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The Third Party Funding (TPF) regime in commercial arbitration is becoming an important and increasingly relevant factor in the global commercial dispute resolution arena. TPF allows a disputing party to receive funding from a third party, who is not directly involved in the dispute, to cover legal expenses and other arbitration-related costs.
This provides an opportunity for disputing parties, particularly those with limited financial resources, to access and pursue arbitration claims without worrying about the burden of costs. However, the emergence of TPF also raises several legal and ethical issues that need careful consideration, such as ensuring the transparency and fairness of the arbitration process and the potential impact on the rights of the participating parties. This article delves into the impact of the TPF regime in commercial arbitration, exploring the benefits it offers as well as the challenges and risks that need to be managed.
About the Third Party Funding Model
In the context of increasing global integration and international commerce, commercial disputes are becoming more prevalent, creating opportunities for mechanisms like international commercial arbitration to further develop as a means of resolving such disputes.
In many cases, due to limited financial resources, a disputing party – often an individual or a small business – may struggle to pursue litigation against large companies that can afford the prolonged costs of a legal battle. This creates a demand for financial assistance to enable these parties to persist in resolving their disputes.
This is the foundation upon which the Third Party Funding (TPF) mechanism has emerged and gradually gained popularity in dispute resolution. Essentially, in a legal dispute, a professional funder establishes a TPF agreement with the client, funding part or all of the legal costs required to proceed with the case in exchange for a specific benefit, usually a portion of the compensation or assets the client recovers from the lawsuit.
Clients in this context can be either the plaintiff or the defendant, though in most cases, the funded party is the plaintiff.
According to estimates, by 2018, the TPF market for litigation procedures was valued between $50 billion and $100 billion. Since then, the TPF model has grown and expanded, attracting significant interest from venture capitalists, who view it as a new form of investment with a legal orientation, offering better risk control compared to conventional investment forms.
This is because, unlike investments in stocks, bonds, gold, or virtual assets that can be influenced by global market fluctuations, TPF investment only requires the funder to analyze the likelihood of the client’s success, based on their understanding of the legal system and the specific case.
In terms of returns, unofficial statistics suggest that for each TPF investment, funders can recover their full capital along with profits ranging from 60% to 500% of the initial amount. The funded party does not bear any costs during the dispute resolution process and, in case of a win, receives a portion of the recovery – something they might not have achieved without the funder’s financial support from the start.
The funding agreement depends on the specific arrangement between the disputing party and the funder, but in most current TPF contracts, even if the funded party loses the case, they are not required to repay any costs. This ensures security for the disputing party and encourages them to actively pursue legal actions to protect their rights.
Vietnamese Legal Framework on the TPF Model in Commercial Arbitration Proceedings
Internationally, Third Party Funding (TPF) is increasingly recognized as an effective tool for financially disadvantaged parties to access justice, and many countries have incorporated TPF into their legal systems. Notable examples include Hong Kong, Singapore, the UK, Australia, and China, all of which have legal frameworks addressing or legalizing the TPF model.
Many international arbitration centers have also developed laws, guidelines, and enforcement rules related to TPF in preparation for the eventual formalization of TPF or for disputes involving third-party funding. Additionally, the widespread enforcement of international arbitration awards through the 1958 New York Convention has further facilitated the growth of TPF.
As Vietnam is a member of the New York Convention, it is crucial for the country to internalize TPF regulations, aligning with both the recognition and enforcement of arbitration awards and the grounds for refusing to recognize foreign arbitration awards in Vietnam, as discussed at the seminar “Experience in Resolving Disputes through International Arbitration in Singapore and the Enforcement of Arbitration Awards in Vietnam.”
Currently, the Law on Commercial Arbitration 2010 (Law No. 54/2010/QH12) (“2010 Law on Commercial Arbitration”) does not contain any provisions concerning third-party funding, where a party unrelated to the dispute provides financial support to the disputing parties. The third parties mentioned in the law are limited to those whose rights and interests may be affected by the outcome of the dispute.
However, looking from another angle, the 2010 Law on Commercial Arbitration also does not prohibit third-party funding in commercial arbitration. The parties are still guaranteed the freedom to make decisions regarding issues related to their case, including agreements with the opposing party on mediation or seeking financial assistance from a third party through TPF.
Not only the law on commercial arbitration but also Vietnam’s current legal system lacks formal or informal provisions on Third Party Funding in any legal documents.
As a result, even though parties may involve third-party funders or have financial relationships with third parties in arbitration or court proceedings, Vietnam cannot adjudicate these entities as TPF due to the lack of legal regulations.
This presents several challenges because Vietnam has already encountered cases involving agreements with TPF characteristics, and such cases are expected to increase as this model becomes more prevalent both in Vietnam and globally. However, the absence of detailed regulations on TPF has complicated the resolution of disputes in this area.
To develop a legal framework for TPF in Vietnam, policymakers should examine the international treaties that Vietnam has joined, which relate to TPF, such as the EU-Vietnam Investment Protection Agreement (EVIPA) that contains provisions on funding relationships. This will allow Vietnam to consider incorporating appropriate regulations or learning and adapting from these treaties for implementation.
At the same time, Vietnam can look to the experiences of countries with similar socio-economic conditions in the field of legal funding. For instance, Singapore and Hong Kong are two jurisdictions where the TPF legal model has significantly developed. Initially, these two regions studied international regulations on funding and gradually implemented them step by step, assessing commonalities and eliminating inconsistencies.
In terms of specific amendments, Vietnam could consider revising certain laws to regulate TPF, such as the Civil Procedure Code and the Law on Commercial Arbitration, while also directing institutions like the Vietnam International Arbitration Center (VIAC) to update its procedural rules accordingly.
The first step is to recognize the existence of the TPF model, clearly defining what information may be disclosed to the public, enhancing transparency in TPF agreements, and preventing issues such as conflicts of interest, where the funder might exert excessive control or influence over how the disputing party approaches the case.
Considerations for Transparency and Objectivity with the Introduction of TPF
Despite being a third party not directly involved in the dispute, third-party funders through the TPF model can have significant influence over the decisions of the parties they fund. This influence is often outlined in the TPF agreement to ensure that their investment achieves a high rate of return.
As a result, funders might indirectly or directly affect various stages of the arbitration process. For example, if the disputing parties are allowed to agree on the appointment of arbitrators, a funder might request that the party they support choose an arbitrator who is more likely to make a favorable decision. Given that funders may finance multiple disputes, this could lead to conflicts of interest if many parties select the same arbitrator.
To ensure that the arbitration process is conducted with objectivity and transparency and to prevent potential conflicts of interest, TPF agreements should include public disclosure of key details, such as the identity and information of the funder, the terms of the funding agreement, and the funder’s rights concerning the party’s decisions.
This is crucial because a funder’s involvement might affect the progress of settlement negotiations or other procedural aspects, potentially leading to adverse consequences.
To ensure fairness, many international arbitration centers have incorporated rules requiring the disclosure of TPF agreements. For instance, the Singapore International Arbitration Centre (SIAC) includes provisions in its Arbitration Rules that allow the tribunal to request disclosure of the existence of TPF or to identify the funder. Similarly, the Hong Kong Legislative Council has enacted the Arbitration and Mediation Ordinance, which permits TPF in arbitration and mandates the funded party to disclose the funding agreement in writing.
To protect the rights of parties in arbitration proceedings, Vietnam could adopt measures from international arbitration centers, focusing on enhancing transparency, impartiality, and objectivity, while preventing conflicts of interest.
Vietnam could develop specific arbitration procedural rules, including regulations on the disclosure of TPF agreements, the rights and obligations of the involved parties, and measures for addressing violations. This would create a fair and transparent arbitration environment and increase parties’ confidence in the arbitration system.
Additionally, Vietnam should consider collaborating with international arbitration centers to adopt best practices and improve the quality of arbitration activities. By doing so, Vietnam can enhance the effectiveness and fairness of its arbitration system and better protect the interests of disputing parties.
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