This article first appeared in Forum, The Edge Malaysia Weekly on June 5, 2023 – June 11, 2023
Arbitration, international or domestic, is often seen as an expeditious way to seek justice. And increasingly we see investment companies and finance houses offering funding to help people who take their disputes to arbitration. That is called third-party arbitration funding or financing.
As informed readers of this publication know, that which is commodified is an asset. And if arbitration or, strictly speaking, justice represented by arbitration, can be commodified, then it too as an asset can be used as a financing tool and can itself be financed. The funders will take a cut of the proceeds of the winnings. However, the promise of returns explicit in the financing agreement can itself be further collateralised or assigned or financed by the funder. The chain can go on and on, subject to very little regulation. This is a field of financing increasingly called “legal finance”.
In the now well-publicised ongoing enforcement actions taken by the so-called Sulu heirs against Malaysia for unpaid monies, the arbitrator had ordered an award of approximately RM15 billion against the country. What is perhaps less widely known, is that the claim is funded by Therium, a legal finance company with an international footprint. Without rehearsing the now well-known facts, this piece looks at the potentially pernicious effects of third-party funding in arbitration.
The classic approach taken by the funder when deciding whether to fund or not is that consistent with most investment decisions. The funder will assess different factors, such as win prospects, costs, quality of the legal team, the place where the arbitration is to be held, the law in question and the arbitrators. There are of course many who believe therefore that arbitration funding offers up access to justice to those who cannot afford it and is thus a good thing.
However, there are also a number of funders who would look to other less salubrious factors or considerations in the quest for greater profit. For example, in cases which are probably unwinnable, the funders might take the view that, despite that, the commencement of a highly public and publicised dispute can compel the other side to settle. Parties are also more inclined to settle because they fear that when third-party funders become involved legal fees would spiral. This is where the access to justice argument, frequently vaunted by third-party litigation or arbitration funders as the public good they serve, fails.
In the case of international arbitration, the matter becomes even more acute. Arbitrators are increasingly less and less subject to judicial scrutiny. Again, the orthodoxy these days is that arbitration and arbitrators should be free to make decisions on the cases they have been empowered by the parties’ contracts to adjudicate. There is often no room for appeal to the courts, even where the arbitrator has made an error of law, for example — such is the position of countries that have adopted the UNCITRAL (United Nations Commission on International Trade Law) Model Law. Many countries have adopted the Model Law but perhaps interestingly, one of the most prominent countries in the world for arbitration, England, has not adopted such provisions.
This is of course not a sweeping criticism of the Model Law — there are many useful provisions in the Model Law but those provisions are premised on the freedom of the parties to agree specifically as to how and what their purported arbitration should look like. Unfortunately, many contracts are not freely negotiated. The reality of doing business is that often arbitration clauses or agreements are inserted as boilerplate. Moreover, in cases such as the Sulu claim, the “agreement” in question, which was made in a different era (in 1878) between parties who are no longer in existence (Baron von Overbeck and the then Sultan of Sulu), is relied on to fix the terms and parameters for a 21st century arbitration!
Arbitrators also do not necessarily have to apply law as we usually understand law to be — they are free, subject to the terms of the contract and sometimes the arbitration laws of the countries where the arbitration is held, to apply “appropriate” principles and norms. In the Sulu case, the arbitrator had seen it fit to apply the UNIDROIT Principles of International Commercial Contracts 2016 to an agreement made in 1878. Notably too, the UNIDROIT Principles are principles, not law, international or otherwise. That shows the breadth of the arbitrators’ powers, admittedly subject to contractual control between the parties. But as in the Sulu claim, Malaysia having inherited the “agreement”, could not have a say in the terms.
On a general point, moreover, not many contracting parties pay enough heed during the heady days of business courtship to clauses on what law and rules the arbitrator should apply in the event of a dispute.
Hence, cases which seem unwinnable might well be good investments for the funder.
I know it is not popular these days to urge caution in trusting this new religion called arbitration which, of course, has been the bread basket for many lawyers and now, for third-party litigation funders.
Returning to the theme of this article, what the above seeks to argue is that given the uncertainties of outcomes, there is much pressure on parties under suit to settle, which in turn benefits the third-party funder.
There are also important risk factors associated with third-party arbitration and/or litigation funding. There have been a spate of cases supported by third-party funders brought against developing and emerging economies which have limited legal expertise and resources to fight these claims. Indeed, as the Sulu case shows, some of the “agreements” in question had not even been made by those states themselves — they either inherited them from former (and, in some cases, corrupt) governments or their colonial masters.
Arbitrators and arbitration lawyers are often one and the same — a person may be an arbitrator in one case and in another, the representing lawyer. A classic example of conflict is where in one case X acts as counsel in a funded case and in another case, as arbitrator in a case funded by the same funder. As X is paid for by the funder as counsel in the former, the risk of bias in the second is palpable. A more nuanced case of potential bias is where X acts as arbitrator in a funded case but as the funder is active in X’s field of practice, X would not wish to prejudice their own chances of being hired in a future case to be funded by the funder. A third situation is where X belongs to a firm which relies on funders for work — that raises the stakes if X in serving as arbitrator in a funded case does not make the “right” decision. Whether or not there is peer pressure from X’s partners and fee earners, X cannot easily free themselves from actual or self-imposed pressure.
The short of it is that third-party arbitration funding in such an unregulated market environment, subject to very little judicial control, can lead to an unholy tacit alliance.
In the Sulu case, outside the legalities, unfortunately Malaysia finds itself facing the brunt of a two-pronged public relations proposition. One, that third-party arbitration funding is enabling the so-called Sulu heirs access to justice and two, arbitration à la the UNCITRAL model offers the Sulu claimants justice. As to the first, I have tried to show that such a proposition cannot be accepted without questioning. That second proposition is made worse because of our now entrenched institutional belief in the unbridled autonomy of international commercial arbitration.
At the risk of over-simplification, all that glitters is not gold. The same can be said for third-party arbitration funding.