International Commercial Arbitrations Security for Costs and Third Party Funding

30 Nov 2016

This article was first published in the Legal Business Disputes Yearbook 2016.

“As arbitration clauses are widespread in some sectors of economic activity, there has been a serious impediment to the development of the common law by the courts in the UK [though] the UK has not reached the stark example … in the United States, where mandatory arbitration clauses in contracts are removing whole classes of claim from the jurisdiction of the courts and undermining aspects of the law’s development”: noted Lord Chief Justice Thomas in his 2016 Bailii lecture. As he tries to reverse the arbitration tide so the common law can continue to develop public precedents, others are still promoting arbitration as the best way forward.

As litigation and arbitration battle for supremacy, this article considers security for costs alongside the development of third party funding in commercial arbitration and the extent to which this differs in litigation.

As with commercial litigation, third party funding in arbitration is generally accepted and increasing (according to Stavros Brekoulakis in Kluwer Arbitration Blog, 18th February 2016 up to 40% of investment treaty arbitrations are reported to be funded).

A litigation funder may become liable for costs in two ways: prospectively, the English court can order security for costs under the CPR which in reality the funder must provide, and, retrospectively, the court can order costs against a non-party under the Senior Courts Act 1981 (as it did in Excalibur Ventures LLC v Texas Keystone, which is currently awaiting judgment on appeal).

The retrospective route is not conventionally open to an arbitral tribunal whose jurisdiction derives from a contract between two disputants and a funder will typically never be a party to that agreement. For the same reason, the prospective route is not directly available but the arbitral tribunal may achieve the same result indirectly if it can order security for costs and stay the claim if security is not provided.   

Various arbitral rules and the default provision under the Arbitration Act 1996 provide for security for costs. However, there are significant differences between the litigation and the arbitration regimes:

The court can grant security if the defendant satisfies the CPR tests, e.g. the claimant is resident outside the jurisdiction, or is a company unable to pay the costs if it loses or which has arranged assets to make enforcement difficult.

The Arbitration Act does not set up any thresholds but it expressly reverses one of the CPR tests and states that the tribunal may not order security because the claimant is ordinarily resident out of the jurisdiction.

In arbitration it is not usually sufficient just to assert that the claimant may be unable to pay the adverse costs: a respondent is taken to know that the claimant was impecunious when they started trading or that it is a normal business risk that the fortunes of the other party can change over time (CIArb guidelines refer to this as “accepted business risk”).  Instead, tribunals consider whether the financial situation of the claimant has materially and unforeseeably changed since the conclusion of the arbitration agreement.    

If this hurdle is satisfied, the question arises whether the existence of a funder should impact the decision. However, the logical assumption behind this question is that the respondent and the tribunal are aware of the funding arrangement.

Generally speaking, funding arrangements are not mandatorily disclosable though disclosure may be necessary to meet a strong application for security or to justify a costs award under the indemnity principle. IBA Guidelines on Conflicts (2014) and the ICC Guidance Note (July 2016), advise arbitrators to disclose potential conflicts with third party funders.  However, this is only triggered if a claimant voluntarily discloses its funding arrangements.

If the existence of a funder and the terms of the agreement are disclosed, the question arises whether such information should or may be taken into account on the question of security.

Some jurisdictions, such as Hong Kong and Singapore, are making some provision for this: 

CIETAC HKAC’s draft guideline 3.4 for arbitrators provides an arbitral tribunal may “to the extent permitted by applicable laws or rules, consider the nature and extent of a parties’ Funding as a relevant factor when considering any application for security for costs”.

Even more generous is paragraph 34 of the SIAC draft Investment Arbitration Rules “The Tribunal shall have the authority to order in its award that all or a part of the legal or other costs of a party be paid by another party or, where appropriate, any third-party funder”.

The International Council for Commercial Arbitration and Queen Mary University of London Costs Subcommittee Task Force have carried out some very helpful work (both research and analysis of principle) on this issue. They published a draft with preliminary conclusions on 1 November 20015 and are due to publish their final report shortly. They support what we would suggest is the correct conclusion namely that the existence of a third party funder is one piece of information that may be relevant to the decision. It may indicate an impecunious claimant but it may not as there are many different reasons why a claimant may seek funding. They also sensibly conclude that the existence of a funding agreement does not necessarily qualify as proof of a material change in circumstance since the arbitration agreement (after all, it may be a change for the better which could hardly be grounds for security).

Funding is now an established part of international dispute resolution. There is some way to go before there is an accepted approach to funding and security for costs but all States and arbitral bodies need to address this in a way that satisfies Lord Thomas’ quest for a developing and open jurisprudence.


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