Disclosure of Litigation Funding in International Arbitration

Third-party funding has been a trend for several years, not only in International Arbitration but also in traditional litigation, even though in other jurisdictions it has existed for some time now in Latin America it is now an increasingly common practice.

Thus, in an arbitration proceeding, where one of the parties is financed by a third party, one of the common discussions is usually whether the financed party should disclose to the Arbitral Tribunal and its counterpart the existence of the financing agreement and its content. The usual answer would be, as with many other issues in international arbitration, that it depends on the rules that the parties have agreed to apply.

However, the tendency has been that parties have the obligation to disclose the existence of a funding agreement and the identity of the third party funder, which is why recently the arbitration institutions have incorporated into their rules the obligation of the parties to disclose the existence of third party funding.

The justification for requiring this disclosure of the existence of third party funding and the identity of the funder, is the need to protect the integrity of the arbitration process and to maintain the impartiality and independence of arbitrators, thereby protecting the arbitral award from future challenge.

Some of the more arbitration-friendly jurisdictions, such as Hong Kong and Singapore, have already incorporated into their national laws the obligations of the parties with respect to such disclosure of information.

And as noted above, the arbitration institutions are doing their part by incorporating these obligations into their arbitration rules. For example in 2021 these provisions were added to the Arbitration Rules of the International Chamber of Commerce and in this year 2022, the Arbitration Rules of the International Centre for Settlement of Investment Disputes also incorporate the obligations of the parties to disclose any third-party financing they have and the identity of the financiers, in fact, ICSID goes further and requires the parties to disclose the persons or entities that own or have effective control of the person providing the financing.

Despite what appears to be widespread agreement on the importance of disclosure of third-party funding in arbitral proceedings, we can also observe an emerging trend of investment treaty cases in which the tribunal ordered disclosure of the existence of the funding agreement and the identity of the funder of the litigation, but denied disclosure of the underlying funding agreement itself. This reflects the more limited scope of disclosure required by a growing number of arbitral institutions, and also ordered in a number of international commercial arbitration cases.

This approach was evident in a relatively recent case, Amorrortu v. The Republic of Peru (PCA Case No. 2020-11), an energy investor and the Peruvian State in respect of an oilfield project. In this case, the State requested the Tribunal to require the claimant to i) disclose the names of the financiers with whom it had entered into or planned to enter into a financing agreement, ii) confirm that the financing agreement includes the payment of compensation for adverse costs and iii) provide copies of the relevant provision of the financing agreements relating to security for costs and aspects of the conduct, termination or settlement of the arbitration that required the financier’s approval.

And while Peru based its request in part on concerns about the existence of conflicts of interest, it also indicated that disclosure was necessary due to the possible degree of control the funder might have over possible negotiations or the termination of the arbitration proceedings. The tribunal only ordered the claimant to disclose the identity of the third-party funder and nothing more, reasoning that such information is sufficient to deal with potential conflicts of interest.

With respect to Peru’s representations regarding the connection that disclosure might have with the possibility of payment of costs in the proceedings, the Tribunal noted that the fact that the claimant has gone to a third-party funder does not necessarily mean that it lacks the necessary funds to meet its obligations or costs of the proceedings, as there could be numerous justifications for this, such as risk management or review of the merits of the case by a third party that provides a certain level of validation for internal compliance purposes.

As to whether disclosure might reveal any degree of control the funder might have over the negotiations and termination of the proceedings, the tribunal was not convinced and clarified that the claimant is under no obligation to demonstrate that it is free to negotiate and terminate the arbitration process as it sees fit. Finally, the tribunal emphasized the role that litigation funding provides to ensure access to justice.

Now, there is another discussion adjacent to the issues already noted that is equally relevant, and that is anyhow the fact that a party is being funded by a litigation funder seems to signify, or at least sends a message to both the tribunal and the opposing party, that an impartial, otherwise disinterested third party has found the claims to be meritorious probably on the basis of a rigorous due diligence process.

This would seem to indicate that it could influence the opposing party’s sensitivity to negotiations and may accelerate or encourage sensible settlement discussions. In addition, it also appears that knowledge that a party is backed by a litigation funder may deter its opponent from dragging out and delaying proceedings to restrict the claimant’s financial oxygen, which is more difficult to achieve when an established professional litigation funder backs a party’s claims.

There is a growing acceptance and, indeed, a worldwide trend in requiring disclosure of the existence of funding agreements and the identity of third-party funders in international arbitration proceedings. And everything seems to indicate that there are more benefits than disadvantages to such disclosure since at least a message is being sent about the strength of the party’s claims and the durability of its financial means in the proceedings.

In this sense, parties that have or intend to seek financing agreements should take into consideration, even before the commencement of the proceeding, that they will have disclosure obligations related to such agreements and it would be best to have those obligations delimited in order to comply with them in a timely manner.

And they should not lose sight of the fact that there is a strong possibility that the counterparty may seek broader disclosure than is necessary in respect of the financing agreement, information which, while not strictly necessary in terms of the merits of the arbitration proceedings, could be used as a way of undermining the strength of the counterparty’s case.

Joaquín Vega.

Montserrat Abogado.


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