This article by Christopher Bogart was first published in The Times and is available here.
A long-awaited report on third-party funding in international arbitration has just been released in draft, and it reads like a relic of another era.
Doubtless it is well-meaning, but the report from the International Council for Commercial Arbitration and Queen Mary, London University, center for commercial law studies is nonetheless deeply flawed. In its current state, the report presents a serious risk to the competitiveness of arbitration by proposing to add procedural hurdles that will impose costs and delays and thereby further reduce the attraction of arbitration as opposed to commercial litigation.
Largely driven by academics, the report has real consequences for practicing lawyers and arbitrators. Its fundamental problem is that the ground it purports to study has shifted profoundly since the task force began its work in 2013, but it holds tight to outmoded terms and assumptions. The result is rather like someone spending years earnestly considering typewriter regulation after the invention of the personal computer.
The market for third-party funding of arbitration has evolved from a predominantly single-case model based on the payment of the legal fees in exchange for a share of the ultimate recovery, towards a more varied landscape. The report cannot get away from its outdated focus, despite proclaiming the need for a broader approach. It similarly ignores the substance of funding transactions and focuses instead on their form, with aberrant results.
For example, a funding contract to provide financing for an arbitration is third-party funding according to the task force’s definition. Yet an equity investment of the same amount into a vehicle that holds only the claim and will use that capital to pay legal fees is not. Those are functionally and economically equivalent transactions, and it is nonsensical to treat them differently.
Costs and disclosure are perhaps the two most discussed issues concerning arbitration finance, and the task force recommends a sensibly light touch when dealing with costs issues, advocating, for example, that applications for security for costs be determined irrespective of the presence of funding.
However, on the issue of disclosure, the task force could not agree. The report notes that most members support mandatory disclosure of funding and the identity of the funder, although why that should be the case when many other capital participants in the arbitration remain undisclosed is never explained. Other members of the task force disagree, arguing, as I do, that it is sufficient to confirm the authority of arbitrators and arbitral institutions to request disclosure of such information as needed, without the general presumption of disclosure in every instance.
Although there is a lot of funding in arbitration it is dwarfed by the funding activity in litigation. And court systems have accommodated this important part of dispute resolution with much less hand-wringing and angst than is present in arbitration.
Capital is here, clients want it and it’s time to get on with figuring out how best to use it instead of the navel-gazing and academic debate that the task force’s report typifies.