration, the relationship between a funder and an arbitrator, or in some other circumstances, the involvement of the same funder in two cases with the same person acting in two different capacities (either arbitrator or counsel), may impact the impartiality and independence of the arbitrator, leading to conflicts of interest.

This is particularly true for arbitration, considering that arbitrators and counsel are often drawn from the same pool. Especially where an arbitrator is regularly appointed or seeks appointments from claimants in different arbitrations who are funded by the same funder, serious questions arise as to the impartiality and independence of the arbitrator. Such risks are acute in arbitration, since arbitrators are appointed ad hoc for each arbitration, often by the parties, and the same individuals may act alternately as arbitrator or counsel.

The potential for conflicts of interest arising from relationships between arbitrators and funders was the first issue that attracted global attention to the impact of TPF in international arbitration. There are concerns about the effect that the belated revelation of a relationship between a funder and arbitrator could have on the enforceability of an arbitral award, triggering agonized debates over whether and how much to permit or require arbitrators, arbitral institutions, and parties to disclose.

Notably, some stakeholders have argued that disclosing funding relationships will encourage frivolous arbitrator challenges and requests for security for costs, which may prolong the arbitration process or otherwise increase costs. Nevertheless, there appears to be a growing consensus in support of mandatory disclosure. This was confirmed by the 2015 International Arbitration Survey conducted by White & Case and Queen Mary University of London, in which 76% of international arbitration practitioners surveyed agreed that disclosure of the existence of a TPF relationship should be mandatory and 63% agreed that disclosure of the identity of the funder should be mandatory. The need for disclosure is justified on two broad bases: (a) to prevent conflicts of interest and safeguard the independence and impartiality of the arbitrators, and (b) to give tribunals the opportunity to consider whether the funded party should be subject to an order for security for costs or to impose a duty of confidentiality on the funder.

The IBA Guidelines on Conflicts of Interest 2014 (IBA Guidelines) was the first regulatory instrument to extend conflicts of interest rules in international arbitration to funders. Although not binding in the absence of an agreement by the parties, the IBA Guidelines are increasingly seen as representing the international standard for determining conflicts of interest and independence of an arbitrator. According to a survey on soft law instruments conducted by the Kluwer Arbitration Blog in 2014, the IBA Guidelines were the second most popular instrument in the survey, with 44.4% of respondents stating that they use them always or regularly.[6]

The IBA Guidelines define third-party funders as relevant to a conflict analysis if they have a “direct economic interest” in an award. The phrase “direct economic interest” was later adopted by the International Chamber of Commerce (ICC) in its 2016 Guidance Note on conflict Disclosures by Arbitrators and by the Singapore International Arbitration Centre (SIAC) in its 2017 Practice Note on TPF.

Other instruments with disclosure provisions include (a) legislation: (see, for example, the Hong Kong Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance 2017);[7] (b) investment treaties and rules on investment arbitration: Singapore International Arbitration Centre Investment Rules 2017,[8] China International Economic and Trade Arbitration Commission (Hong Kong Arbitration Centre) Investment Arbitration Rules,[9] and the Comprehensive Economic and Trade Agreement (CETA) ratified by Canada and the European Union (Article 8.26); and (c) institutional and professional rules: (see, for example, the Singapore International Arbitration Centre Practice Note 2017,[10] and Singapore’s Legal Profession (Professional Conduct) Rules 2015).[11]

Some investment arbitration tribunals have also issued procedural orders recognizing the importance of disclosing the identity of the funder associated with claims.[12] In EuroGas Inc. and Belmont Resources Inc. v. Slovak Republic, the tribunal ordered the Claimant to reveal the identity of its third-party funder for the purposes of checking for arbitrator conflicts of interest. The decision in EuroGas can be contrasted with the orders in Muhammet Cap & Sehil Insaat Endustri ve Ticaret Ltd Sti v. Turkmenistan (ICSID) and South American Silver v. Bolivia (PCA), where the tribunals ordered the Claimants to disclose not only the identities of their funders, but also the terms of their funding agreements. The tribunals based their orders on the need to preserve the rights of the parties to an impartial tribunal and the integrity of the process more generally.

On the issue whether disclosure of funding relationships should be a routine exercise by the funded party or should be made pursuant to an order of the tribunal or arbitral institution, the ICCA-Queen Mary Task Force Report on TPF recommended that the party should, on its own initiative, disclose the existence of a TPF arrangement and the identity of the funder to the arbitrators and the arbitral institution. The use of the phrase “on its own initiative” suggest permissiveness rather than mandatory disclosure of a TPF relationship, which is essential to prevent annulment of an award or refusal of enforcement following a belated revelation of a relationship between an arbitrator and an undisclosed funder.

On the flip side, cues may be taken from existing national laws on TPF and applicable international arbitration rules. Notably, Standard 7(a) of the IBA Guidelines on Conflicts of Interest, while imposing disclosure obligations on parties, provides in pertinent part that “… the party shall do so … at the earliest opportunity.” Similarly, under Section 98T of Hong Kong’s Amended Arbitration Ordinance, the duty to disclose “the fact that a funding agreement has been made” and “the name of [the] funder” is imposed on the funded party. Indeed, it seems best to place an affirmative duty of disclosure upon the party to receive the funding (this party being best positioned to provide the relevant information) rather than to seek disclosure by order of the tribunal. This position need not impair the power of arbitrators to independently order parties to disclose a TPF relationship, including the identity of the funder; tribunals may and should make such orders if at any stage they have reason to suspect the existence of an undisclosed relationship. 

ICSID recently released its proposed updated rules for consideration and observation by states and the public. In relation to TPF, the proposed amendments include a mandatory and continuing obligation on the part of the funded party to disclose the existence of TPF and the source of the funding. Whilst there is no obligation to disclose the contents of the funding agreement, ICSID proposes that the Tribunal may order disclosure of further information regarding the funding agreement and the funder if it deems it necessary at any stage of the proceeding.

The proposed amendments by ICSID on disclosure of TPF is important. It will impress upon funders that, while the terms of their funding deals are proprietary business information that should be protected, the existence of the funding arrangement is of concern to the tribunal and is not a purely private matter. Whilst it is assumed that some funders may push back on this, such objections would be unreasonable, given that one of the underlying objectives of TPF regulation is to insulate the award from annulment or non-enforcement based on grounds of conflict of interest.

Lastly, it is important for relevant instruments to include clear language that the existence of a funding relationship shall not in itself constitute a ground for challenging an arbitrator, nor in itself justify a request for security for costs. Thus, I agree with the ICSID proposed amendments on security of cost which states that the existence of TPF may form part of the evidence for an order of security for costs but is not by itself sufficient to justify such order. This provision will obviate the risk of unnecessary delay that may arise from frivolous challenges raised following disclosure of a funding relationship and will motivate parties toward full disclosure of funding arrangements, in keeping with the positive obligation.

Conclusion

This article discusses the significance of transparency in international arbitration and analyses the debate on the potential benefits of disclosure of TPF to overcome the policy and ethical concerns. It shows that the relationship between TPF and disclosure is crucial for achieving a balance between the policy response to TPF and the attractive menu of benefits offered by the funding arrangement.

This article was first published on the International Bar Association Journal of Arbitration.

[1]           It is usually defined as including concepts such as public access and disclosure of documents or information. This paper focuses on disclosure as a tool for achieving transparency in funded arbitration proceedings.

[2]        A countering view is that because TPF is typically a non-course financing, funders heavily scrutinizes the merits of a case before granting any funds, thus, reducing the number of frivolous cases.

[3]         Art. 12(2), UNCITRAL Model Law, 2006 (as amended)

[4]     An independent arbitrator is one who does not have any personal and/or employment relationship, nor any economic link or tie, to any of the parties; while an impartial arbitrator does not have any inclination - or disinclination towards any of the parties. Thus, while impartiality is needed to ensure that justice is done, independence is needed to ensure that justice is seen to have been done.

[5]         Grant Hanessian and Lawrence Newman, “International Arbitration Checklist” (JurisNet, LLC, United States, 2009) 41

[6]        Similarly, 60% of survey respondents in the 2015 International Arbitration Survey (White & Case and Queen Mary University of London) rated the Guidelines as “effective”.

[7]      Sections 98U and 98V Amendment Ordinance obligate a funded party to disclose to the arbitration body and to each of the other parties to the arbitration the existence of the funding agreement, the date of commencement and the name of the third-party funder.

[8]         Rule 24(1) empowers the tribunal (unless otherwise agreed by the parties) to order parties to disclose TPF arrangements, the identity of the funder, and any other details which the tribunal may deem necessary.

[9]         Article 27 of the Investment Arbitration Rules requires any party in receipt of TPF to notify the other party (or parties), the tribunal and the institution, in writing and without delay, of the existence and nature of the TPF arrangement, and the name and address of the funder. The tribunal has power to order disclosure of information relevant to the funding arrangement. 

[10]        Article 6 of the Practice Note provides that an arbitrator shall immediately disclose to the Disputant Parties, to the other arbitrators and to the Registrar any circumstances that may give rise to justifiable doubts as to his impartiality or independence, including any relationship whether direct or indirect, with an External Funder, that may be discovered or arise during the arbitration proceedings.

[11]        The Rules were amended in March 2017 with provisions to impose on legal practitioners the obligation to disclose the existence of a TPF contract and the identity of the funder to the tribunal and to the other parties.

[12]         See Muhammet Çap & Sehil Inşaat Endustri ve Ticaret Ltd. Sti. v. Turkmenistan, ICSID Case No. ARB/12/6, Procedural Order No. 3 of June 12, 2015; EuroGas Inc. and Belmont Resources Inc. v. Slovak Republic, ICSID Case No ARB/14/14; and South American Silver v. Bolivia, PCA Case No. 2013-15, Procedural Order No. 10 of January 11, 2016.