www.lexmarc.us

Funder, Thy Name Is …

I learned from reading the draft ICCA-Queen Mary Report on third-party funding in international arbitration a significant industry fact that perhaps is already well-known to many of you: that prominent third-party funders now engage prominent international arbitrators to work with (or perhaps indeed for) them to assist in the screening of cases for potential investment. I did not find in the draft report, however, any specific discussion of how this development in the market might affect the arbitration community’s views on the precise contours of disclosure of third party funding in international arbitration, now that a consensus appears to have evolved that there should be some form of disclosure at the beginning of a case for the purpose of allowing arbitrators to check for conflicts and make any appropriate disclosures.

Under one of the two alternative formulations of a disclosure protocol that are set forth in the ICCA-Queen Mary draft, a funded party would have a duty to disclose the existence of the funding agreement and the identity of the funder to the other party, the Tribunal and the institution that is administering the case. Under the second alternative, an arbitral tribunal would have discretion to require a party to disclose the existence of a funding arrangement and the identity of the funder.

The concern addressed in this Commentary is that disclosure of the identity of the funder to the Tribunal comes at a price: The Tribunal may form preliminary impressions about the merits of the case based on the fact that an identified funder has (or has not) decided to provide funding for a party. I suggest that this risk may be avoided by a disclosure protocol that shields the arbitrators from knowledge of the identity of the funder, albeit also at a cost — that arbitrators in law firms may need to search more broadly for funding relationships and disclose the relationships more broadly to the administering institution in order to effectuate an “identity-blind” conflict check.

Major third-party funders are understood to have constructed their businesses upon a model analogous to that of a venture capital firm.  Having raised capital from investors on the premise of their ability to generate very attractive rates of return in comparison to investments of comparable risk, the third-party funders then seek to optimize the risk-reward ratio and projected rate of return, doing so by a process of intensive evaluation of the law, facts, predilections of the arbitrators if they have already been selected, and any other factors in the environment of the case that bear upon the likelihood of a favorable award (or settlement) and its satisfaction (voluntarily or through enforcement) and the expected costs. Already staffed with skilled lawyers to make such assessments, certain well-capitalized funders in the high-value sector of dispute funding market have taken their due diligence strategies to an arguably higher level of refinement and predictability by adding renowned arbitrators to their case assessment teams. There can be little doubt that the funders seek to give assurance to potential investors that their selection of cases for investment is exceptionally rigorous. Further, it cannot have been overlooked by the funders, as funding disclosure regimes begin to be implemented in key arbitration markets (such as Hong Kong and Singapore), that if disclosure of the identity of the funder is required, the funder in order to make a favorable impression on the Tribunal that will receive the disclosure should have branded itself as an impeccable selector of meritorious cases.

This phenomenon creates a disquieting prospect. If disclosure of the identity of the funder to the Tribunal is made mandatory and automatic under applicable arbitration law or provider rules, just imagine how this might play out — after conflict issues are resolved — when the arbitrators first convene to discuss the case at the pleading/preliminary conference stage.  “Claimant is backed by one of the really first-rate funders, and they are exceptionally selective, and they use Arbitrator X (who is on their “Investment Advisory Board”) as the team leader to vet all their big cases. So we can have confidence that Claimant has quite a strong case here.” Or maybe the prudent arbitrator will not say this — but only think it.

Now suppose instead that the funder is a new entrant in the field, or is expanding to international arbitration from its established business of funding auto accident cases in the US domestic market. The spoken or unspoken reaction of the arbitrator might be “We have to have some concerns about the merit of this case. Chances are this funder is involved because the case was turned down by the better-established players.”  Also, knowing the identity of the funder might cause the Tribunal to draw inferences about the funder’s ongoing involvement in the legal strategy and tactics. A first-tier funder might be assumed to exert substantial and continuous influence, a new player perhaps not as much. Many arbitrators will insist that they are immune from such influences and will in all events decide the case strictly on the basis of the evidence and the law. But when we spend so much time worrying about so-called “unconscious bias,” can we afford to look away from this very real source of potential influence on the arbitrator’s judgment?

So it seems fair to ask whether a mandatory disclosure scheme for provider rules might be designed to mitigate this concern. Could the rule for instance require disclosure in the first instance of the identity of the funder only to the administrating institution, with the understanding that the identity of the funder will not be revealed to the arbitrators unless this becomes necessary for a determination of whether an arbitrator needs to make a disclosure? Perhaps the rule could also impose upon the party a duty to disclose its funder’s known relationships with the arbitrators. But on the basis that such disclosure might not be complete – as the funder may not fully disclose to the funded party – the administrator could then call upon the arbitrator to disclose her (or her firm’s) relationships with any funder in the funder category of the identified funder. If this disclosure reveals no relationship with the party’s identified funder, the administrator would either so advise the parties, or from the absence of a communication and confirmation of the arbitrators’ nominations it would be assumed that no arbitrator relationship with the funder exists that could be relevant to the arbitrator’s impartiality and independence.

Granted this makes the conflict checking more difficult for the arbitrator, especially one who is affiliated with a large law firm. Conflict checking for funder relationships could not under this protocol be done through the law firm’s automated system without an entity name. But would arbitrators be able by other means to determine if their clients in pending or recent cases have used funding, or if a funder was a client of the firm? Would the challenge of defining “funder” for these purposes be adequately resolved if the administrator, based on the party’s disclosure, is able to inform the arbitrator of an adequate generic classification of funder involved?

The specific concerns discussed here about the downside of mandatory disclosure are not discussed in the Task Force draft. But there was division within the Task Force about whether to make disclosure of the identity of the funder mandatory, and the advocates of such mandatory disclosure believed, according to the draft, that this is necessary in order for arbitrators to conduct reasonable investigation for potential conflicts. I leave you with these questions, which have not been analyzed in the draft ICCA-Queen Mary Report, and with the notion that there is considerably more work to be done before the notion of mandatory disclosure of the identity of the funder becomes enshrined in the rules of major arbitration provider organizations.

Leave a Reply