Why Third-Party Funding Should Be Given a Second Glance in Arbitrations: A Post-Pandemic Option for Arbitration Financing in Singapore

Third Party Funding (“TPF”) is not an unfamiliar practice in international commercial arbitration.  It is a mode available to parties to an arbitration to seek financial support from parties who are not (the “Third Party Funders or TP Funders”) to commence and continue an arbitration to its conclusion. In providing financial support, the TP Funders assume the risks of their ‘investment’; if the arbitration claim is successful, the TP Funders would receive an agreed pay out, usually a percentage of the arbitration award, otherwise, the TP Funders assumes the risk of nil returns if the claim fails.

TPF is attractive because it enables businesses or individuals to pursue claims which are legitimate notwithstanding that they could be in situations which may not be conducive to consider arbitration. The current pandemic-stricken times have only heightened the significance of TPF; the availability and viability of TPF throw a lifeline to businesses and individuals battling pandemic-caused business disruptions and contractual disputes to enforce their rights by arbitration.

While the use of TPF in the early days was mostly associated with illegality, it has gained traction of late.  Leading arbitration centres in London, Paris and Geneva have advocated the use of TPF in arbitration claims commenced under their auspices.  Singapore has also followed suit lending itself as one of the most sought-after venues by businesses and individuals to arbitrate claims.

This article looks at:

• the advantages of TPF;
• the benefits to businesses and individuals of arbitrating with the support of TPF;
• the disputes suitable for TPF;
• considerations when sourcing for a TP Funder;
• the information businesses need to disclose to a potential TP Funder; and
• why Singapore is an attractive venue for international arbitration supported by TPF.

Advantages of TPF

TPF helps to identify and support claims that are legitimate worthy of arbitration. Through extensive due diligence, the TP Funders would take a thorough assessment of the merits of the claim before any agreement to commit to the financial undertaking to fund the claim is made. As such, inevitably, only claims which have a reasonable prospect of success and a high chance of enforcement would be preferred by TP Funders.

The growing need to consider TPF as an avenue to advance a claim in arbitration has had many positives; to name a few, the arbitration circle has seen an increased sophistication of TP Funders, a wider variety of TPF arrangements with better legal and regulatory initiatives to govern TPF.[i] As such, the practice of TPF has long evolved from a single-case legal financing solution. There now exists a wide range of solutions which are tailored to the needs of businesses with increased liquidity in the market due to more capital providers.

As the top five preferred seats for arbitration in the world, Singapore is cognisant of the practices of commercial parties who have chosen to arbitrate in Singapore. Staying abreast of the business needs of commercial parties, Singapore allowed TPF as a source of funding for international arbitration in 2017.[ii] Since then, Singapore has seen an increase in the pool of TP Funders wanting to lend financial support to parties wanting to arbitrate.

Further, from 28 June 2021 onwards, the Ministry of Law has extended the current TPF framework to cover domestic arbitration proceedings, certain proceedings in the Singapore International Commercial Court and related mediation proceedings.[iii] These recent developments can only mean one thing – that TPF is gaining popularity and is here to stay.

Attractiveness of Singapore as a Place for International Commercial Arbitration Supported by TPF

The development and liberalisation of TPF in Singapore has been modest and targeted.[iv] The concerns underlying TPF have been alleviated through regulations and guidelines. Singapore’s uniquely light-handed approach of TPF is geared to address the many procedural and ethical hurdles which manifests in TPF. This three-fold approach endeavours to also ensure that the commercial attractiveness of TPF is not diminished.

First, Singapore’s Civil Law Act (Cap. 43) (the “CLA”) currently allows the provision of TPF only by qualified commercial TP Funders.[v] This allows for a controlled examination of the feasibility of the current framework by parties of commercial sophistication.[vi]

As such, Singapore’s subsidiary legislation, Civil Law (Third-Party Funding) Regulations 2017 (S 68/2017) (the “CLR”), sets out the qualifying criteria which TP Funders must satisfy and continue to satisfy before entering into a third-party funding contract.[vii] This includes:

1. the TP Funder to be in the principal business of funding dispute resolution proceedings; and
2. the TP Funder shall have a paid-up capital or manage assets worth $5 million.

Second, in order to prevent conflict of interest issues from arising between the solicitor and the success of the dispute, amendments have been made to Singapore’s Legal Profession Act (Cap. 161) (the “LPA”) and the Legal Profession (Professional Conduct) Rules 2015 (S 706/2015) (the “PCR 2015”).

Currently, solicitors in Singapore are allowed to introduce TP Funders to their clients, advise their clients on third-party funding contracts and act for them in disputes arising out of the third-party funding contract. However, this comes with a caveat: that the solicitors do not receive any direct financial benefit from their recommendation or advice.[viii] Additionally, solicitors and their law practices are prohibited from holding any interest in a TP Funder whom they have referred to their clients.[ix]

In addition, other ethical and policy issues that may arise in TPF have also been addressed. For instance, to address the potential conflict of interest arising from a relation between an arbitrator and the TP Funder, duties of disclosure have been imposed on the solicitor. Regulation 49A of the PCR 2015 requires the solicitor to disclose to the court or tribunal and every other party the existence of any funding contract, the identity and address of the TP Funder.

Lastly, in addition to the Guidance Note as issued by the Law Society of Singapore on TPF,[x] various arbitration centres such as the Singapore International Arbitration Centre (“SIAC”)[xi] and the Singapore Institute of Arbitrators (“SIArb”)[xii] have issued best practices guidelines to assist in TPF.

These guidelines provide the best practices for parties to tackle common issues and concerns which may arise in TPF, such as the following: [xiii]  

• confidentiality and privilege issues;
• how to set out the scope of funding provided and the TP Funder’s liability for adverse costs;
• how to set out the TP Funder’s level of involvement in decision-making and dispute resolution procedures should the TP Funder and claimant disagree; and
• termination of the funding agreement.

Singapore’s multi-tiered approach to TPF has by-and-large allowed TPF to develop as a legitimate source of financial support for international commercial arbitration. The regulations as well as the guidelines set out by the Law Society of Singapore, SIAC and SIArb provide a cohesive support system which respects the integrity of proceedings and the ultimate pursuit of justice.

Determining the appropriateness of a dispute for TPF

The following is a checklist to assist businesses who are looking for a TP Funder:[xiv]

1. The nature of the claim – TPF would be more appropriate in monetary claims. Crucially, a claim which has a reasonable prospect of success would be more likely to attract a TP Funder.
2. Enforcement of the arbitral award – Considerations in this regard includes whether the respondent would be able to meet the claim, furnish the costs and interests, whether there is a risk of enforcement, whether the respondent’s assets are ascertainable.
3. Size of the claim – As an arbitration matter requires deep pockets and is a high-risk investment by nature, appropriate one-off cases in which TP Funders will be interested are those where there are substantial damages to be assessed.
4. Seat/place of arbitration – Finally, the location where the arbitration would be held is an important consideration. As discussed above, if Singapore is the seat of arbitration, TPF has been permitted for both international and domestic commercial arbitration matters. Enforcement of the award would likely not be an issue as the fact of funding would no longer raise public policy arguments of champerty and maintenance.

Further, as only qualified TP Funders are allowed in TPF arrangements in Singapore, a party seeking a TP Funder is advised to undertake due diligence to ensure that the requirements as listed in the CLR are satisfied.

Lastly, a party seeking a TP Funder should furnish the relevant information to a TP Funder, to aid in their consideration to fund the claim.[xv] This entails providing the necessary information to the potential TP Funder to analyse the merits of a claim. Such information may include evidence relevant to the dispute, legal opinion of legal professionals, information on the respondent (such as its financial viability and the location of their assets), forecast on legal costs and the requisite budget of the arbitration.

TPF:The post pandemic financing solution to arbitration

In a pandemic and the post-pandemic times, TPF would become a much sought-after avenue to fund a claim in arbitration. This is so because businesses and/or individuals are circumspect with monetary outlay in pursuing any disputes which may be tantamount to throwing good money after bad.   Globally, TPF has become more widely accepted. This can be seen by the changes made to the Rules of Arbitration of the International Chamber of Commerce in 2021.[xvi] These 2021 rules have added provisions to safeguard against potential conflicts of interests. This includes a provision requiring each party to inform the Secretariat, the arbitral tribunal and the other parties, of the existence of a TP Funder. It is evident that TPF is destined to remain a centrepiece of the international arbitration landscape.

The liberalised usage of TPF in the recent years have allowed for a deepening of a funding pool available to businesses with legitimate claims. For businesses who are keen to make use of Singapore as their seat of arbitration, they can be rest assured that the ethical and policy concerns underlying TPF have been alleviated by the necessary regulations and guidelines. As such, a second glance should be given to TPF as a viable commercial option for the financing of an arbitration claim in Singapore.

[i] Hussein Haeri, Claudia Baro Huelmo and Giacomo Gaspartiotti, Third-Party Funding in International Arbitration, 20 January 2021. Retrieved from Global arbitration

[ii] Second Reading Speech by Senior Minister of State for Law, Indranee Rajah SC, on the Civil (Amendment) Bill 2016, 10 January 2017. Retrieved from mlaw.gov.sg

[iii] Ministry of Law, Third-Party Funding to be Permitted for More Categories of Legal Proceedings in Singapore, 21 June 2021. Retrieved from mlaw.gov.sg

[iv] Ibid.

[v] Section 5A and 5B of the Civil Law Act (Cap. 43) (the “CLA”).

[vi] Ibid.

[vii] Regulation 4 of Civil Law (Third-Party Funding) Regulations 2017 (S 68/2017).

[viii] Section 107(3A) LPA.

[ix] Rule 49B PCR 2015.

[x] The Law Society of Singapore, Guidance Note 10.1.1, Third Party Funding. Retrieved from mlaw.gov.sg

[xi] Singapore International Arbitration Centre (SIAC) Third-Party Funding Practice Note PN-01/17, 31 March 2017. Retrieved from siac.org.sg

[xii] SIArb Guidelines for Third Party Funders. Retrieved from siarb.org.sg

[xiii] The Law Society of Singapore, Guidance Note 10.1.1, Third Party Funding, 25 April 2017. Retrieved from mlaw.gov.sg

[xiv] Ashurst, Third Party Funding in International Arbitration, 21 February 2020. Retrieved from ashurst.com

[xv] Ibid.  

[xvi]Inhouse community

This article was originally published on Asian Legal Business.