Third-Party Funders And Their Exposure To Adverse Costs Liabilities

The assenting opinion in RSM Production Corporation v. Saint Lucia, ICSID Case No. ARB/12/101 raises a highly emotive issue, relevant to the issue of third-party funding which continues its expansion in international arbitration claims.

This issue concerns the fact that in principle, tribunals currently lack the jurisdiction to issue a costs order against a third-party funder ("TPF"), because TPFs are not typically a party to the arbitration agreement, with no involvement in the underlying dispute between the parties in an arbitration. A TPF's involvement in the proceedings cannot readily be interpreted as consent to arbitrate, and litigation funding agreements are commonly designed to ensure that that the TPF cannot be construed as a party to an arbitration. Current research suggests that there have been no published arbitral awards ordering a TPF to pay adverse costs in international arbitration.

The ICCA-Queen Mary Task Force Final Report on Third-Party Finding in International Arbitration, due to be published in September 2016, amongst other things, will seek to address this issue. This article briefly explores how certain national court jurisdictions have dealt with this issue.

In England & Wales the seminal case of Arkin v Borchard Lines Ltd2 introduced what has become known as the "Arkin cap", effectively endorsing the litigation funding market in the UK. Following the Arkin decision, whilst TPFs still risk exposure to adverse costs, the Arkin cap limits their exposure to the amount of their investment. TPFs will not be found liable to pay all of their opponent's costs of litigation unless the funding agreement is found to be champertous3. The judgment and the principle it established, were designed to balance access to justice, against the need for fairness to successful opponents who should be able to recover their costs.

In practice, TPFs reduce their adverse costs exposure by making it contractually binding for a funded party to obtain After The Event Insurance, providing sufficient indemnity, thereby insuring the TPFs adverse costs risk. Incidentally, ATE insurance policies are often used to try and satisfy requests for security for costs, both before the English courts4 and in international arbitration claims5.

Champerty and maintenance are concepts found in jurisdictions following common law doctrine. In the context of civil litigation, maintenance means the improper support of litigation in which the supporter has no...