Keywords - Arbitration, Third-Party Funding, Confidentiality, Disclosures
In Third-Party Funding [“TPF”] arrangements, a party to arbitration receives funds from third-parties for the pursuit or defence of the proceeding. This funding can be either through a donation or a grant, or in return for remuneration dependent on the outcome of the proceeding. It is a resort taken by financially weaker parties to protect their legitimate interests by successfully pursuing their claims before arbitral tribunals. As the exorbitant costs involved in international arbitration is not an unknown issue, parties sometimes also opt for TPF to diverge the money in further investment, instead of paying for arbitral costs. The funder invests in the claims of such claimants with a settlement that a percentage of the damages awarded would go to the funder.
However, the advent of TPF has come at the expense of various novel issues, disclosure obligations being the most prominent one. In arbitration, disclosure is considered fundamental due to an issue conflict with the arbitrators, which means the existence of bias in the arbitrator. For instance, the arbitrators may have a relationship with the funder, which if not disclosed might lead to enforcement issues at a later stage. Therefore, there arises a need for determining the nature and extent of disclosure of funding contracts in international arbitration proceedings. To determine this extent, the author analyses the current position of arbitral institution rules and tribunal awards to suggest a balanced approach to unite the contradictory obligations of disclosure and confidentiality.
Regulation by International Bodies
The aspect of regulating standards for disclosure of TPF has not been uniform. Below, the author discusses this varied approach to understand the shortcomings of various rules and thus recommend appropriate changes.
1. International Bar Association [IBA]: General Standard 7 of the 2014 IBA Guidelines requires the disclosure of the funder’s identity or of any information that serves the transparency of the proceedings. In the explanation to the General Standard, it is stated that such disclosure is important to protect the independence and impartiality of an arbitrator and thus, reducing the risk of delivering an unmeritorious award.
2. Singapore International Arbitration Center [SIAC]: By the 2017 Investment Arbitration Rules, the SIAC under Article 24(L) has entrusted tribunals with the power to order the parties to disclose the existence of a TPF arrangement, the identity of the funder, details of the interest that such funder holds in the resolution of the dispute, and whether the funder is ready to undertake costs liability.
Though the funder enters into an arrangement with the prospect of profit-making, there exist corresponding risks like higher arbitration costs than expected, funded party losing the arbitration thus loss of profit on the percentage of damages. Therefore, these disclosures ensure that the funders are willing to take the risk and would not escape the liability to pay if the funded party loses in the arbitration.
Further, in line with the national law of Singapore, in 2017, SIAC also published a Practice Note on Arbitrator Conduct in Cases Involving External Funding. The Singapore municipal law[i] imposes an obligation upon the counsels to disclose any relevant information available with them on TPF arrangements. Thus, in addition to the parties, the counsels are also brought under the purview of disclosure obligations under the SIAC Rules.
3. International Congress and Convention Association [ICCA]: The ICCA – Queen Mary University Task Force on TPF in International Arbitration was set up to assess the issues in international arbitration. In its 2018 Report, the Task Force highlighted the importance of disclosure obligations. It required that a balanced disclosure should be made by the parties of any TPF agreements in order to prevent any possible conflict of interest of the funder with the arbitrators or the law firms involved in the proceedings. This was to prevent any future challenge to the award based on the independence of the arbitrator.
4. United Nations Commission on International Trade Law [UNCITRAL]: The UNCITRAL published the Report of Working Group III in April 2018 which explored the scope of possible development in future dispute settlement laws. While taking an anti-TPF approach and suggesting for a complete ban of TPF arrangements in ISDS, as an alternate solution, it relied upon the ICCA – QMUL Report to emphasise on the introduction of a mechanism to ensure transparency by way of disclosure of TPF arrangements.
5. International Center for Settlement of Investment Disputes [ICSID]: The 4th Edition of the ICSID Working Paper (February 2020) provided for an amendment to the ICSID Rules of Procedure for the incorporation of mandatory disclosure in cases of TPF arrangements. Rule 14 of the Proposed Arbitration Rules mandates a written notice by the TPF accruing party and additionally requires the following information:
· Name and address of the funder.
· Whether the funding received by a party is direct or indirect.
· TPF received for the ‘proceedings’ rather than for ‘the dispute’. [ii]
While the first two proposed changes mention the general information for disclosure, the third one restricts the scope of the term funding to ‘proceedings’ only. This change means that the parties will have to disclose the exact funding received exclusively for ICSID proceedings and not the overall amount received for resolution of the dispute which may cover municipal litigation financing etc.
In light of the aforementioned, it is safe to say that all the institutions have recognised the need for disclosure of TPF arrangements of the parties. What remains uncertain is the extent of disclosures and the consequent breach of confidentiality. IBA and SIAC have made general remarks as to the need for disclosure obligations and have left the rest to the tribunals. On the other hand, ICSID Rules have made specific disclosure requirements. However, there are no comprehensive rules on the intersection of confidentiality and disclosure obligations.
The Approach of the Tribunals
Arbitral tribunals faced with TPF arrangements, without any guiding law in place, have tried to address this issue through the interpretation of the institutional rules as discussed above. In doing so, they have taken a pro-disclosure stance. The Permanent Court of Arbitration [“PCA”] in the South American Silver[iii] and the ICSID in the EuroGas[iv] matters respectively, have emphasised upon the necessity of disclosure of the funder’s identity and have also recognised the duty of the funder to maintain confidentiality.
Further, in the matter of Sehil,[v] the PCA ordered the claimant to inform whether it relied on TPF and if so, to disclose the funder’s identity and the terms of the agreement in order to ensure the proceedings’ integrity and transparency. Similarly, the ICSID in the García Armas[vi] matter went a step further from the earlier position in deeming that the disclosure of the funding agreement is equally necessary for the sake of procedural integrity.
Striking a balance between Disclosure and Confidentiality
A TPF arrangement between the funder and the funded party participating in the arbitral proceedings is a contract and thus should be confidential. Further, the arbitral proceedings are also confidential in nature, but if a funder is involved then the funded party would have to disclose the details of the proceedings to them. Thus, it would violate the confidentiality of the opposite party which submits its documents in confidence.
Though there are exceptions to disclosure obligations in the form of confidentiality clauses in the Arbitration Rules of various centers, real progress can only be seen if the funders undertake to respect the confidentiality interests of the opposing party. Scholars have suggested that the upcoming Rules for disclosure obligations should navigate the concern of confidentiality, and should accommodate exceptions to confidentiality obligation. For example, though the information received by a lawyer from their client is privileged, Singapore, as discussed above, has imposed an obligation upon the counsels to disclose any TPF arrangements. Thus, Singapore has made an exception to the general confidentiality obligation and has mandated disclosure to protect the interests of the parties and to ensure that the arbitrators do not share any interest with the funders.
The Way Forward
The narrow interpretation given to the term ‘party’ by tribunals and domestic courts all over the world and the consequent refusal to exercise jurisdiction over third-parties is acting as a barrier to the usage of TPF arrangements. The need of the hour is to make the law uniform across all borders so as to mitigate the possibility of forum shopping where the parties choose the seat of arbitration in a country which is pro-TPF (Singapore, England, Australia, etc.).
Further, there is a need for limited regulation and not over-regulation in the field by way of determining the rights and duties of the parties, the arbitrators, the counsels, and the funders with respect to disclosure, confidentiality, costs, and security for costs. Steps taken by SIAC, recommendations of the ICCA-QMUL Task Force, and the ICSID Working Paper Series should be considered as a base to build upon a well-regulated regime of third-party funding in arbitration.
One of the possible ways to strike a balance between the contradicting obligations of disclosure and confidentiality is to exempt certain general confidentiality obligations and allow people like counsels, guarantors to disclose the relevant TPF arrangements. To ensure that confidentiality is ensured, obligations should be imposed on the funders to not disclose any sensitive information. However, these funders should be exempted from any statutory obligation of disclosure to their shareholder or investors so that the sensitive information of the funded party or the opposite party to an arbitral proceeding is not made available publicly.
* Chitransh Vijayvergia is a Final Year Student of B.A. LL.B. (Hons.) at National University of Advanced Legal Studies, Kochi and has a keen interest in international dispute resolution laws. For any discussion related to the article, he can be contacted via mail firstname.lastname@example.org.
[i] Civil Law (Amendment) Act (Act No. 2/2017) (Sing.), https://sso.agc.gov.sg/Acts-supp/2-2017/; Legal Profession (Professional Conduct) Rules, 2015 (Sing.), https://sso.agc.gov.sg/SL/LPA1966-S706-2015. [ii] Rule 14, 4th ICSID Working Paper. [iii] South American Silver Limited v. The Plurinational State of Bolivia, PCA Case No. 2013-15, Procedural Order No.10, ¶44 (Jan. 11, 2016). [iv] EuroGas Inc. and Belmont Resources Inc. v. Slovak Republic, ICSID Case No. ARB/14/14, Transcript of the First Session and Hearing on Provisional Measures, p. 145 (Mar. 17, 2015). [v] Muhammet Çap & Sehil Inşaat Endustri ve Ticaret Ltd. Sti. v. Turkmenistan, ICSID Case No. ARB/12/6, Procedural Order No.3, ¶8 (June 12, 2015). [vi] Manuel García Armas et al. v. Bolivarian Republic of Venezuela, PCA Case No. 2016-08, Procedural Order No. 9 (On Security for Costs), ¶¶2-3 (June 20, 2018). This article is co-edited by Snehal Dhote (Managing Editor) and Yagnesh Sharma (Associate Editor).
Preferred Citation: Chitransh Vijjayvergia, “Balancing Disclosure and Confidentiality Obligations in Third-Party Funding”, Arbitration and Corporate Law Review, Published on 14th July 2020.