New York, March 5, 2014—Third-party funding of international arbitrations is booming, yet the rules and norms of using this method of funding have not kept up with that economic reality, according to leading academics, attorneys, and funders participating in a conference on the topic February 7 at the Columbia Club in New York City.
The all-day conference, titled the “First Annual Program of CICIA on Third Party Funding of International Arbitrations,” was hosted by the Columbia Law School’s Center for International Commercial and Investment Arbitration
(CICIA) to help advance discussion on the legal and ethical issues raised by the involvement of outside funders in international arbitrations. These financiers evaluate potential claims before choosing to fund, or not, and stand to profit substantially (typically as a percentage of damages) if the side they back prevails. The amount it costs to bring a claim varies, based in part on how long the dispute drags on, but can easily go to seven figures.
“We have this third person, this phantom,” said George A. Bermann ’75 LL.M.
director of CICIA and the Jean Monnet Professor in EU Law and the Walter Gellhorn Professor of Law. “The ethical issues are basically conflicts of interest and distortions of the representation.”
In sessions on how funding of international arbitration is different from international litigation funding, and on disclosure, transparency and confidence, the panelists discussed those complexities, and to what extent regulation was needed. Among other topics of debate, key questions included: Should the existence of third-party financing be disclosed before or during an arbitration? Will the third-party funder wind up exerting control over the conduct of a case?
The big advantage of third-party funding in arbitrations is that it helps to level the playing field. It allows companies with fewer financial resources to bring their claims before a tribunal and offers a way to address the squeeze on corporate legal budgets that has grown tighter since the financial crisis. For investment arbitrations, in which a state may have expropriated a company’s assets, without third-party funding there may be no cash available to wage a battle for compensation.
Thus, the arbitration funding market has developed and expanded rapidly over the past few years. Large institutional funders, such as Juridica Investments Ltd. (which went public in London in 2007) and Burford Group (which followed in 2009), have become powerhouses in the field, while hedge funds and other financial players have eased into the business.
Today, according to Lord Daniel Brennan, chairman of Juridica and one of the speakers, the demand for such outside financing far outstrips its supply. “Litigation funding is here to stay. There is no going back,” he said at the “basics” panel during the conference.
However, the rise of third-party funding raises thorny issues. “The funder is the only actor in the process who is there to make a profit,” said Sophie Nappert, an independent arbitrator and an attorney at Three Verulam Buildings in London. “That is the problem. That is a different aim, and it raises all sorts of issues.”
It’s hard to say precisely when third-party funding of international arbitrations began, but Nappert pointed to an International Centre for Settlement of Investment Disputes decision in favor of Ioannis Kardassopoulos and Ron Fuchs in an expropriation case against Georgia in 2010 as an important public acknowledgement of the practice. The tribunal ordered Georgia to pay $98.1 million in compensation, interest, and—despite the fact that a third party was funding their claim—attorneys’ fees.
The funding industry has grown so quickly that many questions remain, said Selvyn Seidel, chair of the advisory board of CICIA and founder of Fulbrook Capital Management, an advisor in the third-party funding market. “This topic is endless, and very complicated, and very much on the move,” he added.
One of the complexities, from the perspective of attorneys, is the question of attorney-client privilege when a third-party funder is involved, said James Tyrrell, managing partner of the greater New York/New Jersey offices of Patton Boggs. (Tyrrell is perhaps best known as the litigator representing a group of Ecuadorians in their ongoing environmental battle with Chevron, which has involved a third-party funder.) “There’s not sufficient certainty, and that problem becomes multiplied with international arbitration,” he said. While-third party funding of litigation is already complex, the variety of countries that may be involved in an international arbitration add an extra layer of complication.
While panelists offered differing opinions on some of the thornier details about third-party funding, most everyone seemed to agree that the practice is here to stay. The issue, then, becomes how best to ensure that third-party funding proceeds in the most reasonable and appropriate manner possible. As Bermann put it: “It is an industry, and it needs some ethical standards.”