Raising of third party funding in international arbitration
On September 11, 2019, the board of the Arbitration Institute of the Stockholm Chamber of Commerce (“SCC”) adopted a new policy on the “Disclosure of third parties with an interest in the outcome of the dispute”. The policy, effective immediately, encourages parties to the arbitration to immediately disclose the existence of third parties, such as “persons entitled to receive an award under a third-party funding or other agreement”.
The SCC is not the only arbitration institute attempting to regulate the phenomenon of third party funding by way of requiring its disclosure: lately, third party funding has been catching the eyes of arbitration experts worldwide. What may, however, not be so clear is the reason beyond this increasing interest. What are the features of third party funding? How is a third party funding agreement likely to affect arbitration?
Peculiar traits of third party funding
Third party funding is an expression used to define agreements in which a third party (“the third party funder”) commits to financing the procedural costs for a party. In exchange, the funder will be remunerated if the financed party wins the case. The benefits of such contracts are evident: the financed parties will gain access to justice, regardless of their financial situation, and, at the same time, the third party funders will enter into a speculative contract, which could, in the end, be very remunerative. Third party funding is particularly popular in common law countries and, in particular, in the United States (it has been established that the funds collected from funders in the US amounts to 1.75 billion from 2016[1]).
The nature of the funding agreement can vary according to the circumstances of the case: the fund can derive from insurance coverage or can come from the counsel of the party. It can consist of an agreement with a company, and this is the most common scenario. Finally, sales of claims, just as assignments of claims, can result in a third party funding.
Reflections on Arbitration Proceedings
At the same time, third party funding has raised concerns, especially when related to arbitration proceedings. First, the presence of a third party with financial interests in the arbitration risks undermining the confidentiality of the proceedings. Second, it has been noted that the requirements of impartiality and the independence of the Arbitral Tribunal shall also be determined in relation to third party funders. In this respect, in order to contrast the possible conflict of interests, the strategy generally adopted by Arbitration Institutions[2] is that of demanding the disclosure of the existence of third party funders as soon as possible.
Third party funding in Italy
Interestingly enough, in Italy, there are no legal provisions on third party funding, nor is there any case law witnessing its use.
Article 43 of the most updated version of the Arbitration Rules of the Milan Arbitration Chamber (“CAM”) expressly states that “The party that is funded by a third party in relation to the proceedings and its outcome shall disclose the existence of the funding and the identity of the funder”. The article therefore holds the primacy of addressing the matter, although specifically in the context of commercial arbitration.
As far as claims sales are concerned, according to the Italian Civil Code (“CC”) a third party funding agreement may either be:
- a transfer of credit, pursuant to Section 1260 CC. (stating that the creditor can transfer the credit upon payment and even without the debtor’s consent); or
- a contract release, pursuant to Section 1406 CC (stating that each party to a bilateral contract can be substituted by a third party).
Possible future implications for Italian civil proceedings
It is too soon to say whether third party funding will become a popular tool for financing arbitration proceedings in Italy. It is, however, safe to assume that the adoption of the latest provision reveals an emerging awareness of this instrument, and, in the Italian case, they may even result in becoming a stepping stone for the introduction of third party funding to civil proceedings too.
In any case, and absent any legal provision to the contrary, parties will now have the opportunity to autonomously regulate the matter, at least as far as arbitration proceedings are concerned. When drafting their arbitration agreements, they will be able to decide whether to incorporate Arbitration Rules, by reference, and, therefore, to apply the related rules on third party funding to their arbitration procedure.
[1]https://thelawreviews.co.uk/edition/the-third-party-litigation-funding-law-review-edition-2/1176859/united-states.
[2]In addition to the above-mentioned Article 43 of the CAM Arbitration Rules, and to the newly introduced SCC policy, several other international institutions have started expressly regulating the matter. Above all, the Hong Kong International Arbitration Centre (“HKIAC”) Rules, 2018, under Article 44, require the disclosure of the funding agreement and of the identity of the funder. Even earlier, in 2016, the ICC had adopted its “Guidance Note for the disclosure of conflicts by arbitrators”, which had a section dedicated to third party funding.
