Third party funding exists both in court litigation and in arbitrations. But, due to the rise in popularity of international arbitration of late, most references to third party funding concern international arbitration funding.
Simply put, third party funding is the funding of legal proceedings on behalf of another, often to assist a party who would not ordinarily have been able to fund their own case (or on behalf of a party who chooses to out-source a portion of the risk associated with such proceedings). In return, a funder would often negotiate a higher than normal return, in the event of success. Seems rather simple and at first glance sounds a lot like a contingency fee arrangement. Only, it is not. Contingency fee legislation, in South Africa at least, only restricts legal practitioners and not pure funders of litigation. Third party funding in South Africa is presently not regulated but a relatively long line of civil case law exists which may be instructive in arbitral proceedings.
Recently, both Singapore and Hong Kong have made moves to enact legislation regulating the provision of third party funding in international arbitrations seated in their respective regions. This move is in line with governmental support for the growth of these countries as preferred seats for such proceedings. Both regions are widely regarded as being at the cutting edge of developments in international arbitration.
So, what is all the fuss about? Well, many argue that further regulation is required. One cannot allow the resolution of disputes to evolve into a form of gambling, especially where the funding party is not on the hook for an adverse award. This leads to the next hot topic: the duty to disclose the existence of any third party funding arrangement.
Can a party request the disclosure of any such funding? Well, yes and no, depending on where the arbitration is seated. More and more jurisdictions around the world are providing mechanisms for the disclosure of not only the fact that the other party is funded, but also the terms of any such funding agreement, such as found in Singapore. Hong Kong seems to be more pro-active by shifting towards the mandatory disclosure of such arrangements.
The biggest risk to a funder is losing the case. It is therefore not unusual to see funders playing an active role in the proceedings. This then enters into the public policy domain. From a South African perspective, a court is likely to look into the actual nature of the funding. Insofar as the funder is an arms-length funder, without overly involving itself in the litigation, then the court will most likely permit it. If however, the funder is actively involved in the proceedings, such funding may be regarded as contradicting local public policy. Each region approaches this question in a different way and public policy on the continent is a constantly moving target.
Further difficulties arise regarding the issue of legal privilege. Such protections do not normally extend to disclosures made to a funder. Problematically, such a funder may find themselves subpoenaed to testify at subsequent proceedings. A funder may also be required to put up security to cover the legal costs of an opposing party.
Notwithstanding some of the difficulties highlighted above, one cannot overlook one of the prime objectives of third party funding: to enable a party who may not be able to afford realistic access justice, to do just that. For this reason, third party funding is particularly important for disputes on the African continent where many parties simply cannot afford the disproportional cost of access to justice. This coupled with the recent upsurge and interest in international arbitration in Africa, means that this form of investment is becoming increasingly attractive.
Astute investors know not to overlook Africa’s potential. Similarly, African parties should not overlook this opportunity to achieve access to justice. A win-win, some might say. The others, well… they are less optimistic.