VICTOR ADEGBITE*
Covid-19 has affected at least 188 countries and territories of the world and has brought a lot of economic hardship to many individuals and companies. The global pandemic, which has taken a significant toll, by claiming millions of lives, has the entire world buzzing with uncertainty and questions: How long will the pandemic last? What will people’s lives look like once the pandemic is over? The spread of the virus has continued to negatively impact the economy, commercial activities, people and legal matters.
It is inarguable that there is a likelihood in increase in international disputes due to the constraints and failure of individuals and parties to meet their contractual obligations due to the pandemic.[i] The post-corona virus world will give rise to a myriad of claims and lawsuits, including some that are likely to transcend state and national borders. As Arbitration is becoming a popular choice in commercial contracts and dispute resolution, those invoking their dispute resolution/arbitration clause may find themselves submitting request for arbitration. This is due to the perceived potential advantages of Alternative to Dispute Resolution (ADR) over judicial proceedings, such as the flexibility and how less costly it is.
In times of economic and financial hardship like this, individuals and parties may find it difficult to provide for legal matters arising from the Covid-19 issues. The legal budgets of companies are dwindling due to the disruption of the production and supply caused by the lockdown in some parts of the world. This article focuses on the third-party funding in Arbitration in a post-Covid-19 world.
THIRD PARTY FUNDING IN ARBITRATION
Third party funding (TPF) is when a non-party to a dispute provides all or part of the funding for the legal costs of the dispute to a party in exchange for an agreed return upon the rendering of a favourable decision by the adjudicator, especially where a party is under a financial strain. It was originally designed as a means of assistance for companies or parties which were struggling to sustain their claims in arbitration or litigation.
Third party funding involves the formation of a legally enforceable contract between the funder and funded parties, where the funder receive a percentage of the amount recovered if the litigation is successful, commonly in the range of 25-40% percentage of the cut they take, or where it is based on the financial necessity of a party seeking fund to sponsor their meritorious claims. Additionally, the funding party may agree to pay the costs incurred by the opposite party, if the opposite party is under resourced. The funder has the hopes of getting returns once the dispute is settled or the award made. If the case is unsuccessful, the funder loses its investment, receives no success fee and has no recourse against the funded party. The consideration for the funding agency necessarily includes meritorious claims, pursued by motivated claimants and a percentage of the compensation-award granted in the arbitration. Cases considered unsuitable for funding are divorce and personal injury cases.
Over the years, there has been a marked increase in third party funding. Today, it is commonly adopted in commercial activities, and also State-to-State arbitration, as stated in SA Veolia proprete (Formally SA Onyx) V. Foris AG.[ii] The global community has accepted the process, and the framework for the process is being considered with Singapore and Hong Kong as notable examples. In Nigeria, a recent amendment to the Arbitration and Conciliatory Act via an amended bill,[iii] which grants the cost of obtaining third party funding to be included in arbitration costs has been welcomed by all, this effectively legalises TPF in arbitration but not litigation in the country.
It is common to ensure third party funding is domiciled in the jurisdiction where the arbitration is seated. Some countries have restrictions that forbids third party funding (TPF), for example, under law of champerty and maintenance, which are common law doctrines, to safeguard a party\’s best interests and protect the administration of justice against abuse from non-parties. Maintenance is the improper intermeddling in a lawsuit by a party with no legal interest in it. Champerty is a subspecies of maintenance and arises when a \’maintainer\’ shares in the profits of litigation. These laws are referred to as antique laws, which prohibits the outside financing of litigation and has been abolished in some jurisdictions, such as Massachusetts, and New York in the United States, this is to further aid the development of TPF; as stated in Arkin v Borchard Lines.[iv]
THIRD PARTY FUNDING IN A POST-COVID-19 WORLD
As the Covid-19 global pandemic has caused the economic sectors of various countries to be paralyzed, third party funding is likely to increase in usage because parties may want to offset some of the risk associated with costly arbitration, particularly if the award made by the tribunal is not favorable to them. Funders also are more likely to fund cases which involves damages, because the same phenomenon that is causing parties to seek out disputes funding is forcing funders to proceed with caution and funding arbitration matters is a high-risk investment. Third party funding in this period will enable companies to invest their money for a better efficiency and growth in their services, by moving legal fees and expenses off their own balance sheets. Third party funding has the potential to ensure that disputing parties has the sufficient resources to meet all legal costs that arise from the arbitration proceedings. Funders in Third party Funding includes, specialised third party funders, insurance companies, investment banks, hedge funds and law firms.
There will likely be an influx of cases after this pandemic ends, as many courts have been closed or restricted to limited operations as they seek to implement new technologies to facilitate virtual hearings. International arbitration too has been impacted, however, as a flexible and dynamic procedure, where technology and procedural innovations have been in use by some for many years, it has been in a good position to respond to the new ways of working. Recently in Nigeria, there was the launch of COVID-19 Alternative Dispute resolution initiative (CADRI) to ensure that their courts would not be overwhelmed with Covid-19 legal matters by offering ADR alternatives to litigation, in person, or by virtual proceedings and enable continued access to justice during the lockdown. This initiative[v] was envisioned to ensure that disputes, even those that are suffering COVID-19 imposed delays in courts, are resolved in a timely, considerably cheaper and efficient manner, notwithstanding the existence or otherwise of dispute resolution clauses in the contracts executed between the parties. It is important to note that, under Nigerian law, third party funding of arbitration/litigation is generally regarded as champertous if it involves a third party to maintaining and bearing the costs of an action for another to take a share of proceeds of the action or suit. The American Bar Association has also created a nationwide task force of volunteer lawyers from across the legal profession, to address legal needs arising from coronavirus pandemic.[vi]
Third party funding can be considered to fund vital and not frivolous cases, as a sieve in reducing the burden on the system. Factors taken into consideration by funders when deciding whether to fund an arbitration include (1) the value and complexity of a claim, (2) the amount of funding needed, (3) the likelihood of success of the claim, (4) whether other parties have an interest in the claim, (5) the jurisdiction in which the arbitration takes place, (6) the arbitral institution that administrators a case, (7) whether counterclaims will be made and (8) the ease of enforcement of the arbitral award to be rendered. For parties seeking to pursue TPF, careful consideration of the above factors and due diligence prior to applying for funding will assist in ensuring their best chances of success. Lawyers with experience in TPF and the type of claim being considered can help guide interested parties in weighing their options and prepare its best case for funding, as well as identifying appropriate funders.
Given the increasing popularity of third party funding in international arbitration and the impact it may have in helping parties access justice in the post COVID –19 world, stakeholders in the arbitration community, such as arbitrators, and ADR organisations need to be proactive in setting standards that regulate third party funding and also ensure deliberate steps to promote third party funding. Some of the areas that need to be addressed includes conflicts of interest; the independence or impartiality of an arbitrator may be called into question where an arbitrator and Third-Party Funder of a disputing party in an arbitration have a pre-existing relationship.
Control over claim and protection of confidential information is an issue in third party funding; Parties should enter into confidentiality or non-disclosure agreements with prospective funders. Parties should also consider what material in fact needs to be shared: a balance must be struck between limiting risk and meeting the funder’s need for adequate information (both when considering whether to make an offer for funding and throughout the proceed.
In conclusion, third party funding will be a great method to increase access to justice, irrespective of the lows and harshness of the pandemic period in different jurisdictions and steps must be taken to ensure there are recognised public or private legal entities to be set as third party funding institutions.
*Victor Adegbite is a law undergraduate of Olabisi Onabanjo University, in Nigeria.
[i] Law Blog, Global Litigation After the Coronavirus Pandemic, Mary-Christine (“M.C.”) Sungaila, Marco A. Pulido, March 30, 2020.
[ii] Veolia Propreté v. Arab Republic of Egypt, ICSID Case No. ARB/12/15.
[iii] Whitecase Blog, Third Party Funding in Arbitration: Reforms in Nigeria, Robert Wheal, Elizabeth Oger-Gross, 27 Nov 2018.
[iv] Arkin v Borchard Lines Ltd & Ors, England and Wales Court of Appeal (Civil Division), 26 May, 2005.
[v] Covid-19 Alternative To Dispute Resolution (ADR) Initiative, CADRI.
[vi] Americanbar Blog, ABA creates task force to address legal needs arising from coronavirus pandemic, March 13, 2020.