Discoverability of litigation funding in international arbitration
In international arbitrations where one party is being financed by a litigation funder, an issue that commonly arises is whether the funded party must disclose to the tribunal and the opposing party the existence of the funding arrangement. By extension, questions – and disputes – have also arisen as to whether the underlying funding agreement is subject to discovery.
The answer, as with many issues in international arbitration, is that it depends on the applicable rules. One of course would have to look at any national laws that apply to the arbitration and the relevant arbitration rules.
The trend: disclosure of the existence of the funding agreement and the identity of the litigation funder
While there is no general rule in international arbitration that requires disclosure of litigation funding, there is an increasing acceptance – indeed, a global trend – that at least the existence of the funding arrangement and the identity of the litigation funder should be disclosed or are discoverable. And for good reason.
The rationale for requiring the disclosure of the existence of the funding agreement and the identity of the funder is that doing so protects the integrity of the arbitral process, helps maintain the impartiality and independence of arbitrators, and protects the arbitral award from future challenge.
National laws in the arbitration hubs of Hong Kong and Singapore have already mandated such disclosure, as part of their amendments to laws permitting the use of litigation funding in international arbitrations, among other dispute resolution proceedings.
A number of arbitral institutions embrace the same approach. For example, the 2018 Administered Arbitration Rules of the Hong Kong International Arbitration Centre, the 2021 ICC Rules of Arbitration, and most recently, the 2022 Arbitration Rules of the International Centre for the Settlement of Investment Disputes (the “ICSID Rules”) also require the disclosure of the existence of the funding agreement and the identity of the funder. The ICSID Rules even go a step further and require the disclosure of the identities of the “persons and entities that own and control th[e] juridical person [providing the funding].”
In the area of investment treaty law, some investment treaties have included disclosure obligations pertaining to funding arrangements. The Comprehensive Economic and Trade Agreement, ratified by Canada and the European Union, requires “the disputing party benefiting from [third party funding to] disclose to the other disputing party and to the Tribunal the name and address of the third party funder.” The Investment Protection Agreement between the European Union and Vietnam contains similar disclosure obligations.
Rejection of broader attempts at disclosure of the funding agreement
There is also a nascent body of investment treaty cases where the tribunal has ordered the disclosure of the existence of the funding arrangement and the identity of the litigation funder, but denied disclosure of the underlying funding agreement itself. This reflects the narrower scope of disclosure required by a growing number of arbitral institutions, and also ordered in a number of international commercial arbitration cases.
That approach was evident in the relatively recent case of Amorrortu v. The Republic of Peru (PCA Case No. 2020-11), a case between an energy investor and Peru regarding an oil fields project. In that case, Peru sought an order from the tribunal compelling the claimant to: (i) “disclose the names of any funder(s) with whom [the claimant] or [his] legal representatives may have entered or plan to enter into an agreement in relation to th[e] case;” (ii) “confirm that the funding arrangement includes payment of an adverse cost award;” and (iii) “provide copies of the relevant provision from the funding agreement(s) relating to () cost awards, and () aspects of the conduct, termination, or settlement of the present arbitration that require funder approval.”
While Peru in part based its request on conflict of interest concerns, it explained that disclosure was necessary because of questions regarding the degree of control that the funder may exercise over “possible negotiations or . . . terminati[on] [of] the proceedings.” Peru also expressed the need to clarify “the basis on which [its] potential application for security for costs would be made.”
The tribunal in Amorrortu ordered the claimant to disclose the identity of the third party funder, and nothing more, explaining that “[s]uch disclosure is sufficient to deal with potential conflicts of interest.” (emphasis added)
Addressing the connection of the disclosure sought to any potential application for security for costs, the tribunal noted that “[t]he fact of third party funding does not imply that [the claimant] is impecunious” and that “[t]here are numerous other reasons why a claimant may seek third party funding, including risk management and validation by a more objective third party of the merits of the claim.”
As to whether disclosure might reveal any degree of control that the funder might have over settlement negotiations and termination of the proceedings, the tribunal was unconvinced and clarified that the claimant does not have any onus to demonstrate that “he is free to negotiate and terminate the arbitration as he sees fit.”
Finally, the Amorrortu tribunal highlighted the “access to justice” function that litigation funding provides. The tribunal rejected Peru’s overbroad disclosure demand along those lines: “If the Claimant can meet the jurisdictional prerequisites to have his claim arbitrated . . . there is no additional requirement that he prove financial capacity to meet any potential adverse costs award or that he is the master of his own litigation.
Is the disclosure of litigation funding necessarily undesirable?
But even setting aside whether a party has the obligation to disclose its funding arrangements in an arbitration, there are nonetheless benefits to such disclosure. The fact that a party is being funded by a litigation funder means – and sends a message both to the tribunal and the opposing party – that an impartial, otherwise disinterested third party has found the claims meritorious likely based on a rigorous due diligence process. That may influence an opposing party’s openness to compromise and may accelerate or encourage sensible settlement discussions. Moreover, the knowledge that a party is backed by a litigation funder may discourage its opponent from dragging and delaying proceedings to constrict claimant’s financial oxygen, which is more difficult to achieve when an established, professional litigation funder is supporting a party’s claims.
There is growing acceptance of and indeed, a global trend in, requiring the disclosure of the existence of funding arrangements and the identity of the litigation funder in international arbitral proceedings. Indeed, there are benefits to disclosing to an opposing party that one is being supported by a litigation funder. It sends a message regarding the strength of that party’s claims and the durability of its financial wherewithal in the arbitration.
Parties that have funding arrangements in place should, even before the commencement of any arbitral proceedings, determine their disclosure obligations pertaining to those arrangements, and of course, fulfill those obligations in a timely manner, and as required.
But at the same time, those parties should also be alert to, and be ready to resist, what are usually overbroad attempts at seeking disclosure of the underlying funding agreement. That information is almost always irrelevant and immaterial to the underlying dispute, and connected with improper attempts at erecting additional barriers to a claimant in bringing its case.