Mandatory Disclosure of Third-Party Funding in International Arbitration

©acerislaw

HU Yue

I. Introduction
Recent years have seen an upsurge in the number of third-party funded cases and the number of reported cases involving issues relating to third-party funding in international arbitrations. The existence of third-party funding in international arbitration can create potential arbitrator conflict of interest. A number of factors contribute to the concern about arbitrator conflict of interest: arbitrators may take ad hoc consultancy positions with some third-party funders (TPF), the symbiotic relationship between TPF and a small group of law firms, the relationship between law firms and some arbitrators, and the general calls for transparency.
As a result of the increased concern, third-party funding has increasingly drawn the attention of arbitral institutions and national legislatures. Many arbitral institutions and national regulatory legislatures have amended their arbitration rules or national legislation to require disclosure of the existence of TPF in arbitrations. However, the issue of disclosure of a TPF is not addressed by the Chinese national arbitration law and is not universally addressed by the arbitration rules of Chinese arbitral institutions. For China to be an internationally popular arbitration seat, Chinese domestic arbitration law should be amended to address this issue. While the legislation procedures in China may take a long time, amending Chinese arbitral institutions’ arbitration rules to address this issue may mitigate the disputes caused by the lack of regulation in this area.
This article proposes that Chinese arbitral institutions should amend their arbitration rules to require systematic disclosure of the existence and identity of a TPF. Meanwhile, Chinese domestic arbitration law should be amended to mandate disclosure of the existence and identity of a TPF as a matter of course in every case. Accordingly, in this article I will: (I) explain the rationale behind a systematic disclosure of the TPF (II) outline current legislation and arbitration rules in selected jurisdictions, including China (III) discuss the issue of when, how, to what extent, and by whom should disclosure be made.

II. The Rationale of a Systematic Disclosure of  TPF
1. It is a fundamental right that parties be fully informed of all circumstances that may be relevant in their view to determine that an arbitrator is impartial and independent
It is a fundamental principle that the parties be fully informed of all circumstances that may be relevant in their view in order to assess an arbitrator’s suitability. The International Bar Association (IBA), the very first entity to address third-party funding, has recognized this principle and further explained in the IBA Guidelines on Conflicts of Interest in International Arbitration (IBA Guidelines) that “[i]t is the purpose of disclosure to allow the parties to judge whether they agree with the evaluation of the arbitrator and, if they so wish, to explore the situation further.” In its Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration under the ICC Rules of Arbitration (30 Oct. 2017 version), the ICC Court gave arbitrators the following guidance:

“The parties have a legitimate interest in being fully informed of all facts or circumstances that may be relevant in their view in order to be satisfied that an arbitrator or prospective arbitrator is and remains independent and impartial or, if they so wish, to explore the matter further and/or take the initiatives contemplated by the Rules.
An arbitrator or prospective arbitrator must therefore disclose in his or her Statement, at the time of his or her appointment and as the arbitration is ongoing, any circumstance that might be of such a nature as to call into question his or her independence in the eyes of any of the parties or give rise to reasonable doubts as to his or her impartiality. Any doubt must be resolved in favor of disclosure.”

Third-party funding could give rise to a conflict of interest between the TPF and an arbitrator, which may destroy the arbitrator’s independence and impartiality. The President of the Center for Arbitration and Mediation of the Chamber of Commerce Brazil-Canada issued Administrative Resolution No. 18 of 20 July 2016 (Resolution 18/2016). Article 3 of that Administrative Resolution provides that “the presence of a third-party funder can raise reasonable doubt as to the impartiality or independence of the arbitrators, due to possible past or current relationship between the arbitrator and the third-party funder.” A potential conflict of interest exists where the TPF with whom the arbitrator has a relationship is supporting one of the parties to the instant arbitration. Take for example an arbitrator who is a counsel in another case requiring funding, or an arbitrator who has an ad hoc role as a consultant with the TPF. In these circumstances, the arbitrator may be biased because the award favoring or disfavoring the funded party would also affect the funder’s interests. Therefore, as a reasonable person, the parties would definitely like to know the existence of this connection and explore the situation further.
2. Not disclosing third-party funder creates many risks
A conflict of interest between the TPF and an arbitrator may be unknown at the beginning of the arbitration but discovered later in the process. Not disclosing TPF at the beginning of the arbitration may, as an international arbitration practice, result in withdrawal or disqualification of an arbitrator, or an effective challenge to the arbitral award. No matter whether it is an international arbitration or a domestic arbitration, the bottom line is justice, including procedural justice. Procedural justice requires that a person cannot be his own judge and the judge should be impartial. In the context of arbitration, this means the arbitrator must not have a conflict of interest with the parties.
UNCITRAL Model Law on International Commercial Arbitration (UNCITRAL Model Law) was prepared by the United Nations Commission on International Trade Law and has served as a model for many countries’ domestic arbitration legislation. Article 12(2) of the UNCITRAL Model Law states that “[a]n arbitrator may be challenged only if circumstances exist that give rise to justifiable doubts as to his impartiality or independence, or if he does not possess qualifications agreed to by the parties. …” Also, Article 12(1) of the UNCITRAL Arbitration Rules gives the parties the right to challenge an arbitrator, “[a]ny arbitrator may be challenged if circumstances exist that give rise to justifiable doubts as to the arbitrator’s impartiality or independence.” Article 34(2) of the UNCITRAL Model Law specifies the circumstances where the arbitral award can be annulled, “…(iv) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Law from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Law; …”.
If the arbitrator withdraws or is removed from the arbitral panel, the challenged arbitrator would need to be replaced and the hearings would need to be repeated to the extent the challenged arbitrator has been involved. This costs the parties and the TPF time and money. An arbitrator will also suffer the embarrassment of a public questioning of his or her integrity. If the award is annulled based on the ground that the arbitrator is biased, this is even more costly. All of these can be avoided if the conflict of interest between the TPF and an arbitrator is discovered at the beginning of the arbitration by disclosure of the existence and the identity of the TPF.
3. It would not be burdensome for arbitrators to investigate the existence of third-party funders
Arbitrators can easily uncover third-party funders by simply asking the parties upon appointment whether they are funded by a funder. If any party is funded by a TPF, the arbitrator shall run a conflict check and reveal any information that may raise justifiable doubts as to arbitrators’ impartiality or independence. Moreover, arbitrators can submit a list of all funders with connections to them and other members of the arbitrators’ law firm, so that the parties can check whether any circumstances exist that give rise to justifiable doubts as to the arbitrators’ impartiality or independence.
Under IBA Guidelines General Standard 7(a), the funded parties would be required to disclose the funder. If the funded party is required to keep confidential the identity of its funder under a confidentiality agreement, the parties and arbitrators can submit the list of all funders with whom they have relationships to a neutral third entity, e. g., arbitral institutions, to decide whether there a conflict of interests exists. This neutral agent approach is not new, Article 3(8) of the IBA Rules on Evidence provides for neutral agent approach for the production of potentially confidential documentary evidence.

III. Current Legislation and Arbitration Rules
The Chinese Arbitration Law is silent on the issue of disclosure of the existence and identity of a TPF. However, article 27(2) of the China International Economic and Trade Arbitration Commission (“CIETAC”) Investment Arbitration Rules appears to require expressly the systematic disclosure of third-party funding as a matter of course. CIETAC’s Hong Kong Arbitration Center has recently published “Guidelines for Third Party Funding in International Arbitration”. These Guidelines also requires that “a party obtaining Funding should without delay disclose to the tribunal and the other party (or parties) any circumstances arising from that Funding that might give rise to any possible issues of conflict of interest under applicable laws and rules.”
However, there have been many practices in other jurisdictions that require mandatory disclosure of the existence and the identity of TPF in international arbitration. Those international practices are good references when contemplating the issue of amending the Chinese arbitration legislation.
1. Comparative Legislation
Hong Kong has issued the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance in 2017. Article 98U of the Amendment requires disclosure of the existence of third-party funder.
Similarly, in Singapore, Amendments to the Legal Profession (Professional Conduct) Rules of 2015 require that a legal practitioner must disclose “to the court or tribunal, and to every other party to those proceedings” the “existence of any third-party funding contract” along with “the identity and address of any third-party funder involved in funding the costs of those proceedings.”
2. Guidance from Arbitral Institutions
The 2018 Hong Kong International Arbitration Center (“HKIAC”) Administered Arbitration Rules mandates that “If a funding agreement is made, the funded party shall communicate a written notice to all other parties, the arbitral tribunal, any emergency arbitrator and HKIAC of: (a) the fact that a funding agreement has been made; and (b) the identity of the third party funder.”
In ICC’s Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration under the ICC Rules of Arbitration, the ICC court gave arbitrators the following guidance: “Arbitrators should in each case consider disclosing relationships with another arbitrator or counsel who is a member of the same barristers’ chambers. Relationships between arbitrators, as well as relationships with any entity having a direct economic interest in the dispute or an obligation to indemnify a party for the award, should also be considered in the circumstances of each case.” The ICC’s Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration seems to imply that arbitrators have a duty to investigate the existence of a funder in an arbitration.
Moreover, although Rule 24(l) Investment Arbitration Rules of the Singapore International Arbitration Center (2017) does not require a mandatory disclosure of the TPF, it gives arbitral tribunals the power to order disclosure of third-party funder.

IV. When, How, to What Extent, and by Whom the Disclosure Should Be Made
As stated above in II (2), many risks can be avoided if the conflict of interest between the TPF and an arbitrator is discovered at the beginning of the arbitration by disclosure of the existence and the identity of the TPF. Therefore, this article supports that if the funding agreement is made before or upon the initiation of the arbitration, the disclosure shall be made at the time of the submission of a claim. If the funding agreement is made after the submission of a claim, the disclosure shall be made without delay as soon as the agreement is concluded.
TPFs are not parties to the arbitration, therefore they cannot be directly compelled by an arbitral tribunal or rules applicable within the arbitral proceedings to disclose their participation. Instead, disclosure is ordinarily made by the parties. Therefore, a party or its representative should, on their own initiative, disclose the existence of a TPF at the appointment of arbitrators, or as soon as practicable after funding is provided or an arrangement to provide funding for the arbitration is entered into.
Usually, when disclosure has been ordered, the arbitral tribunal orders disclosure of the identity of the third-party funder, but only rarely disclosure of the terms of the funding arrangement, and usually not for reasons related to arbitrator conflicts. This article agrees with this idea because usually the parties and the TPF are under a confidentiality agreement. Thus, if the funding agreement is not in dispute, it is not necessary or appropriate to disclose its terms for the purposes of assessing potential conflicts of interest.
Therefore, this article argues that a party or its representative should, on their own initiative, disclose the existence of a TPF at the appointment of arbitrators or as soon as practicable after funding is provided or an arrangement to provide funding for the arbitration is entered into.

V. Conclusion
Chinese arbitration legislation is silent on the disclosure of TPF. The participation of a TPF in international arbitration can create potential conflicts of interest, which may cause the award to be annulled based on the ground that the arbitrator is biased and is contrary to the parties’ right that parties be fully informed. Chinese domestic arbitration law should be amended to mandate disclosure of the existence and identity of a TPF as a matter of course in every case. Meanwhile, Chinese arbitral institutions should also amend their arbitration rules to require systematic disclosure of the existence and identity of TPF.

Footnotes:
1. Arbitraje: Revista de Arbitraje Comercial y de Inversiones, Noticias Volume IX, No. 2 (2016), p.613.
2. IBA Guidelines on Conflicts of Interest in International Arbitration, Explanation to General Standard 3(c).
3. Secretariat of the ICC Court of Arbitration, “Note to parties and arbitral tribunals on the conduct of the arbitration under the ICC Rules of Arbitration” (2017), paras.17, 18.
4. CAM-CCBC Administrative Resolution 18/2016, available at http://www.ccbc.org.br/ Materia/2890/resolucao-administrativa-182016/en-US.
5. Jonas von Goeler, Third-Party Funding in International Arbitration and Its Impact on Procedure (2016), p.263-64.
6. Id.
7. Jonas von Goeler, Third-Party Funding in International Arbitration and Its Impact on Procedure (2016), p.278; International Council for Commercial Arbitration, Report of the ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration (April 2018), p.87.
8. Jonas von Goeler, Third-Party Funding in International Arbitration and Its Impact on Procedure (2016), p. 278.
9. International Council for Commercial Arbitration, Report of the ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration (April 2018), p.87.
10. Sebastian Perry, Third-Party Funding: an Arbitrator’s Perspective
in: Global Arbitration Review (2011), available at: https://globalarbitrationreview.com/article/1030794/third-party- funding-an-arbitrators-perspective.
11. Marc J. Goldstein, Should the Real Parties in Interest Have to Stand up? – Thoughts about a Disclosure Regime for Third-Party Funding in International Arbitration, available at: https://www.transnational-dispute- management.com/article.asp?key=1745.
12. International Council for Commercial Arbitration, Report of the ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration (April 2018), p.110.
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