Litigation financing, also known as third-party funding, enables a party to pursue legal claims by obtaining funding from an outside investor in exchange for a share of potential proceeds. As the costs, complexity and risks associated with arbitration continue to rise, increasing numbers of claimants are exploring litigation finance arrangements.[1] However, the lack of mandatory disclosure guidelines creates concerns about transparency and ethical considerations around the role and influence of funders.[2] This article examines the debate around whether litigation finance serves as a meaningful source of access to justice in arbitration or primarily introduces further issues around conflicts of interest, impartial proceedings and settlement motivations contrary to a legal merits basis.
Over the last decade, litigation financing has expanded significantly across jurisdictions. Though exact figures on the scale of arbitration funding remain difficult to confirm due to limited required disclosure,[3] respected organizations estimate total investments may exceed $10 billion globally. Under most arbitration rules and national laws, parties stand under no obligation to divulge whether they have secured funding or identify details on the arrangement such as the funder’s identity or their level of involvement in key legal strategy decisions and settlement discussions. Supporters of litigation finance highlight how it serves to enable greater access to justice by allowing claimants to pursue meritorious claims they otherwise could not afford on their own without the backing of a funder. The promise of a portion of monetary proceeds in the event of a successful outcome provides an incentive for investors to take on risks and costs -associated with complex arbitrations. With rising administrative expenses, legal representation fees and lengthy case timeframes, funders portray their involvement as an alignment of interests around securing justice. Yet critics argue aspects of influence from profit-motivated backers undermine the impartial spirit arbitration intends to provide.
As the practice of third-party litigation financing grows more prevalent across legal systems, so too has the debate around its implications for arbitration’s procedural integrity, ethical landscape and role in access to justice. While the previous article covered funder motivations and procedural impacts, this piece widens the lens across manifold aspects of arbitration potentially affected by outside financing parties unrestrained by appropriate regulation. By examining issues from confidential data management to legal marketing tactics to diversity barriers, layers of influence — both overt and subtle — come into focus alongside the need for reasoned guidelines calibrated for arbitration’s unique context.
Several critical areas of debate emerge around if and how litigation funding may unfairly affect arbitration proceedings if not properly regulated:
- Conflicts of Interest – A key criticism centers on how funding potentially introduces biases or conflicts of interest between arbitrators and funders that parties have no means to uncover in the absence of transparency requirements. Critics point to situations where the same funders back clients across multiple cases involving similar arbitrators as examples of undisclosed links calling impartiality into question.
- Settlement Motivations – Observers also raise concerns around how funders might push funded parties toward premature settlements that align with their aim to free up invested capital instead of seeing the legal process through to its fullest determination. Data on arbitration case duration provides mixed indications, with some research showing a pattern of shorter case length for funded parties but methodology constraints make conclusions uncertain. Critics maintain that without mandated disclosure however, tribunals stand limited in their ability to fully evaluate if funding arrangements are impacting motivations behind settlement decisions versus arriving there based on legal merit arguments.
- Availability of Claims – Supporters counter that the only meaningful way to assess litigation funding is through its increasing availability of legitimate legal claims rather than hypotheticals around potential for interference or control. By easing the financial barriers that prevent parties from bringing cases forward, they argue funders help widen access across economic levels. Critics however highlight that many funders conduct minimal vetting around actual legal merits in their haste to deploy capital for sizable returns. The lack of oversight around funders’ eligibility analysis allows questionable claims potential entry that would otherwise lack standing if pursued independently.
- Party Resources & Accuracy Imbalance – Relatedly, observers point to how claimants and respondents frequently face asymmetry around financial resources available to commit to arbitration. Supporters maintain funding serves to regain balance where single parties would otherwise lack the means to advocate their position accurately. Again however this argument presumes funders conduct careful merits investigations rather than pursuing volume and return which critics indicate dominates strategic screening. Lacking mandated transparency however makes verification impossible.
On the whole, assessing the tangible impacts of rising third-party litigation funding presence in the arbitration landscape presents layers of complexity with reasonable arguments on both sides as well as limitations around conclusive data. The extent critics rightly identify potential manipulation of proceedings through conflicts of interest, excessive control of party strategy or inflated caseloads from precipitated settlement timeframes remains difficult to size without additional reporting requirements for funders. However, supporters also provide meaningful examples of funding addressing real claimant resource disparity that produced inaccurate case outcomes.
The case of RHL vs Shell (2022)[4] saw India’s first court-ordered disclosure of litigation funding under Section 11 of the Arbitration Act. The court held that funding details were relevant in assessing arbitral independence during appointment challenges. It set a precedent favoring disclosure despite no statutory mandate. Delhi HC overturned an arbitral award in Manway Construction vs Municipal Corporation of Delhi (2021)[5] after concluding the funded claimant suppressed key funding details during proceedings. The court ruled that the claimant’s deliberate concealment “vitiated arbitral principles of integrity and fairness”. So Indian courts have recognized litigation finance’s potential for misuse if left unchecked. Judgments are aligning more to global trends favoring transparency during disputes to uphold sanctity of proceedings.
A landmark case of UK Supreme Court in Essar v Norscot (2016)[6] confirming third party funding costs can be recovered as “other costs” under UK arbitration laws. This increased funder liability risks. This case was decided by the English High Court (Commercial Court) in 2016. The dispute related to an ICC arbitration between Essar Oilfields Services Limited and Norscot Rig Management Pvt Limited. The court dealt with the issue of recoverability of third-party funding costs as part of the arbitration award.
In Re E&M (2021)[7] the Hong Kong court of First Instance ordered a funded claimant to provide security for costs to the defendant due to unclear financing details and failure to disclose the litigation funding agreement. The dispute related to a winding-up petition filed against E&M Engineering Company Limited. The court dealt with the issue of third-party funding in the context of insolvency proceedings and ordered the disclosure of the litigation funding agreement.
Singapore courts in Manuchar Steel vs Star Pacific (2014)[8] recognized funded parties may have ancillary disclosure duties, despite no express legal provisions mandating it then. Australian Federal Court enforced disclosure obligations deriving from funded parties’ general duties of confidentiality in arbitral contracts.[9] European Court of Justice ruled failure to disclose financing details breaches EU transparency laws around dispute settlements involving states.[10]
In moving forward, rather than banning litigation funding from arbitration outright, a compromise around regulated transparency mechanisms holds greater merit. Reasonable disclosure guidance would enable tribunals, counterparties and oversight bodies to better evaluate funding arrangements on a case by case basis and rule out clear improprieties if present while still allowing funding as an option. Further, minimum merit review standards for funders combined with limits on influence over claimant’s litigation strategy also provide value. Though no framework stands perfect, calibrated guidelines balancing access, integrity, transparency and ethics help shift the debate from speculative harms to demystifying litigation finance through managed oversight.[11] With arbitration’s rise across global jurisdictions expected to continue, building consensus around appropriate funding guardrails specific to this legal context best supports its long-term credibility and purpose.
Author : LOLITA DELMA CRASTA, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at IIPRD
[1] Bench Nieuwveld, L., & Sahani, V. S. (Eds.). (2012). Third-Party Funding in International Arbitration. Kluwer Law International.
See also Cremades, B. (2012). Third Party Funding in International Arbitration. B. Cremades y Asociados, 1-18.
[2] Flake, C. R. (2015). In Domestic Arbitration: Champerty or Social Utility? Dispute Resolution Journal, 70(2), 109-123.
[3] Legg, M. (2017). Litigation Funding and Class Actions: Idealism, Pragmatism and a Legal Framework. Australian Law Journal, 91(12), 955-973.
[4] Reliance Holding USA, Inc. & Ors. v. Shell Plc & Ors., 2022 SCC OnLine Guj 850.
This case was decided by the Gujarat High Court in 2022. The dispute related to an arbitration agreement between Reliance Holding USA, Inc. and Shell Plc. The court dealt with issues of third-party funding and discussed the need for disclosure of such funding arrangements in arbitration proceedings.
[5] Manway Construction v. Municipal Corporation of Delhi, 2021 SCC OnLine Del 3597.
This case was decided by the Delhi High Court in 2021. The dispute related to an arbitration proceeding between Manway Construction and the Municipal Corporation of Delhi. The court dealt with the issue of non-disclosure of third-party funding and its impact on the integrity and fairness of the arbitration proceedings.
[6] Essar Oilfields Services Limited v Norscot Rig Management Pvt Limited [2016] EWHC 2361 (Comm).
[7] Re E&M Engineering Company Limited [2021] HKCFI 1967.
[8] Manuchar Steel Hong Kong Ltd v Star Pacific Line Pte Ltd [2014] SGHC 181.
This case was decided by the Singapore High Court in 2014. The dispute related to a sale contract between Manuchar Steel Hong Kong Ltd and Star Pacific Line Pte Ltd. The court dealt with the issue of third-party funding in the context of international arbitration and discussed the potential implications of such funding arrangements on the arbitration proceedings.
[9] Zhang v Fan [2021] FCA 961.
This case was decided by the Federal Court of Australia in 2021. The dispute related to a commercial agreement between Zhang and Fan. The court dealt with the issue of third-party funding in the context of litigation and discussed the disclosure obligations of the funded party.
[10] Case C-536/13, “Gazprom” OAO v Lietuvos Respublika, ECLI:EU:C:2015:316.
This case was decided by the Court of Justice of the European Union (Grand Chamber) on May 13, 2015. The dispute related to the enforcement of an arbitral award in Lithuania, which was challenged on the grounds of public policy. The court dealt with issues of arbitration and the application of the Brussels I Regulation.
[11] Von Goeler, J. (2016). Third-Party Funding in International Arbitration and Its Impact on Procedure. Kluwer Law International.
See also Hodges, C., Peysner, J., & Nurse, A. (2012). Litigation Funding: Status and Issues. Oxford Legal Studies Research Paper No. 55/2012.
