The focus of the 32nd Annual Meeting of the ICC Institute of World Business Law was on the analysis of third-party funding of arbitral proceedings. This provided an interesting platform to contrast the points of view of the main players in financing and both international commercial and investment arbitration.

It is immediately clear just how difficult it is to agree on a definition for this concept. The British prefer to call it 'Third-Party Funding' whilst the American Bar Association prefers the term 'Alternative Litigation Finance', better known by the acronym ALF. The phenomenon could also be described as 'Contingency Fee by Non-Lawyers'. The reason why it is so difficult to reach a firm definition for litigation or arbitration funding derives from the many forms in which it manifests itself. We have, for example, bank financing for those who need to litigate or arbitrate a dispute. Then again, on occasion, financing implies an assignment of claims, or even the sale of a company whose only asset is the contentious claim or debt itself. And then we have the more sophisticated formulae which enter into the realms of venture capital.

It could be said that in 'pure' third-party funding the funder finances the arbitral proceedings in exchange for a percentage of what the litigant recovers in the arbitral award, a percentage which usually oscillates between 10 and 45%. Alternatively, the investment may be structured as a 'litigation loan' or 'cash advance'. In such cases the principal will accrue certain interest over the passage of time. Some firms specialise in loans or lines of credit directly to law firms. This type of financing to lawyers secured by assets of the firm (including, but not limited to, accounts receivable, furniture or contingent interests in ongoing cases ) entails additional questions or concerns about ethical obligations of the lawyer or law firm.

Those in favour of third-party funding argue that their activity facilitates access to justice. As Jeremy Bentham so rightly stated 'wealth has indeed the monopoly of justice against poverty'. In contrast, there are also fierce detractors of third-party funding of litigation or arbitration. Amongst those radically opposed to third-party funding is the US Chamber of Commerce which, in an in-depth study, concluded that third-party funding fostered a certain frivolity among litigants and their lawyers in their claims.

Whether in favour or against, third-party funding of litigation and, more recently, arbitration, is an undeniable and important reality. The New York City Bar Association estimated in 2011 that the aggregate amount of litigation financing outstanding exceeds US$ 1 billion. Fulbrook Management estimated that there is a potential market of claimants in the United States needing financial support in the combined amount of US$8-10 billion.

This conference was structured in three parts. In the first part the funders took the floor to explain exactly what their financial activities are, while the second part analysed the reaction of the traditional players in international commercial arbitration to the figure of the funder and the awkward 'ménage à trois' scenario that this gives rise to. The third part of the meeting was devoted to the unique characteristics from a funding perspective of investment arbitration, in particular, to the fact that the respondent is a sovereign state with its obligations of transparency in its arbitral commitments with its sovereign parliament obliged at all times to control on behalf of the people any financial commitments.

Throughout the morning the funders provided a thorough analysis of their activity. Before committing the funds, the funders will customarily undertake a due diligence analysis of the claim during which the funder will also decide what share or fee is acceptable. To this end, the funder will perform a thorough analysis of the facts and merits, including the nature of the damages and creditworthiness of the opposing party. In addition, the analysis will consider other factors such as: 1) value of the law suits; 2) amount to be advanced; 3) jurisdictional obstacles; 4) defenses; 5) nature and length of the proceeding (including whether arbitration or litigation; venue and applicable rules); 6) possibilities of settlement; 7) creditworthiness of client and the opposing party (particularly with a view to collection prospects); 8) counsel chosen and compensation structure (whether there is a contingency fee agreement in place) or 9) additional obligations of the party to be funded linked to the potential risk of recovery (such as previous funding agreements or any other alliance).

Each funder has a rather unique due diligence process. At the end, only strong cases would be financed and thus the risk of losing would be minimised. Some critics of third-party funding argue that the advances are not contingent because financiers have in-depth information about the case and thus can calculate the probabilities of success with great precision. Some large funding firms have specifically stated that they would typically not invest in any case with less than 70% probability of success.

Indeed, funding companies do not typically charge interest, but instead they secure a percentage of the recovery at different levels to be paid according to varying timeframes. For this reason, most funders avoid using the word 'loan'. Likewise, the agreement between litigation-arbitration financier and the funded litigant is typically called an 'investment agreement' rather than a 'financing agreement'.

The manner in which the funders described their daily activities made a marked impact on those present. Some voiced their deep concerns in this regard believing that funders are engaged in a risky business. What jurists call claims, for the funders are simply 'assets'; funders have no qualms about using derivatives to structure their financing. In some cases even, funding has been structured via bonds placed on the market. With the catastrophe of the sub-prime mortgages all too present in the minds of the audience, there was general concern that the financial collapse that we have experienced in recent times has to be avoided in third-party funding of litigation or arbitration. They attributed the origins of the collapse to the lack of regulation and control on behalf of the financial authorities. Of all the topics discussed in the conference, this was the one that most eluded any consensus.

The second part of the conference focussed on third-party funding in arbitration proceedings where an overriding theme was attorney-client privilege. The role of funders in the proceedings (production of documents, oral testimony, legal arguments, settlement negotiations, termination of the funding agreement…) poses a great number of difficulties. The difficulties are essentially threefold: 1) whether or not the intervention of a third party funder needs to be disclosed and, if so, the terms under which the 'investment agreement' should be made available; 2) conflicts of interest for lawyers and arbitrators that may arise with the intervention of a third-party funding the arbitral proceedings; 3) control of the arbitral proceedings given that difficulties may arise when defining the boundaries of the attorney's duties to the client or as to the funder as the party paying the costs and, more importantly, the attorney's fees.

Many lawyers and arbitrators will categorically point out that it's nobody's business who finances the claimant or respondent in an arbitral proceedings. However, the answer is not as simple as it appears. It may well happen that at some point during an arbitral proceedings or even once the proceedings are over, exactly who and under what terms the proceedings have been funded may come to light and consequently the neutrality and impartiality of the arbitral tribunal may be called into question.

Undoubtedly, the funder has the greatest interest in the fact that an arbitral award cannot be questioned in the future. The arbitral award can and should be subject to judicial control at the seat of arbitration, through annulment proceedings, or at the execution stage at whichever place the arbitral award is to be executed, or where the assets are located. The independence of the arbitrator is part and parcel of the public policy on which the validity of the award or the possibility of its execution may be questioned.

A funded litigant may not always be happy to return to the financier the amount agreed after securing a favourable settlement or judgment. In such situations, the funded party may attempt to seek an order from a local court to invalidate the agreement previously entered into with the funder.

Common law lawyers have seen the limits of third-party funding traditionally in maintenance, champerty or barratry. On this side of the channel we see the limits on the traditional 'pactum de quota litis'. These concepts and legal institutions have played a very important role in the past when regulating contingency fees of lawyers in litigation and arbitration. Still more so, where the contingency fees will be paid to third parties and especially financers. Nevertheless, on each side of the channel both common lawyers and continental lawyers have evolved and in some form these practices are allowed with the due reserve that ethical rules may lay down within the relevant Bar Associations.

Nowadays, judicial control of the funder's 'investment agreement' follows a different course. Usurious contracts are against public policy and are, generally, void for that reason. For Jeremy Bentham usury is the taking of a greater interest than it is usual for men to give and take. Usury laws are to be interpreted restrictively, especially 'when the promise to pay a sum above legal interest depends upon the contingency, and not upon the happening of certain events' (as early as 1888 stated by the Supreme Court of Pennsylvania). The courts have found that litigation finance agreements, when subject to a contingency, are to be considered investments. Nowadays, many scholars believe that abusive arbitration is more adequately prevented and punished by the causes of action for malicious prosecution, wrongful use of proceedings, abuse of process and the like. Contract law applies to contracts regardless of whether they are intended to finance a dispute or not. The doctrines of duress, unconscionability and good faith establish standards of behaviour for those entering into agreements for the support of litigation or arbitration.

Third-party funding in investor-state arbitration must address the distinctive characteristic of the involvement of a sovereign state. The current controversy in international arbitration with regard to transparency versus confidentiality is raised in all its different facets by third-party funding. In international commercial arbitration confidentiality has traditionally been an essential factor, whereas in investment protection arbitrations the respondent is a sovereign state. Therefore, confidentiality must wholly give way to the requirements of transparency.

It is well-known that the 'arbitration agreement' in investment protection arbitration may derive from an investment agreement, from the domestic legislation of the host state, or, as is most frequently the case, from a bilateral or multilateral investment protection treaty. The concept of investment and above all of the investor plays an important role in defining who and under what conditions an international arbitration may take place. The figure of the financer may confuse the nationality of the investor, and consequently the application of an investment protection treaty. The State makes a public offer of arbitration in an international treaty to investors entitled to claim under the treaty claims against the host state, and the State, logically, will demand transparency as to the identity of a claimant in this conjunction of public international law and private international law, which is the legal regime for investment protection.

International arbitration, whether commercial or investment, demands good faith from all of the participants in the arbitral process. I know that the concept of good faith is part of the legal background of the continental jurist, and is much less so for the common lawyer, but the globalisation of the economy and consequently of law, have made the general principles of law the foundations of all international relations. The principle of good faith is, without a doubt, the cornerstone of international law and in particular of international economic law, consolidated in the times in which it has befallen our generation to live and play a major part.