Note: This article was originally published in the ADR Institute of Canada newsletter ADR Perspectives.
Parties entering into arbitration agreements do not want to limit their own access to capital in the event that a dispute arises and they need to pay for arbitration. Whether incorporated into the definitive agreement or not, parties and their counsel need to be aware of the drafting considerations associated with third party arbitration funding so that they maintain their freedom to fund their arbitration as they see fit.
You are drafting an agreement. Someone decides that arbitration should be the dispute resolution method. Great. Do you tuck a standard-form arbitration clause somewhere in the litany of boilerplate provisions? Perhaps. The ADR Institute of Canada does have an excellent model clause. But are there further considerations? The cost of arbitration is on the rise. So is the use of third-party funding to offset some of those costs as well as some of the risks. Now the question becomes what do you need to consider when drafting the arbitration agreement and incorporating third-party funding? Tell your client that Hulk Hogan successfully sued a tabloid for publishing his sex tape with the help of third-party funding from a billionaire who had himself been a target of that tabloid. Now that you have their attention, watch their eyes glaze over as you discuss the following details.
Choice of law
The choice of law provision may have important implications for the availability of funding. In Canada, litigation funding is permitted, and Ontario has the most developed jurisprudence on point. Funding is also relatively common in Australia, the U.K. and many U.S. states. However, Ireland and some other U.S. jurisdictions consider funding to be a violation of the common law prohibitions on maintenance and champerty. As a result, to preserve the option for a client to explore funding, ensure the guiding law is in a favourable jurisdiction.
Confidentiality
An agreement that contains an arbitration provision likely also includes confidentiality clauses. Disclosure to a funder is likely permitted in the same way that disclosure to an expert or other advisor would be.1 However, to prevent any disputes about this, the confidentiality provision could allow disclosure of information to potential third-party funders under the same confidentiality terms binding the parties themselves, or could require the funder to enter into a non-disclosure agreement. In the alternative, the claimant seeking financing could apply to the arbitrator to permit disclosure of confidential information to a potential funder once the arbitral tribunal is appointed. Historically, this might have suggested that the party was unable to fund its claim. However, a well-financed claimant could merely be transferring the cost and risk of the arbitration to a third party. This is consistent with the experience of Bentham IMF, a publicly-traded Australian litigation funder that opened Canadian operations in 2016: “Although litigation funding has its origins in David-and-Goliath battles, we are increasingly seeing well-capitalized clients exploring funding as a corporate finance and risk management tool,” explains Naomi Loewith, an Investment Manager and Legal Counsel with Bentham in Toronto.
Disclosure
Disclosure of the existence and details of a third-party funding agreement is another consideration that parties drafting an arbitration agreement will want to consider. The best practice in arbitration is for the party with funding to disclose the fact that they are supported by a funder, as well as the identity of the funder, to prevent any conflicts for the other party or arbitral panel. Professional funders will ensure they do not have a conflict before considering a case, but disclosure should ensure that there is no conflict that can be raised later. The terms of the funding arrangement, on the other hand, should not be relevant to the issues being arbitrated, and disclosure of the details could reveal confidential information about budget or litigation strategy. This is consistent with the Canada-European Union Comprehensive Economic and Trade Agreement, which was entered into force in September 2017. That treaty requires that, where a party to a dispute under CETA has litigation funding, it should disclose that fact and the identity of the funder to the opposing party and the tribunal, but no further disclosure is contemplated.2
Arbitrator’s authority
In the terms of appointment for arbitral tribunals, provisions can be included that set out the authority of the arbitrators, or lack thereof, over third-party financing arrangements. An arbitrator could rule on any conflict of interest arising from the involvement of a third party funder, or the amount of disclosure of confidential information to a funder. Questions of whether to permit third-party funding of a claimant, whether a third party funding agreement requires the approval of the arbitral tribunal, whether the arbitrator may access the third party funding agreement, or the scope of the role that a funder may play in an arbitration on a spectrum from financing to counselling could also be put to the arbitral tribunal.
Recoverability of funding costs
If the agreement gives the arbitrator discretion in awarding costs, counsel may want to consider explicitly allowing the arbitrator to order the unsuccessful party to pay the costs of litigation funding if the party with funding prevails. The English High Court recently upheld a costs award that included payment of litigation funding costs as “other costs” when a funded party succeeded in an ICC arbitration.3
Going forward
Counsel and clients that are involved in drafting arbitration provisions should be aware of the issues surrounding third party funding, even if such considerations never make it into the definitive agreement. Bodies that govern arbitration could play a meaningful role in guiding the development of third-party arbitration funding by making provision for this concept in their codes of conduct. Parties to arbitrations would be well advised to at least consider this financing mechanism and its consequences since the only constant appears to be the rising cost of the arbitration itself.
Courtney Kachur practises construction law and commercial litigation in Calgary with Rose LLP. She is currently the Secretary on the CBA’s National Construction and Infrastructure Law Executive.
End notes
1. The Federal Court recently held that a third-party funder is entitled to receive information as any related third party would be, e.g. “experts, potential witnesses, consultants or others whose advice is relevant to the carriage of the litigation”. Seedlings Life Sciences Ventures v. Pfizer Canada, 2017 FC 826
2. CETA, s. 8.26.
3. Essar Oilfields Services Limited v Norscot Rig Management PVT Limited [2016] EWHC 2361 (Comm).