July 1, 2016

Third-party funders and their exposure to adverse costs liabilities

The assenting opinion in RSM Production Corporation v. Saint Lucia, ICSID Case No. ARB/12/101 raises a highly emotive issue, relevant to the issue of third-party funding which continues its expansion in international arbitration claims.

This issue concerns the fact that in principle, tribunals currently lack the jurisdiction to issue a costs order against a third-party funder (“TPF”), because TPFs are not typically a party to the arbitration agreement, with no involvement in the underlying dispute between the parties in an arbitration. A TPF’s involvement in the proceedings cannot readily be interpreted as consent to arbitrate, and litigation funding agreements are commonly designed to ensure that that the TPF cannot be construed as a party to an arbitration. Current research suggests that there have been no published arbitral awards ordering a TPF to pay adverse costs in international arbitration.

The ICCA–Queen Mary Task Force Final Report on Third-Party Finding in International Arbitration, due to be published in September 2016, amongst other things, will seek to address this issue. This article briefly explores how certain national court jurisdictions have dealt with this issue.

In England & Wales the seminal case of Arkin v Borchard Lines Ltd2 introduced what has become known as the “Arkin cap”, effectively endorsing the litigation funding market in the UK. Following the Arkin decision, whilst TPFs still risk exposure to adverse costs, the Arkin cap limits their exposure to the amount of their investment. TPFs will not be found liable to pay all of their opponent’s costs of litigation unless the funding agreement is found to be champertous3. The judgment and the principle it established, were designed to balance access to justice, against the need for fairness to successful opponents who should be able to recover their costs.

In practice, TPFs reduce their adverse costs exposure by making it contractually binding for a funded party to obtain After The Event Insurance, providing sufficient indemnity, thereby insuring the TPFs adverse costs risk. Incidentally, ATE insurance policies are often used to try and satisfy requests for security for costs, both before the English courts4 and in international arbitration claims5.

Champerty and maintenance are concepts found in jurisdictions following common law doctrine. In the context of civil litigation, maintenance means the improper support of litigation in which the supporter has no legitimate concern, without just cause or excuse. In England, whilst these rules are clearly relevant, the modern climate of encouraging access to justice means that funding arrangements are less likely to be struck down by the courts. Nevertheless, the courts can hold the agreement to be unenforceable if the TPF exercises excessive control over the proceedings or stands to recover disproportionate sums6 and in context, the TPF is the ‘real party’. The English courts have provided some guidance on the issue of excessive control, see for example the Arkin and Excalibur Judgments.

The level of control over litigation is a consideration to bear in mind also outside of England. The Florida Third District Court of Appeal reached a similar decision in Abu-Ghazaleh v. Chaul7.

The Court of Appeal reversed the trial court’s denial of the defendants’ motion for attorneys’ fees and court costs and remanded for a determination as to the amount of fees. The relevant legal test applied was whether the funders had ‘party’ status within the meaning of the applicable Florida Statutes for attorney’s fees. It held that the two funders controlled the litigation to the extent that they were deemed parties to the litigation. As the instant case was a fee shifting state, the funders were found directly liable for attorney’s fees and court costs.

In practice, it seems that unless a TPF can be bound to the arbitration agreement, costs orders against TPFs would hardly ever be capable of being made. This is because arbitration, by its consensual nature, means that the parties entering into an arbitration agreement opt for arbitration as the sole dispute resolution mechanism. There would need to be a logical fallacy to circumvent the fundamental principles of arbitration consensus.

The SIAC draft Investment Arbitration Rules8, currently under consultation try to address this issue by including the following provision: “The Tribunal shall have the authority to order in its award that all or apart of the legal or other costs of aparty bepaid by another party or,  where appropriate, any third-party funder”. It is however unclear in practice how a party obtaining this order in its favour could enforce such an order under the New York Convention, given that because the norm is that a TPF is not a party to the arbitration, and therefore not bound by the arbitration agreement.

Is there an alternative route available in seeking an order against a TPF via a national court jurisdiction? It is not possible to fully deal with this issue within the confines of this article, however examining this solely from an English jurisdictional perspective, a successful party in an arbitration with its seat in England might apply to the national court for a costs order against the TPF. Pursuant to Article 44(1) English Arbitration Act 1996 (“The Act”), ‘unless otherwise agreed by the parties, the court has for the purposes of and in relation to arbitral proceedings the same powerofmaking orders about thematters listed below as it has for the purposes of and in relation to legal proceedings’. The corresponding list contained within Article 44(2) of The Act does not include costs orders. The general principle contained in Article 1(c) of The Act, namely that ‘in matters governed by this Part the court should not intervene except as provided by this Part’ indicates that the English courts do not have the jurisdiction to make this type of order. Since no such cases on this issue have come to light, it is yet to be seen how national courts in England as well as in other jurisdictions will respond.

We will be hosting a 'Question Time' style debate addressing third-party funding in dispute resolution at the National Portrait Gallery on Tuesday, 12 July 2016. Please click here to find out more.

1) Decision on Saint Lucia’s Request for Security for Costs of 13 August 2014, Assenting opinion, paras 13 to 14

2) [2005] EWCA Civ 655

3) See Excalibur Ventures LLC v Texas Keystone Inc [2014] EWHC 3436 (Comm) for an example of where the Arkin cap has been disapplied. Please note certain aspects of this Judgment are currently under Appeal.

4) Al-Koronky and another v Time-Life Entertainment Group Ltd and another [2006] EWCA Civ 1123, Belco Trading Co v Kondo and another [2008] EWCA Civ 205; Michael Phillips Architects Ltd v Riklin and another [2010] EWHC 834 (TCC); Geophysical Service Centre Company Ltd v Dowell Schlumberger (Middle East)  Inc. ([2013] EWHC 147 (TCC); Harlequin Property (SVG) Ltd and another v Wilkins Kennedy (a firm) [2015] EWHC 1122 (TCC).

5) Kantor, in ICC Dossier third-party funding 57, 57; compare Guaracachi America, Inc. (U.S.A.) and Rurelec plc (United Kingdom) v. Plurinational State of Bolivia, PCA Case No. 2011-17, Procedural Order No. 13 of 21 February 2013, para. 6 (‘unless “The Funder” will bear costs, the Respondent considers that it would be put in a precarious situation that would require an order for cautio judicatum solvi’).

6) For example 55% share was acceptable in Stocznia Gdanska SA v Latreefers Inc (no. 2) [2001] BCC 174. 80% was too much in a Canadian case, Operation 1 v Phillips (2004) 248 DLR (4th) 349.

7) Florida Third District Court of Appeal, Decision of 2 December 2009, Nos. 3D07–3128, 3D07–3130, 36 So. 3d 691.

8) SIAC Draft Investment Arbitration Rules, para 34.