Disclosure obligations and conflict of interest

2019 | roadmap

Third-party funding has become a common feature of international arbitration. Yet, despite the upsurge, it still raises many controversial legal questions. The most prominent is whether and to what extent the existence of third-party funding and the identity of the third-party funder must be disclosed to the other party, the arbitrators and the arbitral institution.

After all, only a few jurisdictions (such as Hong Kong and Singapore) provide rules on third-party funding and on any disclosure obligations in this respect. Likewise, the vast majority of arbitral institutions offer no or virtually no guidance with regard to any disclosure obligations incumbent upon the funded party. Only a few arbitral institutions have adopted explicit rules on disclosure obligations in the context of third-party funding. In this sense, one of the most popular institutional arbitration rules, the Rules of Arbitration of the International Chamber of Commerce ("ICC"), do not provide express rules on third-party funding. However, in its "Note to parties and arbitral tribunals on the conduct of the arbitration under the ICC Rules", the ICC deals with disclosure obligations in relation to the impartiality and independence of arbitrators. The ICC advises that the relationship between arbitrators and any entity having a direct economic interest in the dispute or an obligation to indemnify a party for the award should be considered when identifying circumstances which may (i) call into question the independence of an arbitrator or (ii) give rise to reasonable doubts as to his or her impartiality.

Indeed, it is precisely the potential conflict of interest scenario that proponents of disclosure have advanced in favour of wide-ranging disclosure obligations. In this respect, two scenarios that may bear the potential of conflict of interest stand out: (i) frequent appointment of individual arbitrators in arbitration proceedings involving the same funder, and (ii) the appointment of an arbitrator by a funded party where that arbitrator already has a relationship with the third-party funder. In contrast, disclosure opponents have advanced primarily pragmatic arguments observing that disclosure may prompt unfounded challenges to arbitrators and meritless requests for security for costs, filed for strategic reasons only. Also, opponents of disclosure have argued that the existence of third-party funding and the identity of the third-party funder need not be disclosed, as unknown conflicts offer no basis for a successful challenge of an arbitrator or for setting aside an award.
Nevertheless, despite several pragmatic arguments against disclosure obligations, there appears to be broad agreement that, at a minimum, disclosure of a third-party funding arrangement and the identity of the third-party funder is necessary for an arbitrator to properly analyse potential conflicts of interest. In this sense, the IBA Guidelines on Conflicts of Interest in International Arbitration ("IBA Guidelines"), a soft-law instrument with wide acceptance within the international arbitration community, in 2014 introduced rules on disclosure obligations and conflict of interests in the context of third-party funding. Under Article 7(a) of the IBA Guidelines, a party shall inform the arbitral tribunal, the other parties and the arbitration institution of any direct or indirect relationship between the arbitrator and the party or between the arbitrator and any person or entity with a direct economic interest in, or a duty to indemnify a party for, the award to be rendered in the arbitration. Under the IBA Guidelines, the funded party shall do so on its own initiative and at the earliest opportunity.

Parties who are third-party funded are advised to pay attention to how they disclose the existence of a third-party funding arrangement and the identity of the third-party funder to the other party, the arbitrators and the arbitral institution. They should do so on their own initiative and at the earliest opportunity, even if express rules are missing or the IBA Guidelines do not apply; ultimately, not to raise any concerns about the integrity of the arbitral proceedings. Conversely, parties should avoid disclosing the existence of funders at an inappropriate stage of the proceedings; for example, during the pre-hearing conference call. Needless to say, a disclosure shortly before the evidentiary hearing or at any other inappropriate stage of the proceedings will serve little but to give the other party the opportunity to take a tactical advantage as a result of the late disclosure.

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This article was up to date as at the date of going to publishing on 10 December 2018.