Recent reports and surveys confirm two trends in international dispute resolution: Commercial arbitration is thriving in New York, and the use of third-party funding is on the rise. Are the two phenomena related? Arguably yes, as third-party funding alleviates commercial parties’ main complaint about arbitrating international disputes: soaring legal costs. Turning to third parties to pay for legal fees can be an attractive option for parties seeking to manage risk and to offlay costs in pursuing meritorious claims in international arbitration.
Commercial Parties Prefer International Arbitration
Parties engaged in international commerce clearly prefer international arbitration over other dispute resolution mechanisms when entering into cross-border contracts. In May 2018, the School of International Arbitration at Queen Mary University of London and White & Case released the fourth edition of their industry-leading survey on international arbitration, based on 922 questionnaire responses and 142 in-person or telephone interviews. A remarkable 99 percent of respondents said they would choose or recommend international arbitration to resolve cross-border disputes in the future. “Despite the fact that international arbitration as a system is not without its flaws, it remains the best available option in the view of its users,” notes the report accompanying the survey results.
There is one important caveat to this enthusiasm. A substantial 67 percent of survey respondents identified the cost of arbitration as its least attractive feature. Arbitral institutions have responded by providing guidelines on how to reduce time and costs, as well as by implementing expedited procedure rules. But there is another way to manage costs without sacrificing quality or quantity of legal work: turning to a third party to pay for the costs of an arbitration.
Third-Party Finance: The Basics
The use of alternative means to pay for the high costs of litigation is not new to the United States, with contingent fee arrangements widely accepted and used, and litigation insurance commonplace. However, the use of financing by third parties in order to fund the pursuit of meritorious legal claims is relatively new—and growing markedly in commercial arbitration disputes.
The mechanics of third-party funding are relatively simple. A third-party investor evaluates the merits and potential damages of an arbitration claim. If both elements are strong, the investor may decide to provide capital to cover the costs of pursuing the arbitration claim, in return for a share of the proceeds if the claim is successful. If the arbitration is unsuccessful, the investor loses its investment. Subject to any applicable legal requirements, how this third-party support is structured will be dictated by the commercial interests of the client and the investor.
The paradigmatic claimant that would look to third-party funding is a corporation either in or near insolvency. But a broad range of corporate legal departments and treasurers have now recognized the benefits of removing legal spending from their balance sheet. In return for in effect bringing their claim or counterclaim for free, the corporation will cede a portion of an eventual award. In the meantime, there is no outgoing legal expense and no negative balance sheet impact—and no need to compromise by hiring anything but the best legal counsel.
New York Continues to Dominate in Arbitration
It makes sense that New York, as a global financial capital, leads the pack with respect to commercial arbitration in the United States. And, with its history of financial innovation, it is equally unsurprising that New York is at the forefront of developments in the third-party funding industry.
New York is identified as one of the top choices worldwide and as the preferred U.S. seat in the 2018 Queen Mary/White & Case survey. New York’s continuing dominance in U.S. commercial arbitration is also borne out by recently released full-year 2017 statistics of the International Court of Arbitration of the International Chamber of Commerce (the ICC). As in years past, the most frequent nationality of parties using ICC arbitration is that of the United States. The most frequently chosen applicable laws—in all new ICC cases worldwide—were those of England and various U.S. states, with New York in the lead.
Looking forward, the future for New York commercial arbitration is bright. A recent study conducted by the University of Leicester determined that New York is the preferred seat of 66 percent of U.S. users of commercial arbitration. In addition, among U.S. respondents, 61 percent estimated that over half of all cross-border commercial contracts within the last five years included an arbitration agreement.
It seems likely that commercial claimants will continue to look at third-party funding arrangements for their future disputes. This is all the more so because the perception of third-party funding has undergone a dramatic shift in recent years, with lingering doubts replaced by widespread recognition of the utility and soundness of third-party funding arrangements.
Third-Party Finance Enters the Mainstream
Based on the results of the 2018 Queen Mary/White & Case Survey, there is near total market awareness (97 percent) of the availability of third-party funding in international arbitration. What is more, awareness is tending toward the positive, with a marked shift since the prior edition of the survey in 2015. As the authors note, “perception of third-party funding has seen a clear shift from neutral to positive: while around a third of respondents expressed a ‘neutral’ perception, more than half of the respondent group indicated a ‘positive’ perception.”
More importantly still, when parties and counsel have experience with third-party funding, they are more likely to have a positive view of its use in international arbitration. No less than 75 percent of respondents “who have actually used third-party funding in practice” had a positive perception, with most of the remainder in the group taking a “neutral stance” toward third-party funding.
Of course, a large variety of financial arrangements may potentially fall under the rubric of third-party funding, and not all such funders will be well capitalized and ethically rigorous. The international arbitration community is rightly considering the procedural impact of the growth in third-party funding, as well as the circumstances in which disclosure of the “fact of funding” in a given case can support the integrity of the arbitral process.
Third-party funding can be a powerful tool for entities with meritorious arbitration claims that do not have the financial wherewithal or inclination to self-fund arbitration proceedings. As international commercial arbitration in New York continues to grow, savvy claimants are likely to seek support from third parties in increasing numbers.
Alexandra Dosman is managing director at Vannin Capital, where she advises clients on funding options for international arbitration cases and for litigation relating to the enforcement of arbitral awards in U.S. courts.