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Financing by External Parties in Arbitration

External or third-party funding in arbitration involves support from an outside entity, providing financial backing to a party engaged in arbitration. This financial support typically covers legal fees, administrative costs, and other associated expenses.

In return for their investment, the external financier usually takes a share of any successful claim's proceeds. This practice has grown in popularity, particularly in international arbitration, offering a crucial resource for those unable to finance their arbitration proceedings alone.

Understanding External Financing in Arbitration

In recent times, external financing has gained considerable ground, especially in international commercial and investment treaty arbitrations. This mechanism allows parties to seek justice even when they lack the funds for arbitration by introducing an investor who finances the case in anticipation of a share in the success.

This approach is particularly useful for individuals, corporations, or even governments facing high-cost, complex disputes.

Key Participants in External Funding:

  • The entity or individual needing financial support for their arbitration case, whether as claimant or respondent.

The Funder

  • An entity or individual providing financial support, expecting a return on investment from any arbitration award.
  • They generally have no direct interest in the dispute but act as a financial stakeholder.

Legal Representation

  • The law firm for the funded party is pivotal, aiding in structuring the financial arrangement.
  • Advises on case merits and ensures compliance with legal and ethical standards.

Arbitration Panel

  • The arbitrators must be informed of the funding to manage any potential conflicts of interest.

Mechanics of External Funding

The process involves a contract between the funded party and the financier, detailing funding terms, financial obligations, and the allocation of any potential recovery. The financier might cover all or part of the arbitration costs, with agreements potentially including clauses on influence over case strategy or settlement discussions.

Advantages of External Funding

  • Justice Accessibility: It democratizes the legal process by allowing those financially constrained to engage in arbitration.
  • Risk Management: The financial risk is shifted to the funder, beneficial in cases with significant costs.
  • Expertise: Funders often possess specialized knowledge in dispute resolution, potentially enhancing case outcomes.
  • Settlement Motivation: Financial interest can expedite settlement resolutions.
  • No Initial Outlay: The funded party typically incurs no upfront costs, with payments linked to case success.

Challenges and Critiques of External Funding

  • Regulatory Gaps: The lack of consistent regulation can lead to misuse or uncertainty.
  • Conflict of Interest: There's a risk that funders might overly influence case strategy.
  • Confidentiality Risks: The need to keep funders informed might compromise confidentiality.
  • Proportionality Concerns: Critics argue that funding might encourage frivolous or excessive claims.
  • Ethical Issues: There are ethical concerns about how much control funders should exert.
  • Power Imbalance: Funders can alter the power dynamics within arbitration.
  • Transparency Deficit: Funding agreements often remain confidential, obscuring the financial dynamics.

Legal Structures and Regulation

  • United Kingdom: Permitted with guidelines on ethical conduct concerning funder involvement.
  • Australia: Has a well-defined regulatory framework demanding transparency and ethical compliance.
  • United States: Allowed but with various stipulations on confidentiality, conflicts, and fees.

Best Practices for External Funding

  • Disclosure: Funded parties should inform tribunals about funding arrangements for transparency and integrity.
  • Clear Agreements: Written contracts should clearly define terms, funder's share, and termination conditions.
  • Regulatory Adherence: Compliance with local laws regarding funding is crucial.
  • Ethical Awareness: Parties must navigate the ethical challenges posed by funding.
  • Managing Conflicts: Procedures should prevent funders from unduly affecting arbitration outcomes.


Conclusion
External funding has transformed arbitration, making it more accessible while posing new regulatory and ethical questions. Its future will hinge on the development of clearer, more uniform regulations to safeguard the arbitration process's fairness and integrity.

References:
  • https://thelawcodes.com/article/third-party-funding/
  • https://thelawcodes.com/law-firm-in-chandigarh/
  • https://thelawcodes.com/law-firm-in-gurgaon/
  • https://thelawcodes.com/corporate-lawyers-in-chandigarh/
  • https://thelawcodes.com/corporate-lawyers-in-gurgaon/

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