Sir Rupert Jackson has called for international rules on the use of third-party funding in international arbitration, part of what he termed a wider global lex mercatoria.
Referring to its “increasing role” in international arbitration, the retired lord justice of appeal said he had for many years argued that, if properly regulated, third party funding “promotes access to justice”.
Though it remained a “controversial topic”, Sir Rupert, based at 4 New Square, said regulatory changes in both Singapore and Hong Kong had allowed such funding to be used in arbitration.
“Over time it is hoped that an international consensus will emerge about whether and how third-party funders should be regulated.”
He was delivering the Akin Arbitration Lecture 2019 – held at the London offices of US firm Akin Gump – on arbitrators’ powers to grant interim relief in support of international arbitration, particularly security for costs.
He said certain principles could already be derived from such arbitral decisions as were in the public domain, which was a sign of the emergence of a general lex mercatoria.
“The recent phenomenon of international commercial courts, which are springing up around the globe and producing reportable decisions after hearings in public, can only accelerate that process.”
It should be part of this lex mercatoria that funding would only be allowed to proceed if the identity of the funder was disclosed and the funder accepted full liability for adverse costs. There must also be measures to prevent “arbitrary withdrawal” by the funder mid-case.
“In this way litigation funding will become generally recognised as a means of promoting access to justice, not as an instrument of oppression.”
Sir Rupert said that in arbitration, unlike litigation, the funder could not be joined as a party unless it consented – which would not happen in practice.
“So, arbitrators have no power to make costs orders against funders. Therefore, the only way in which the tribunal can protect a respondent’s ability to recover costs (if it wins) against an impecunious funded claimant is by ordering the claimant to provide security for costs.
“Then either the funder puts up the security as ordered or, alternatively, the arbitration comes to an end.”
However, Sir Rupert said that if the funder was unwilling to put up security, then such an order may “stifle the claim”, which was “generally unacceptable” both in arbitration and litigation.
“One unfortunate consequence is that this puts a weapon in the hands of impecunious, but funded, claimants. They can say: ‘We can afford to go on and if we win you will pay our costs. But if you win, you won’t get your costs back. So settle now.’
“The situation becomes even harsher if, in the event of winning, the impecunious claimant is entitled to recover not only its ordinary legal costs, but also its funding costs (as some judges and arbitrators have ordered).
“The prospect of such double recovery puts an even stronger bargaining counter into the claimant’s hands.”
Sir Rupert said that despite the “plethora of powers to make such orders”, arbitral tribunals were less willing than courts to order security for costs, partly because the obligation on claimants to pay an advance on costs to arbitral institutions was regarded as enough to deter ‘try-on’ claims.
“Where both parties seek security for costs, tribunals may be less reluctant to make such orders. This may happen in arbitrations where there is a counterclaim.
“I have had experience of making orders for security against both parties in an appropriate case.”