6 Things You Need to Know about Third-Party Funding in International Arbitration

On 10 January 2017, the Singapore Parliament passed amendments to the Civil Law Act legalising third-party funding in international arbitration. Here are 6 things you need to know about the amendments.

1. What is third-party funding?

Third-party funding is a financing method where a party to a dispute obtains funding for its legal costs from a third-party funder who has no connection to the dispute. In exchange, the third-party funder is given a share of the proceeds if the party recovers any money after the resolution of the dispute.

2. Third-party funding was prohibited previously

In Singapore, agreements for third-party funding of disputes have always been prohibited for being a contravention of the laws of maintenance and champerty. This is manifested in two aspects – one, the common law tort of maintenance and champerty, and two, that agreements affected by maintenance or champerty are void under the law of contract for being contrary to public policy.

Maintenance is generally defined as the provision of financial assistance to a party to a dispute without taking an interest in the outcome and receiving a share of any money recovered by that party. Champerty is a subset of maintenance – it is the provision of the same assistance, but with the expectation of receiving a share of money recovered by the party (if any).

Two centuries ago, many jurisdictions outlawed these acts in order to prevent vulnerable individuals from being oppressed by wealthy funders, as well as to prevent excessive and frivolous claims. However, in the 21^st century, the usefulness of these doctrines have been reconsidered in light of other safeguards against fraud and abuse that are available in legal systems today. Jurisdictions such as the United Kingdom and parts of Australia have viewed these protections as no longer necessary and have removed them. In other jurisdictions, exceptions with respect to third-party funding are being carved out. Singapore is one example of such a jurisdiction.

3. Third-party funding is now allowed for international arbitration in Singapore

Third-party funding for international arbitration became permitted in Singapore when the Parliament passed the Civil Law (Amendment) Bill 2016 on 10 January 2017. The amendment abolishes the common law tort of maintenance and champerty, as well as makes clear that a contract for third-party funding of international arbitration proceedings (along with its related court and/or mediation proceedings) will not be rendered unenforceable for being contrary to public policy or illegal by reason of it being a contract for maintenance or champerty.

In addition, a third-party funder has to satisfy the requirements of:

• carrying on the principal business of the funding of the costs of dispute resolution proceedings;
• it must have access to funds immediately within its control; and
• the funds must be invested to enable the party to meet the costs of the proceedings.

4. Third-party funding is a feature in other seats of arbitration

International arbitration can be expensive, and this may deter parties with legitimate claims from initiating proceedings. This has led to an increase in business demands for financing options for dispute resolution. On the supply side, there is a growing body of well-capitalised professional third-party funders to meet this demand.

Third-party funding has become a feature in the world’s most popular seats of international arbitration – London, Paris, Geneva and Hong Kong. Singapore has now joined the list of being one of the top seats of international arbitration. Therefore, to maintain its position and continue attracting international parties to choose Singapore as their seat of arbitration, Singapore has to be cognisant of the practices of other jurisdictions and stay responsive to business needs of commercial parties. This will enable Singapore to strengthen its position as an international commercial dispute resolution hub and a key arbitration seat in the world.

5. Businesses can pursue legitimate claims through arbitration subject to certain caveats

With the framework for third-party funding in place in Singapore, businesses will be offered the additional financial advantage of being able pursue claims that they would otherwise not have due to financial constraints.

Given their objective of providing attractive returns to their investors, third-party funders are highly selective in choosing the types of claims to fund. Businesses would therefore have to provide extensive information about their cases for third-party funders to assess the likelihood of success and the ability to recover from the assets of the losing party. This may lead to substantial costs being incurred before the claim even begins, which may be wasted if the application for funding is unsuccessful.

Businesses may also have to disclose confidential or privileged information in the process of presenting their cases to third-party funders. It may thus be prudent to enter into a non-disclosure agreement with the third-party funder to prevent any inadvertent waiver of privilege.

6. Lawyers may introduce third-party funders to their clients

Changes are also made to the Legal Profession Act – solicitors are now allowed to introduce or refer third-party funders to their clients as long as they do not receive any direct financial benefit from the introduction or referral. Solicitors are also allowed to advise or act for their clients in relation to third-party funding contracts.

Amendments are also made to the Legal Profession (Professional Conduct) Rules to address problems of conflicts of interests between solicitors and third-party funders. Solicitors will be imposed with a duty to disclose the existence of any third-party funding that their clients are receiving, as well as the identity and address of any third-party funder involved.