INTRODUCTION

The subject of this dossier is potentially vast in its theoretical and practical ramifications. This is because it is concerned with the involvement, some might say intrusion, of a third-party into a process between parties who are bound by a contractual (in commercial arbitration) or consensual (in investment arbitration) relationship or link.

A third party, which by definition is not bound by this link, is also by definition not subject to the authority (or jurisdiction) of the arbitrator(s). which derives from this relationship between the parties and which generates obligations between them, as well as towards the arbitral tribunal. Most if not all of the issues raised and discussed in this dossier derive from this given of international arbitration.

The position of counsel in this context raises a distinct but perhaps more limited series of issues. The issues are distinct, because the relationship of concern to counsel, which is affected by the intervention of a third-party funder, is not so much that between the parties and the arbitrators as the relationship between counsel and client. They are more limited, at least for the purposes of this dossier because, arising as they do from the client-counsel relationship, they are common to all forms of litigation (and third-party funding).

I will accordingly try to concentrate insofar as possible on those aspects of counsel's role in relation to third-party funding that are influenced by the nature of the process, that is to say, international arbitration. To do otherwise would require a comparative analysis of ethical rules generally applicable to litigation counsel, which is not the purpose of the present dossier.

1 COUNSEL AS A THIRD-PARTY FUNDER

The first and perhaps most obvious source of third-party funding is counsel himself/herself: any contingency fee agreement, whereby counsel agrees to be paid only a part of his/her usual fee (or no fee at all) while the arbitration is pending, only to be remunerated in the event of a successful outcome, is a form of funding by a third-party to the dispute. There are well-known examples of this, that go as far as lawyers advancing arbitration costs, including arbitration and expert fees,1 in return for a substantial proportion of any recovery made.2

Ethical and legal rules vary from jurisdiction to jurisdiction as to whether and to what extent such arrangements are permissible. In England, there is specific statutory provision allowing so-called "conditional fee agreements" whereby lawyers undertake representation on a "no win no fee" basis and are remunerated, in the event of a successful outcome, on the basis of an agreed multiple of their usual fee.3 However, a "pure" contingency fee arrangement, whereby a lawyer is only remunerated on the basis of a proportion of the amount recovered is not currently permitted.4

In France, it is the "no win no fee" arrangement that is prohibited. Provided that a fee is payable in respect of work done, irrespective of the outcome, an additional fee (honoraire de résultat) can be agreed in the event of a successful outcome. This fee can consist of a proportion of the recovery. Only a "pure" contingency fee would be characterized as an unlawful pactum de quota litis.5

Similarly, in Switzerland, pure contingency fee arrangements are prohibited,6 whereas an additional fee, dependant on the outcome of the proceedings, is permitted.7 The position is similar in a number of other European jurisdictions, such as Belgium, Denmark, Finland, Norway, Portugal, Sweden and Spain.8 Other countries, such as Italy, have recently adopted a more liberal approach that allows pure contingency fees.9 The Code of Conduct for European Lawyers of the Council of Bars and Law Societies of Europe (CCBE) adopts the "majority view" and prohibits the pactum de quota litis.10

These rules, of national origin, are clearly intended to apply to litigation before the state courts of each country concerned. That leaves open the question whether they also apply to arbitration and, specifically, to international arbitration.

The English courts dealt with this question in case of Bevan Ashford v. Geoff Yeandle.11 The issue there was whether a conditional fee agreement, which was otherwise compliant with the requirements of section 58 of the Courts and Services Act 1990, but which related to arbitration proceedings, was valid and enforceable. The first issue was whether the public policy objection to contingency fee agreements, based on the common law tort of champerty (to which section 58 of the 1990 Act establishes an exception), was applicable to arbitration proceedings in the same way as litigation proceedings.

Vice-Chancellor Scott held that it was. It should be noted in this regard that English law makes no distinction between domestic and international arbitration. However, the Vice-Chancellor considered that, since the enactment of the 1990 Act, conditional fee agreements, as defined, could no longer be considered as against public policy and that this would also apply to arbitration, so that the agreement in issue could be held enforceable.12

In France, the Paris Court of Appeal had to consider the validity of a pure contingency fee agreement entered into by a member of the Paris Bar and his client in relation to an international arbitration. The Court confirmed that such agreements (pacta de quota litis) are in principle invalid. However, it considered that the agreement had been concluded in relation to an international arbitration and that this type of agreement was widely recognized as valid in international commerce. Accordingly, the agreement in question, which was not by its terms excessive or improper, would be recognized as valid and enforceable.13

The position in Switzerland seems to be that the prohibition against pure contingency fee agreements is applicable to Swiss lawyers, including in international arbitration.14

The stipulations of the CCBE, including the prohibition against pacta de quota litis,15 apply to the cross-border activities of lawyers from EU states and other associated states, such as Switzerland.16 They therefore arguably apply to arbitrations involving lawyers from those states, even though article 4.5 of the CCBE Code of Conduct, which regulates relations between counsel and arbitral tribunals, is not directly applicable to this issue.17

The applicability to arbitration of the prohibition against certain forms of financing by counsel will vary according to the source of the prohibition and the terms in which it is expressed. In England, for instance, the prohibition is of statutory origin and applies to any "person providing advocacy and litigation services" in connection with (English) court proceedings. It has been extended to arbitration (domestic and international). It must therefore be supposed that, under the current regime,18 the prohibition against pure contingency fee agreements applies to all arbitrations that take place in England, irrespective of the nationality or residence of the parties or of the nationality or bar membership of counsel. Conversely, it seems doubtful that the provisions of article 58 or more broadly of the English law of champerty would apply to an English solicitor or barrister appearing in an arbitration with its seat outside England.

The Swiss prohibition, on the other hand, finds its origin in the federal law regulating the legal profession in Switzerland (BGFA). Its intent is therefore to cover the activities of members of the profession, irrespective of the localization (or seat) of the arbitrations they participate in from time to time.

The French rule prohibiting pacta de quota litis also forms part of the body of rules governing the professional activity of lawyers registered with a French Bar. The exception carved out by the Paris Court of Appeal for international arbitration is not geographically defined. Under French law, it is the international nature of the subject matter of the dispute that determines the international nature of an arbitration.19

It follows that French avocats are free to finance international arbitrations, as defined by French law, including cases where the arbitration takes place in France, even where all parties to the dispute are French or French residents and are represented by French counsel.

2 THE RELATIONSHIP BETWEEN COUNSEL, THE CLIENT AND THE THIRD-PARTY FUNDER

Although they are a time-honoured institution, ménages à trios have in most cases proven to be unstable and difficult to manage successfully. They have never enjoyed a good reputation; on the contrary, they have tended to provoke suspicion. The relationship between counsel, the client and the third-party funder is no exception. It can give rise to difficulties both before and at the conclusion of an agreement between the party and the funder and in the course of the arbitration proceedings.

The problems that can arise at both these stages arise from potential conflicts between the duties owed by a lawyer to his or her client and the lawyer's real or perceived interest, exacerbated by the presence, in the ménage, of the third-party funder. The presence of the third-party funder can also give rise to issues of a more technical nature, in particular relating to the payment of fees, confidentiality and privilege.

These issues, however, are common to all forms of litigation, whether before courts or domestic or international arbitration tribunals. It is therefore sufficient for present purposes to identify and describe them as problems that also arise in international arbitration.

2.1 Issues for counsel at or before the conclusion of a funding agreement

A fundamental principle relating to the professional obligations of lawyers is the obligation to act in the interest of the client. It is found in the professional rules for lawyers in practically every jurisdiction.20

This principle can be put to the test at the very outset, even before an agreement has been concluded between the funder and the party, where the decision to fund a case is based on the evaluation of the chances of success by the lawyer who will subsequently be instructed to act in the proceedings.

The lawyer will have a personal interest in obtaining funding for the case in order to earn the fees and, perhaps more insidiously, the professional prestige that goes with conducting a high-profile case. This interest can of course come into conflict with that of the client, who, even in receipt of third-party funding, may be exposed to the risks of years of wasted effort, negative publicity (in some cases) and liability for the winning side's costs (where these are not covered by the funding agreement).

Relying on the opinion of counsel retained for the case for the purposes of deciding whether or not to fund the case also gives rise to distinct problems:

• Can this opinion be disclosed to the prospective third-party funder and what are the consequences with regard to professional secrecy, confidentiality and privilege?

• To what extent may the prospective third-party funder rely on this opinion?

The (national) rules governing a lawyer's obligations of secrecy and confidentiality vary from jurisdiction to jurisdiction.

In some cases, it will be sufficient for the lawyer to receive clear instructions (preferably in writing) that he or she may disclose an opinion as to the strengths and weaknesses of the case to the prospective third-party funder.21

In other countries, such as France, lawyers are not supposed to release confidential information regarding client matters under any circumstances, even with the client's authorization.22 In such cases, the lawyers must release their advice to the client, and it is a matter for the client, if so advised, to disclose it to a prospective third-party funder.

This obviously does not eliminate the potential risk to the client that the advice may be disclosed in arbitration or in related court proceedings. It is not within the ambit of this discussion to examine the various provisions of domestic procedural law regarding disclosure and privilege. We will limit ourselves to two uncontroversial points. The first is that the less the advice circulates beyond the circle of the client and its legal advisers, the lower the risk of any applicable privilege being waived. The second is that the risk of disclosure also extends to arbitration, particularly insofar if any advice given and provided to the third-party funder is identifiable and production may be ordered under the IBA Rules on the Taking of Evidence in International Arbitration,23 if applicable.

Lastly, there is the issue of whether the third-party funder may rely on the advice of the party's counsel and, in particular, whether counsel runs the risk of being held liable by a third-party funder if the decision to fund has been made on the basis of negligent or inaccurate advice.24 Counsel can obviously seek to limit or exclude liability towards the prospective funder, but the effectiveness of such a limitation or exclusion will in each case have to be measured against the standard of applicable domestic law and/or professional rules.

Most of the above issues can of course be avoided if the prospective funder instructs its own counsel to advise on the merits of the case submitted for funding, as the funder's counsel will not be subject to the potential conflicts of interest identified above.25 However, issues will remain with regard to confidentiality and privilege concerning the information provided by the party or its counsel to the funder's counsel for the purpose of preparing the advice.

2.2 Issues in the course of the arbitration

The issues that can occur during the proceedings derive from the lawyer's overriding duty to act in the interest of the client and the related obligation to take instructions as to the conduct of the matter from the client.26

This is acknowledged in the English Code of Conduct for Litigation Funders, which specifically provides that a funder will "not seek to influence the Litigant's solicitor or barrister to cede control or conduct of the dispute to the Funder".27

However, provisions such as these only apply to members of the Association of Litigation Funders of England and Wales and are in any case purely voluntary. Consequently, their effectiveness has been doubted.28

In any case, the three-cornered relationship must inevitably give rise to potential conflicts, particularly when one considers the role of a third-party funder in selecting or vetting counsel for a case. Even when third-party funders deny taking an active part in the selection of counsel, they acknowledge that the choice of appropriate counsel plays a major part in their decision to fund.29 Others readily recognize playing a role in the choice of counsel.30 The fact of such influence, whether decisive or not, will necessarily place some strain on counsel's obligation to take the client's instructions if they conflict with the desiderata of the funder.

These issues all come to a head in relation to the decision whether to settle a funded claim. Whose decision is it, knowing that, in the event of a decisive disagreement on the issue of settlement, the funding agreement may well give the funder the right to cease its funding?31 Other, more balanced agreements may refer the issue for decision to counsel retained on the case, which gives rise to conflicts and issues analogous to those outlined in section 2.1 above, or to outside counsel specially instructed for this purpose,32 which is arguably more desirable but undoubtedly more cumbersome and expensive.

Lastly, a more technical issue may arise in the course of proceedings regarding the payment of counsel's fees, insofar as it may be improper for counsel to receive payment of fees from a person other than the client.33 In our view, this objection does not extend to how the client itself funds the fees paid to counsel,34 so that this problem can be fairly simply overcome by ensuring that the funding corresponding to counsel's fees is paid to counsel via the client.

3 COUNSEL AND THE OBLIGATION OF TRANSPARENCY

The question whether there is an obligation to disclose the existence and, possibly, the terms of third-party funding in international arbitration is very much a matter of debate and is, in any case, not the subject of this article. The only question that is of relevance to counsel in an arbitration is whether any discrete obligation rests on him/her, assuming there is a disclosure obligation in the first place.

It is tempting to answer "no" to this question. For instance, in litigation, counsel's obligation to disclose - or at least not conceal - relevant evidence35 or, more generally, counsel's obligation to cooperate in the judicial process stems from counsel's status as an "officer of the court" (for solicitors) or as an auxiliaire de justice (for French avocats). Since an arbitral tribunal is not a court, counsel does not owe it a corresponding duty, nor does an arbitration tribunal have an inherent power or jurisdiction to impose obligations on third parties such as counsel.

However, there may be some qualifications that need to be made. In the first place, it should be noted that article 4.5 of the CCBE Code of Conduct expressly provides that:

"The rules governing a lawyer's relations with the Courts apply also to the lawyer's relations with arbitrators and any other persons exercising judicial or quasi-judicial functions, even on an occasional basis."

Among the rules in the CCBE Code of Conduct "governing a lawyer's relations with the Courts", there is article 4.4, which stipulates that "a lawyer shall never knowingly give false or misleading information to the Court".

More generally, it can be assumed that any misleading act or omission by counsel towards the arbitral tribunal, including with respect to the existence of third-party funding, will place counsel in breach of his/her professional and ethical obligations. However, this does not amount to a positive obligation per se to disclose third-party funding, which may or may not rest on the parties to the arbitration.

Counsel's obligation to be transparent may appear in sharper relief when the funding is provided by counsel acting on a contingency fee basis. This will particularly be the case in the context of claims for costs. Any such claim that allows the arbitral tribunal to understand that merely contingent fees have actually been paid would be misleading and therefore almost certainly unethical. In such a situation, the arbitral tribunal will need to know the full facts in order to exercise its judgment as to whether to allow recovery of fees only payable on a contingency basis.37

1
See, e.g., Waguih Siag et al v. King & Spalding, U.S. District Court, Southern District of Texas, 30 June 2010.

2
In the Siag case this was reportedly 80%.

3
Courts and Legal Services Act 1990, s. 58.

4
However, ss. 58 and 58A of the Act have been amended to allow"damages-based agreements" (i.e., pure contingency agreements). See Legal Aid, Sentencing and Punishment of Offenders Act 2012, ss. 44 and 45. These new provisions were due to come into effect in April 2013.

5
Law n° 71-1130 of 31 December 1971, art. 10; ParisCourt of Appeal,O r d erof 1 September 2001.

6
Bundesgesetz über dieFre izügigkeit der Anwältinnen und Anwälte (BGFA) of 23 June 2007, art. 12.

7
Swiss Bar Association Code of Ethics, art. 19.

8
See Daniel Wehrli, 'Contingency Fees / Pactum de Palmario "Civil Law Approach"', ASA Bulletin 26(2) (2008), p. 246 and sources cited.

9
Codice Deontologico Forense, art. 46.

10
CCBE Code of Conduct, arts. 3.3.1 and 3.3.2.

11
Bevan Ashford v. Geoff Yeandle, [1998] All E.R. (D) 138.

12
Section 58 of the Act has since been amended so asto be expressly applicable to arbitration.

13
Court of Appeal of Paris, 10 July 1992, Rec. Dalloz (1992), p. 459, note Jarrosson Charles; Rev. Arb. (1992), p. 609, note Leboulanger Philippe.

14
Wehrli, supra note 8, at p. 250.

15
CCBE Code of Conduct, arts. 3.3.1 and 3.3.2.

16
CCBE Code of Conduct, art. 1.5.

17
Contra, Wehrli, supra note 8, at p. 249.

18
Which, as seen above, will cease to apply as from April 2013.

19
Civil Procedure Code, art. 1504: "An arbitration is international when international trade interests are at stake."

20
A representative example of this is CCBE Code of Conduct, art. 2.7: "subject to due observance of all rules of law and professional conduct, a lawyer must always act in the best interests of the client and must put those interests before the lawyers' own interests or those of fellow members of the legal profession."

21
Of course, this does not prevent the lawyer from advising his or her client to enter into an express confidentiality agreement with the prospective third-party funder regarding the existence of such advice and its contents.

22
Règlement Intérieur National, art. 2.1; Cass. 1ère civ., 6 April 2005, n° 00-19.245.

23
See in particular, articles 3.1(a)(i) and (ii), 3.10 and 9.2(b) and (g). Under these provisions, arbitrators have a wide measure of discretion in deciding whether to order production of a document.

24
In England, for instance, it is well established that professional advisers, including lawyers, can incur liability to parties who are not their clients but suffer damage as a result of a negligent misstatement. Heller v. Hedley Byrne, [1964] A.C. 465; Ross v. Caunters, [1980] Ch. 297; White v. Jones, [1995] A.C. 207.

25
Interestingly, article 7(a) of the Code of Conduct for Litigation Funders (2011) of the Association of Litigation Funders of England and Wales provides that a litigation funder will ensure that the litigant has obtained separate advice on the funding agreement but is silent as to the funder relying on the advice of the litigant's counsel.

26
CCBE Code of Conduct, art. 3.1.1: "A lawyer shall not handle a case for a party except on that party's instructions." Under the (English) Solicitors Regulation Authority Code of Conduct, ch. 1, IB (1.25) "acting for a client when instructions are given by someone else" is an "indicative behaviour" that may be contrary to the obligation to act in a client's interest.

27
Code of Conduct for Litigation Funders, art. 7(c).

28
See Jean Engelmayer Kalicki, 'Third Party Funding in Arbitration: Innovation and Limits in Self-Regulation', Kluwer Arbitration Blog, 15 March 2012.

29
Maxi Scherer and Aren Goldsmith, 'Third-Party Funding in International Arbitration in Europe', RDAI/IJBL Roundtable, 27 January 2012.

30
Susanna Khouri, Kate Hurford and Clive Bowman, 'Third-party funding in international commercial and treaty arbitration - a panacea or a plague? A discussion of the risks and benefits of third-party funding', Transnational Dispute Management 4 (2011).

31
This right is regulated by the Code of Conduct for Litigation Funders. Article 9 of the Code provides that the litigation funding agreement (LFA) must specify whether and how such right may be exercised.

32
Khouri et al., supra note 30.

33
See, for instance, Règlement Intérieur National, art. 11.3: "L'avocat ne peut percevoir d'honoraires que de son client ou d'un mandataire de celui-ci."

34
Except, of course, when there are reasons to suspect that the funds may constitute the proceeds of unlawful activities.

35
Particularly in common law jurisdictions.

36
Awarding costs that are only payable on a contingency basis may also have the unjustified side-effect of increasing the amount of such costs, calculated as a proportion of the total recovery, since such an award increases the total amount recovered. See Philippe Pinsolle, 'Le financement de l'arbitrage par les tiers', Rev. Arb. (2011) p. 385 at p. 412.