Third Party Funding in International Commercial Arbitration: Confidentiality Concerns

[Sreeja Sengupta is a 3rd year B.A. L.L.B. Hons. student at the West Bengal National University of Juridical Sciences]

Confidentiality of proceedings in commercial arbitration is one of its foremost advantages. Specifically, in the field of international commercial arbitration, which involves multinational companies and sometimes even state utilities, confidentiality assumes great significance as a factor in preferring arbitration to litigation. It is a broad concept that concerns the protection of information regarding the content of the proceedings and any materials produced pursuant thereto, which helps the tribunal to reach a reasoned decision. Aspects of confidentiality not only span the duration of the arbitration but also come into play before and after the proceedings take place.

Unfortunately, there is no uniformity in the way in which confidentiality is addressed through institutional rules. The UNCITRAL Arbitration Rules do not address the different aspects of confidentiality and only provide for confidentiality of the award subject to consent of the parties.[1] The ICC and SCC Rules also skirt the issue and impose obligations only on the arbitral tribunal, leaving the rest of the onus to maintain confidentiality largely in the hands of the parties themselves.[2]  On the other hand, the LCIA and SIAC Rules provide for a clear general duty of confidentiality between parties even when express agreement is absent.[3] This lack of uniformity in addressing aspects of confidentiality also persists through diverging judicial decisions in different jurisdictions. While traditionally, the common law understanding of confidentiality of arbitration implies an inherent duty even when there is no explicit mention,[4] courts in certain jurisdictions like Australia[5], Sweden[6] and the United States of America[7] have denied the existence of this legal fiction.

Despite these inconsistencies, a 2018 Queen Mary and White and Case Survey identified that about 87% of the respondents considered confidentiality to be of importance in international commercial arbitration, and would prefer it as a rule rather than an exception. However, in the wake of evolving practices like third party funding, the coveted value of confidentiality is being jeopardized. Funders, who are strangers to the dispute, are coming in possession of crucial information related to the arbitration proceedings in order to conduct case assessments. If unregulated, this can pave the way for misuse of information and severe confidentiality breaches. In this background, this post will analyze the possible concerns posed to the confidentiality of proceedings by the third party funding regime and then identify the current legal framework or lack thereof to tackle these concerns.

Concerns Regarding Confidentiality Posed by Third Party Funding

Third party funding (TPF) is the process of financing a legal claim in part or in whole, by a third party who is not related to the dispute and who, by way of agreement, is entitled to a share of a favourable award, or nothing in the event of an adverse award. In the past two decades, arbitration became significantly more popular for resolution of international disputes, but its costs have also started skyrocketing. This spawned the growth of the TPF industry. While the TPF industry has grown steadily, its popularity has been the subject of much debate amongst the international community. Despite its numerous advantages such as financial support, increased access to justice, risk management and mitigation, and objective claim assessment, TPF has its own set of drawbacks. It can give rise to possible conflicts of interest, increase in frivolous claims, concerns regarding confidentiality and inability to finance adverse costs.[8] As opposed to the field of treaty arbitrations, the data surrounding TPF in international commercial arbitration is seldom available due to the prevailing veil of confidentiality. However, there are several indications that its use is increasing. This brings with it a host of problems, both ethical and procedural, for the present regime.

Several debates regarding TPF have been centered on conflicts of interest, arbitrator bias, security for costs and the like. Yet, there are very few surrounding its implications on confidentiality. However, massive concerns can arise when a party engages in TPF to finance it claim and there is also an understanding of confidentiality between the disputing parties. This is because, as a part of the due diligence process, the funded party is obligated to provide the funder with details of the arbitration in order to engage their services.[9] Although sharing of such information is in furtherance of case assessment and preserving business integrity, the existence of such information at the hands of a third party without any safeguards could be subject to misuse, as a court observed in Sarah Lynnette Webb v. Lewis Silikn.[10] Moreover, since funders are also essentially investors, they can utilize the commercially sensitive information obtained to make business decisions that might amount to ‘market abuse.’ Further, in the event of any confidentiality breach by a third party funder, due to their absence of privity to the proceedings, the arbitral tribunal will lack competence to decide on the consequences of the breach. Thereafter, whether the subject of the breach arising from a private arbitration proceeding can be raised publicly in a court of law will depend upon the jurisdiction of the proceedings. Therefore, the lack of a clear legal framework providing for confidentiality can not only pave the way for breaches, but it can also result in absolving a third party from facing its consequences.

Since there is no binding law requiring a disclosure of TPF by the funder in international arbitration proceedings, there is no method of pre-emptively preventing such misuse of confidential information and consequences thereof. In fact, in most cases employing TPF, neither the arbitrators nor the non-funded party are even aware of the existence of TPF, as there is no binding disclosure requirements. Thus, often the harm goes unassessed. Shifting the onus on the party receiving funding to put safeguards for maintaining confidentiality in the agreement with the funder is not the most viable option, as the latter generally has the higher negotiating power economically. Therefore, in order to prevent such misuse of information and to protect business integrity between the disputing parties, a regime promoting transparency with respect to funding of claims can paradoxically help in furthering the overall interests of confidentiality between disputing parties.

Most TPF proponents against disclosure take the defense of protection of their own commercial interests and sensitive information, yet the extent of disclosure is one which can always be regulated to balance interests. Disclosure of the mere fact of engaging in TPF and the agency employed can be a big step towards offering the non-funded party an opportunity to protect its legitimate interests of preserving sensitive information by way of agreement. Cremades even goes as far to suggest that the absence of disclosure of the existence of TPF to the other party could “imply a breach of procedural good faith with which the parties should conduct themselves.[11] Therefore, it is clear that some extent of transparency is necessary about TPF, and it can only be enforced through binding legislation.

The Way Forward

Admittedly, the present regime does not have comprehensive rules on maintenance of confidentiality of proceedings between disputing parties. Jurisdictions have adopted varying, and sometimes contradictory, approaches in this regard. As a result, the uncertain shroud of confidentiality that surrounds proceedings often does more harm than good by blocking access to even basic case information and not allowing for a proper assessment of potential breaches at the face of evolving practices like TPF. If institutional mechanisms are not developed to tackle this issue at the root, then the most perceived advantage of international commercial arbitration might just be at the risk of being compromised. Therefore, there is even more need to develop a pro-disclosure regime targeted towards protecting confidentiality and addressing potential concerns.

While the IBA recently revised its guidelines on Conflict of Interest in International Arbitration to provide for disclosure of TPF under certain circumstances, these rules are only applicable in specific circumstances and are not binding on parties.[12] Some jurisdictions have led the way by formulating guidelines for regulation of third party funding through their domestic legislation.[13]  However, it is time that the most frequented arbitral institutions for resolution of international commercial disputes like the ICC, LCIA, SCC and UNCITRAL establish a mandatory disclosure regime to provide scope for better protection of confidentiality between parties and prevent the practice of TPF from posing as a threat. Disclosure and confidentiality may seem to be antithetical to one another, but the regulated use of the former in the interests of preserving the latter in this unique situation appears to be the best way forward.

Sreeja Sengupta

[1] UNCITRAL Arbitration Rules (2010) Article 34(5).

[2] ICC Rules of Arbitration (2017), Article 6; SCC Arbitration Institute Arbitration Rules (2017) Article 3.

[3] LCIA Arbitration Rules (2014) Article 30; SIAC Arbitration Rules (2016) Rule 39.

[4] Ali Shipping Corp. v. Shipyard Trogir [1998] 2 All ER 136; Aita v. Ojjeh Revue de L’arbitrage 583 (1986).

[5] Esso Australia Res. v. Plowman 128 A.L.R. 391 (1995).

[6] Bulgarian Foreign Trade Bank Ltd v. A.I. Trade Finance Inc., Nytt Juridiskt Arkiv [NJA] [Supreme Court Reports] 2000 p. 147.

[7] The United States v. Panhandle Corp. 118 F.R.D. 346 (D. Del. 1998).

[8]Susanna Khouri, Kate Hurford & Clive Bowman, Third Party Funding in International Commercial and Treaty Arbitration-A Panacea or a Plague? A Discussion of the Risks and Benefits of Third Party Funding, 8 TDM (2011).

[9] I. Dimitrova, Third Party funding and Confidentiality in International Commercial Arbitration: A Recipe for Uncertainty? 4 TDM (2018).

[10] [2015] EWHC 687 (Ch).

[11] Icc Institute Of World Business Law, Cremades, B. M., & Dimolitsa, A., Third party funding in international arbitration (2013). 

[12] International Bar Association, Guidelines on Conflicts of Interest in International Arbitration (2014).

[13] Hong Kong Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance No. 6 (2017); Singapore Civil Law (Third-Party Funding) Regulations 2017.

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