THE AUTHOR:
Alain Grec, Director & Co-Founder at Profile Investment
Third-Party Funding in Arbitration: A Series on Key Aspects and Best Practices
– Part 5 –
Discover our in-depth series examining third-party funding (TPF) in arbitration. Each installment sheds light on essential aspects of TPF—from foundational principles to funders’ decision-making and collaboration with legal counsel. Through this series, gain insights into how TPF facilitates access to justice, ensures disciplined budget management, and helps claimants pursue cases with confidence.
With the exception of sophisticated entities with general counsels who have considerable litigation experience, potential claimants are often not aware of the availability of third-party funding options. In practice, when discussing whether to commence proceedings and when the high costs may dissuade a client from doing so, it falls upon its external counsel to suggest contacting one or more funders. It is in the practicing attorneys’ best interests to become familiar with the TPF mechanisms and potential constraints: They are indeed most often the first entry point of their potential clients to educate and discuss about the TPF matter. Once the funding is in place, a funder’s involvement allows a client to bring their claims forward while fully securing their external counsels’ remuneration so that they can fully concentrate on the case, unlike lawyers who – without funding – may need to fight to get paid by their clients.
As developed here above, before spending considerable resources financing a litigant’s claims, a funder needs to conduct a thorough due diligence and be convinced of its value. For these reasons, external counsel must be ready to spend considerable time at the due diligence stage addressing the funders’ concerns and preparing a budget for the case, with no guarantee that the funder will accept to take the case. They must repeat the exercise for each funder approached and possibly speak with several funders simultaneously, which may be time-consuming, often without a full fee remuneration for that, or on a deferred fee arrangement.
As the funding market has considerably matured in the past decade, clients now benefit from sound competition and a variety of products. Clients then turn to their external counsel for advice on their options, during the negotiations and on the drafting of the LFA.
One matter deserves special consideration: the potential conflict of interest of a funder with respect to the stakeholders of a dispute resolution process. This is the case, for example, where one of the arbitrators in the case is the lawyer counsel in another matter financed by the same funder.
As the funder is not a party to the case, this requires a verification with the lawyer counsel, but his scope of knowledge is also limited. The other, more systemic way of handling it, is to systematically disclose the existence of the funding of a party and the name of the funding entity to the tribunal, for its assessment. Although this is the most appropriate and systematic method (See the legislation in Singapore, Hong Kong, or the International Chamber of Commerce (“ICC”) Arbitration Rules 2021), all stakeholders must be aware that this can allow for delaying tactics from the opposing side or provide the basis for a biased cost order decision by an insufficiently informed tribunal on the mechanisms of TPF.
Role of the TPF during the Case Development Once the Funding Agreement is in Place
Adding a third-party to the proceedings may change the dynamics of the case and the way it is conducted. However, funders typically adopt a hands-off approach, consisting of an overarching supervision and collaboration with the approved choice of the funded party’s counsel to implement the best strategy. It is, however, reasonable for lawyers to update the funder on a regular basis and be open to suggestions and contributions from them.
Fortunately, eminent funders pay extreme attention to regulation and arbitration institutions guidance and provide state-of-the-art funding options governed by well-drafted contracts. For example, Profile Investment has opted for certain TPF vehicles to be regulated under the framework of the European regulation of the financial sector as applied in Luxembourg.
Once the funding agreement is in force, the funder will first and foremost deliver the financing in accordance with the allocated budget and the agreed budget milestones.
This usually works on the basis of invoices (lawyer fees, expert fees, expenses) and supporting documents (call for provision of the tribunal), following the priorly agreed budget plan.
In order to avoid mismatches and ensure a centralised follow-up, the lawyer counsel might have the role of a paying agent for all budget-relevant payments. It is easier for it to check Know Your Client (“KYC”) acceptability of the entities at stake as they are in direct contact with them (experts, translators, tribunal, etc).
To enable the funder to adequately follow the development of the case, and hence the timely evolution of the different risks at stake, the TPF is usually provided with the draft documents before filing, reports, and feedback from the lawyer counsel, so that it has the opportunity to share its suggestions, questions and opinions.
Although it remains clear that the funder is a ‘third-party’ to the dispute and refrains from instructing the lawyer counsel, the alignment of interests generally leads to a natural teaming up with both the funded party and their lawyer counsel, with a cross fertilisation to the benefit of the prospect of success of the case or of the settlement discussions.
Very strict clauses usually address the issue of disingenuous information, forged documents, or non-disclosure of essential documents as breaches of the funding agreement, which would have impacted “but for” the decisions of the TPF: such situations normally materialize during the procedure, as evidenced by the information or documents filed or brought by the opposing party.
External counsel must be aware that adding a third-party to the proceedings, in particular when its investment is at risk, may change the dynamics of the case and how it may be conducted. However rare in practice, some funders may be overprotective/intrusive over their investments, and so lawyers must be wary of any wording in the Funding Agreement granting the funder too much control over the strategy. Ideally, a relatively hands-off approach is preferred.
After the judgement or the arbitration award has been rendered, and if successful, the claimant will have an enforceable debt title: the funder can then become more pro-active with the elaboration of an enforcement plan to be agreed upon with the funded party.
Very often the appropriate lawyers for debt collection, the asset tracers are not necessarily well-known to the lawyers in charge of the dispute resolution procedure: by contrast, the funder will have gathered comprehensive experience in this field and is often suited to find out the right service providers for focussed enforcement actions, such as injunctions and asset freezing measures or seizures, among others.
Isolated Misbehaviours Shouldn’t Hide the Reality
External counsel must also be aware of unscrupulous and inexperienced opportunistic players seeking to make a quick return, attempting to step into litigants’ shoes (e.g. imposing the strategy and forcefully instructing them and/or their counsel) or backing largely unmeritorious claims. As an example, in Excalibur Ventures LLC v. Texas Keystone LLC [2016] EWCA Civ 1144, the England and Wales Court of Appeal confirmed that funders who enabled to conduct a litigation were liable to indemnify defendants when the claim was “essentially speculative and opportunistic […], was based on no sound foundation in fact or law and it has met with a resounding, indeed catastrophic, defeat.” Although the TPF market has a tendency to self-regulate and quickly squeeze them out, the case may have gone forward and the harm may thus have already been done. This has alarmed the arbitration/litigation community and raised concerns over the likelihood of conflicts of interest and inappropriate behaviours since the early 2010s. Other concerns relate to the origin and availability of the capital committed – often raised by organized fundraisers targeting private and institutional investors or state-owned investment funds – and KYC compliance.
Thankfully, most funders pay extreme attention to providing state-of-the-art funding options governed by cautiously drafted LFAs, communicating extensively and transparently on their methods to gain trust and respectability. These may include:
- Listing on a stock exchange
- Publishing the terms of any internal charter of conduct and procedures
- Submitting their corporate structure, processes, risk management and policies to very rigorous EU regulations for the financial sector (as is the case for Profile investment)
- Or choosing an external recognised authority to decide on TPF-related disputes (Indian Association for Litigation Funding).
Measures taken by funders will not, on their own, be sufficient to address these concerns. They go hand in hand with the rules and legal framework put in place by domestic jurisdictions. Modern jurisdictions looking to regulate the funding activity now frequently look at Singapore as a well-balanced model.
ABOUT THE AUTHOR
Alain Grec is Director and Co-Founder of Profile Investment, a company specialized in third party litigation funding (predominantly commercial international arbitration) with more than 15 years of experience under the Luxembourg regulation of Alternative Investment Funds.
Alain is also heading a complementary business line of external assessment and valuation of litigations for companies, investment funds or auditors.
Alain has held various positions within the banking group Natixis, where he was Head of the German branch of Natixis (1994-2002), as well as Head of Development of its Corporate and Investment Financing bank between 2005 and 2009. He has also lectured in various French university courses, symposiums or seminars as they pertain to his specialisms in international arbitration, notably in Montpellier (D.U. Arbitrage).
*The views and opinions expressed by authors are theirs and do not necessarily reflect those of their organizations, employers, or Daily Jus, Jus Mundi, or Jus Connect.
