Third-Party Funding: Treading on Thin Ice?

By: Payel Chatterjee (Partner) and , Aman Singhania (Senior Associate), Bharatt Goel (Associate)

This piece was originally published on the Kluwer Arbitration Blog.

Third-Party Funding (“TPF”) has emerged as a parallel industrial complex in the modern dispute resolution landscape. Parties routinely enter into Arbitration/ Litigation Funding Agreements (“LFA”) with third parties, based on both conditional fees and damages-based remuneration models, seeking financial services in relation to advocacy, litigation, or claims management. The increasing popularity of the industry can be accredited not only to its commercial viability especially in contentious commercial arbitrations, as evidenced by a ten-fold increase in funders’ assets in the United Kingdom (“UK”) alone, a whopping £ 2.2 billion over the past decade, but also to its stead-fast socio-legal acceptability as a tool for enabling access to justice as well.

Initially, TPF was met with scepticism, and was excluded on grounds of public policy and to avoid unwarranted interferences with the process of justice. Acceptance came gradually; LFAs which did not entail wanton meddling with the process of justice or did not accord disproportionate control or profits to third parties, were deemed to pass the litmus test of maintenance and champerty rules. International and domestic arbitrations guided by principles of party autonomy and addressing commercial interests of private parties, naturally became the most lucrative and acceptable forums for introducing TPF. A typical look of courts attempting to balance commercial and social values of TPF was seen in the landmark case of Excalibur Ventures LLC v. Texas Keystone Inc (no. 2). While on one hand, TPF was acknowledged as a judicially sanctioned activity in public interest, on the other hand, joint and several liability was enforced upon inexperienced funders for adverse indemnity costs.

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