EU principles highlight specific consideration for third-party funding in arbitration

The ELI published a set of 12 principles in a recent report, giving guidance to litigants, funders, legal advisers, courts, arbitration institutions and regulatory bodies involved in the fast-growing TPF market. The project is also intended to provide a “blueprint” for light-touch regulation of the expanding sector across the EU. 

Scheherazade Dubash, international arbitration specialist at Pinsent Masons, said that although many of the principles set out in the report in respect of the third-party funding of litigation are equally applicable to arbitration, the report acknowledges that there are five areas that require particular consideration in the arbitration context.

These are disclosure and transparency, security for costs, confidentiality, control and ancillary proceedings.

Disclosure and transparency in arbitration proceedings are a key focus under the ELI principles. The report emphasises that ensuring the impartiality of arbitrators, who may act as counsel and rely on party appointments for their income, is a concern. The report references the updated 2024 IBA Guidelines on Conflicts of Interest in International Arbitration, which extend the duty of disclosure to include relationships between arbitrators and third-party funders. This is aimed at helping identify and address any potential biases early in the proceedings.

Similar provisions in the arbitration rules of leading international arbitration institutions, such as the International Chamber of Commerce (ICC), the Hong Kong International Arbitration Centre (HKIAC) and the Vienna International Arbitral Centre (VIAC), further reinforce this requirement by mandating that parties disclose the existence and identity of any third-party funders, according to the ELI report.

“While there is considerable support for disclosing the existence of funding and the identity of the funder in arbitration proceedings, there is a general consensus that it is not, for the purposes of addressing concerns about arbitrator impartiality, necessary to disclose the specific terms of the funding agreement,” said Dubash.

In a funded arbitration, it is a common concern that the funded party may be unable to cover the opposing party’s costs if they lose the case, especially for claimants with limited financial resources. The report recognises the issue around security for costs, and that it is particularly relevant in investor-state disputes, where the financial stakes are high and there is a significant resource imbalance between the parties.

As a best practice, the report recommends that all third-party funding agreements include specific and clear provisions regarding the funder’s liability for satisfying an order for the payment of security for costs in respect of the funded dispute. This recommendation is based on the fact that the funder, being a non-party to the arbitration agreement, would not ordinarily be subject to the arbitral tribunal’s jurisdiction and will therefore not be bound by an order to pay costs at the end of the proceedings.

Confidentiality is another main area of concern, as the report finds that there is “little explicit guidance” on questions such as whether a party to ongoing arbitration proceedings can pass information about those proceedings to an existing or potential third-party funder, or whether a party that has obtained an award can share the contents of that award with funders when seeking funding for enforcement proceedings.

The report underscores the importance of maintaining confidentiality in the context of third-party funding and recommends that funders should be subject to the same confidentiality obligations as the funded party under arbitral rules and applicable law. It says that this is an area where regulation could provide clarity.

“Confidentiality is a fundamental aspect of arbitration proceedings, but the involvement of third-party funders introduces complexities. There has been a longstanding need for legal clarity on confidentiality obligations between the funded party and the funder to ensure that sensitive information is protected, especially since communications between the funded party and the funder may not necessarily be covered by the same legal privilege that applies to communications between a client and their lawyer,” said Dubash.

According to Dubash, the current standard practice is for parties to enter into non-disclosure agreements (NDAs) with funders before sharing any information to safeguard confidentiality and mitigate the risk of sensitive information being disclosed. The report also recommends that express confidentiality obligations be incorporated into the funding agreement, with specific provisions for exceptions and termination opt-outs.

The report also points out that the degree of control that funders can exert over the arbitration process is a contentious issue, and there is a greater likelihood of funders taking significant control over the conduct of arbitration proceedings, such as settlement, due to the confidential nature of arbitration.

The report recognises that while funders have a legitimate interest in protecting their investment, this should not extend to controlling the legal proceedings. However, Dubash said that parts of the suggested sample wordings seem to contradict this sentiment. The ELI’s recommended clause says that the funded party must obtain the funder’s express approval before entering into any compromise or settlement. She suggested that the funded party, being the one directly involved in the dispute, should retain ultimate decision-making authority, especially regarding settlement decisions.

“Third-party funding agreements should clearly delineate the extent of the funder’s involvement and control to prevent any undue influence over the funded party,” she said.