Recent developments in Nigeria, India and China highlight the relentless global rise of third-party funding ("TPF"). These developments emphasise how TPF is now an integral part of arbitration proceedings across the world. We discuss each of these important developments in this client alert.
Introduction
Claimants across the world are increasingly seeking recourse to third-party funding ("TPF") in order to help them bring cases cost-effectively.1 As a result, various jurisdictions are starting to grapple with the challenges raised by TPF, producing a number of noteworthy decisions and developments of interest to both third-party funders ("Funders") and arbitration users. In May 2023, Nigeria expressly permitted TPF in the arbitration context, whilst in India, the High Court of Delhi ruled Funders would not be held liable to pay adverse costs where they were not party to the arbitration agreement or arbitral proceedings. In another notable development, two 2022 court decisions in Mainland China ("China") upheld TPF arrangements in the context of arbitration, while a third court decision offered guidance on TPF in relation to litigation proceedings, which may also apply to arbitrations.
Nigeria
On 26 May 2023, the outgoing president of the Federal Republic of Nigeria, Muhammadu Buhari, signed the Arbitration and Mediation Act (the "Act") into law, welcoming in a new arbitration era for Nigeria.2 Prior to this Act, TPF had effectively been prohibited in Nigeria owing to the common law torts of maintenance and champerty.3 As part of wholesale changes brought about by the Act, these torts have been abolished for TPF in relation to arbitration. Consequently, TPF is now permitted in Nigeria-seated arbitrations and arbitration-related proceedings in any Nigerian court.4 The Act makes Nigeria only the third jurisdiction to directly adopt such express legislation in relation to TPF, following Singapore and Hong Kong in 2017.5
The Act provides that once a TPF arrangement has been entered into, the funded party must disclose the name and address of the Funder to the other parties, the tribunal and, where applicable, the arbitral institution.6 A key benefit of imposing this disclosure obligation on the funded party is that it provides a tribunal with the opportunity to proactively manage conflict of interest issues that may arise in the context of a funded arbitration.
Interestingly, the Act also stipulates that where a respondent brings a security for costs application based on the disclosure of TPF, the tribunal may allow the funded party or its counsel to provide the tribunal with an affidavit confirming whether or not the Funder has agreed to cover an adverse costs orders. Any such affidavit is intended to be considered as part of the tribunal's deliberation on whether to order security to be provided. While much will depend on the specific terms of the cover provided for by the TPF arrangement, confirmation in respect of an adverse costs orders will be highly material to a respondent's decision to make a security for costs application, as they would have likely only made such an application owing to concerns regarding the financial prosperity of the funded party.
India
In May 2023, the High Court of Delhi (the "High Court") held that a Funder could not be held liable for adverse costs where it was not a party to the arbitration agreement or the arbitral proceedings. This striking ruling on the liability of Funders in arbitration overturned an earlier 2019 ruling in the same case (the "2019 Decision").
In coming to its decision in Tomorrow Sales Agency Private Limited v SBS Holdings (the "2023 Decision"), the High Court noted that "third-party funding is essential to ensure access to justice", highlighting that India is beginning to embrace the concept of TPF.7 This ruling also reinforces the strong commitment India's executive and judiciary have shown in recent years in promoting arbitration as a means of resolving disputes.
The 2019 Decision
The original dispute involved a freight and logistics company, Transpole, who commenced a SIAC arbitration against SBS Holdings ("SBS"), a Japanese-owned logistics company, alleging breach of contract. Transpole was funded by Tomorrow Sales Agency ("TSA") who, crucially, was not a party to the arbitration agreement or the arbitral proceedings. In December 2019, a SIAC tribunal dismissed Transpole's claims and ordered them to pay SBS US$1 million in adverse costs. When Transpole failed to satisfy this award, SBS sought payment of the awarded sum from TSA, claiming that TSA had not merely funded the proceedings, but had in fact substantially controlled it. As a result, SBS argued that TSA was subject to both the arbitration and the award itself.
Having applied to the High Court for interim relief, a single judge ruled in SBS' favour and ordered Transpole and TSA to provide relevant financial records and details of their fixed assets.8 In addition, the judge also ruled that both Transpole's and TSA's assets were to be frozen up to US$1 million. TSA appealed the 2019 Decision on the basis that their involvement in the proceedings had ended once Transpole's claims had been dismissed.
The 2023 Decision
In allowing the appeal, two judges of the High Court overturned the previous interim order, to the extent that it applied to TSA, and ruled that TSA was under no obligation to pay the awarded amount. The High Court considered that (i) the tribunal had expressly ordered Transpole to pay the costs and not TSA and (ii) the funding agreement did not provide that TSA would have to fund any adverse costs award. Central to the High Court's decision making was the fact that arbitration is founded on party agreement and consent: here, TSA was neither a party to the arbitration agreement nor had they consented to participate in the arbitral proceedings. The High Court observed that only in exceptional circumstances have non-signatories been found to be bound by an arbitration agreement and, in reality, a Funder would only be bound by an award "if it has been compelled to arbitrate and is a party to the arbitration proceedings".
Both judges also dismissed the argument that as Funders provide funding for the purpose of benefiting from successful claims, they should equally be liable for any costs in the event of an unsuccessful outcome. This argument represents one of the commonly raised concerns about TPF and is one of the issues which recent regulatory recommendations from the European Parliament have sought to address.9 However, in this instance, the High Court's desire to permit access to justice prevailed.
China
TPF saw two noteworthy developments in China as a result of decisions from the Jiangsu Province Wuxi Intermediate People's Court (the "Wuxi Court"), the Beijing Fourth Intermediate Court (the "Beijing Court") and the Shanghai Second Intermediate Court (the "Shanghai Court"). These decisions from 2022 (i) underline the differing approach China's judiciary has recently adopted in respect of TPF in the context of arbitration on the one hand and litigation on the other and (ii) inform arbitration users on the factors that may be taken into account when assessing TPF arrangements in China.
Wuxi Court's and Beijing Court's Decision
In December 2021, a CIETAC tribunal ruled in favour of a claimant who had used TPF in order to fund their claims.10 The respondent contested the award first before the Wuxi Court and then the Beijing Court.11 Both the respondent's applications were rejected, with both courts finding that CIETAC's confidentiality provisions had not been breached as a result of the TPF arrangement.12 Moreover, both courts also noted that Chinese law does not expressly prohibit TPF in an arbitration context, deeming that parties have the right to engage Funders as they see fit.
Of particular importance to the facts of this dispute was that during the course of the proceedings, the claimant had voluntarily disclosed both the existence of the TPF arrangement and the identity of the Funder in order to avoid potential conflicts of interest between the arbitrators and the Funder.13 Both courts welcomed the claimant's conduct in doing so, indicating that it would be good practice for other parties in the future to follow suit.
Shanghai Court's Decision
In contrast to the pro-funding approach adopted in an arbitration context, in May 2022, the Shanghai Court ruled that a TPF agreement in relation to a litigation was invalid on the basis of public policy grounds and as a result, a Funder was not entitled to recover any proceeds arising out of the case.14 Although a decision made in the litigation context, the factors that the Shanghai Court took into account will also be of application in the arbitration context.15 They include the following:
- The Shanghai Court was concerned by the excessive control the Funder had over the claimant, potentially preventing the claimant from exercising its freedom of litigation;
- The Shanghai Court was equally concerned that the claimant was not effectively represented as, on the facts, there was potential for a conflict of interests between the claimant and the Funder;16
- Confidentiality provisions within the funding agreement resulted in the non-disclosure of the funding arrangement by the claimant, which the Shanghai Court believed (i) adversely affected the general good order of the proceedings, (ii) prevented the court from intervening when the claimant's freedom of litigation was infringed and (iii) increased the risk of a potential conflict of interest between the court and the Funder; and
- The Shanghai Court deemed TPF in litigation to be contrary to the moral values of harmony and friendship, as it provides parties with the opportunity of pursuing court proceedings, rather than resolving disputes through more amicable means such as mediation.
Both the Beijing Court's decision and the Shanghai Court's decision underline that China is still feeling its way when it comes to TPF. The two decisions also provide an insight into the factors the Chinese courts may take into account in assessing TPF arrangements. As specifically emphasised by the Beijing Court, voluntary disclosure of both the existence of the TPF arrangement and the identity of the Funder at an early stage of proceedings is regarded as good practice.
Despite the Differing Approaches, Overall a Story of TPF Growth
To conclude, it is striking how each of Nigeria, India and China are responding differently to the phenomenon of TPF. In the absence of an express legislative position, India and China's respective stances on TPF have advanced incrementally through individual court decisions. In contrast, Nigeria has legislated for TPF in the arbitration context and it remains to be seen whether the legislation will lead to an uptick in funded cases.
Moreover, the issues before the Indian and Chinese courts are typical of the issues that TPF throws up and it will be interesting to see how other jurisdictions seek to address them. Overall, what is most apparent is that TPF is now a key feature of arbitration proceedings across the globe.
1 TPF is a non-recourse arrangement where a third party, typically an independent commercial fund with no prior connection to or legitimate interest in a dispute, agrees to finance all or part of the legal costs of a party engaged in legal proceedings, in return for a share of any potential damages awarded.
2 The Act is clearly intended to bring Nigeria's arbitral practices in line with global standards, reaffirming Nigeria's position as one of the leading centres for commercial arbitration in Africa. For more information, see our previous client alert on Recent Arbitration Reforms in Nigeria.
3 The torts of maintenance and champerty hark back to when TPF was disapproved of, with many jurisdictions refusing to recognise and enforce arrangements under which third parties funded litigation. 'Maintenance' is the improper support of litigation in which the supporter has no legitimate concern without just cause or excuse. 'Champerty' is an aggravated form of maintenance and occurs when the maintaining party pays some or all of the costs of a party in return for a share of the proceeds of the action or suit.
4 Section 61 of the Act.
5 For more information, see our previous client alert on A changing landscape: third-party arbitration funding in Singapore and Hong Kong.
6 Section 62 of the Act sets out the procedural steps for the required notice concerning TPF arrangements. For example, any notice must be provided on or before the commencement of the arbitration, or immediately following the execution of the TPF arrangement (if proceedings are currently ongoing).
7 See Tomorrow Sales Agency Private Limited v SBS Holdings FAO(OS) (Comm) No. 59/2023, 29 May 2023.
8 SBS filed a Section 9 petition under India's 1996 Arbitration and Conciliation Act.
9 For more information on the recommendations, see our previous client alert on The End of the Regulatory Vacuum in Europe and a New Era for International Arbitration In Ireland? Developments in Third-Party Funding Regulation.
10 During the course of the arbitral proceedings, both parties had been given the opportunity to present oral and written arguments concerning the legality of TPF in Chinese arbitral proceedings. In response, the CIETAC tribunal found that the claimant was entitled to rely on TPF in order to bring their claim and no laws or arbitration rules had been violated by the claimant in doing so.
11 See Ruili Airlines Limited Company v Yunnan Jingcheng Group Limited and others, Jiangsu Province Wuxi Intermediate People's Court, Case No. (2022) Su 02 Zhi Yi 14, Civil Order, 30 May 2022; and Ruili Airlines Limited Company v Yunnan Jingcheng Group Limited and others, Jiangsu Province Wuxi Intermediate People's Court, Case No. (2022) Su 02 Zhi Yi 13, Civil Order, 30 May 2022.
12 Both courts found that the relevant confidentiality provisions were aimed at protecting information about the arbitration from being disclosed to the public. The involvement of a Funder in a dispute would not constitute a breach of these provisions.
13 It is noteworthy that a copy of the funding agreement itself had not been provided to either the counterparty or the tribunal during the arbitral proceedings. Neither court deemed that it was necessary to disclose the actual funding agreement or provide a detailed overview of the terms of the funding agreement.
14 See Shanghai Xu Ding Capital Management Limited v Shanghai Weian Internet Technology Limited, Shanghai Jingan District People's Court, Case No. (2020) Hu 0106 Min Chu 2583, Civil Judgment; and Shanghai Xu Ding Capital Management Limited v Shanghai Weian Internet Technology Limited, Shanghai Second Intermediate People's Court, Case No. (2021) Hu 02 Min Zhong 10224, Civil Judgment.
15 Caution must be urged though when seeking to rely on this decision as, other than decisions of the Supreme People's Court, court rulings hold no legal precedence in China.
16 The Funder and the law firm advising the funded party were related parties as the legal representative, shareholder and director of the Funder was also a partner and lawyer of the law firm at the time the funding agreement was entered into.
Charlotte Kail (White & Case, Trainee Solicitor, London) contributed to the development of this publication.
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