By Hon. Prof. Kariuki Muigua, OGW, PhD, C.Arb, FCIArb is a Professor of Environmental Law and Dispute Resolution at the University of Nairobi, Member of Permanent Court of Arbitration, Leading Environmental Law Scholar, Respected Sustainable Development Policy Advisor, Top Natural Resources Lawyer, Highly-Regarded Dispute Resolution Expert and Awardee of the Order of Grand Warrior (OGW) of Kenya by H.E. the President of Republic of Kenya. He is The African ADR Practitioner of the Year 2022, The African Arbitrator of the Year 2022, ADR Practitioner of the Year in Kenya 2021, CIArb (Kenya) Lifetime Achievement Award 2021 and ADR Publisher of the Year 2021 and Author of the Kenya’s First ESG Book: Embracing Environmental Social and Governance (ESG) tenets for Sustainable Development” (Glenwood, Nairobi, July 2023) and Kenya’s First Two Climate Change Law Book: Combating Climate Change for Sustainability (Glenwood, Nairobi, October 2023), Achieving Climate Justice for Development (Glenwood, Nairobi, October 2023) and Promoting Rule of Law for Sustainable Development (Glenwood, Nairobi, January 2024)*
Third party funding is fundamental concept in international arbitration. It is a positive phenomenon that can permit greater access to justice. Third party funding in international arbitration is also associated with enhanced risk management. However, third party funding in international arbitration is also associated with certain challenges key among them being the potential of conflict of interest. It can also result in increased costs and loss of some of the key features of arbitration especially party autonomy. Despite its challenges, the growth of third party funding in international arbitration is set to continue, as a result of the ever-increasing costs and complexities of dispute management. It is therefore necessary to address the underlying concerns in order to enhance the suitability of third party funding in international arbitration.
It has been observed that the growth of third party funding in international arbitration is set to continue, as a result of the ever-increasing costs and complexities of dispute management. Therefore, it is necessary for participants in international arbitration including parties to disputes, arbitrators, lawyers and other party representatives to adapt and develop the necessary skills to navigate the evolving landscape of third party funding in international arbitration. It is also vital to address some of the underlying concerns in third party funding in order to enhance the effectiveness of the process.
Several measures are necessary in order to achieve this objective. To begin with, there is need for enhanced disclosure and transparency in relation to third party funding. It has been pointed out that in most cases parties in international arbitration are not obliged to reveal the involvement of a funder in a dispute. Therefore, the presence of the funder and the nature of its relationships with the lawyers and the parties in an international arbitration case is often unknown. In addition, it has been observed that the funders generally require that their involvement is not revealed and use confidentiality agreements to prevent the disclosure. However, there is an increasing move from this position with disclosure and transparency being required in third party funding.
It has been argued that disclosure of third party funding is necessary due to the arbitrators’ impartiality requirement, the potential conflicts of interest, and the transparency, the latter especially in the investment treaty arbitration. In addition, it has been posited that despite there being no general obligation on a funded party to disclose the fact of its funding arrangement, the demand for greater transparency is growing in light concerns regarding conflict of interest. Disclosure and transparency in third party funding offers several advantages. It has been asserted that disclosure of the funding arrangement will often benefit a funded party since the fact that a claim is funded demonstrates that an independent third party has faith in the merits of the claim and so its existence may encourage parties to settle the dispute.
In addition, disclosure of third party funding arrangements at an early stage prevents the other party from raising conflict of interest arguments at the enforcement stage should the funded party prove successful. It is therefore necessary for parties in international arbitration to embrace disclosure and transparency in order to enhance suitability of the process. The need for disclosure and transparency in third party funding is being embraced in international commercial arbitration. The International Bar Association (IBA) Guidelines on Conflicts of Interest in International Arbitration address the conflict of interest concerns arising from third party funding in international arbitration. Under the Guidelines, if one of the parties is a legal entity, any legal or physical person having a controlling influence on the legal entity, or a direct economic interest in, or a duty to indemnify a party for, the award to be rendered in the arbitration, it may be considered to bear the identity of such party.
It has been correctly pointed out that given the fact that the funder may have a direct economic interest in the award, as such it may be considered to be an equivalent of the party. In addition, the IBA Guidelines provide as follows in relation to the duty of disclosure:
‘A party shall inform an arbitrator, the Arbitral Tribunal, the other parties and the arbitration institution or other appointing authority (if any) of any relationship, direct or indirect, between the arbitrator and the party (or another company of the same group of companies, or an individual having a controlling influence on the party in the arbitration), 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.’
The IBA Guidelines therefore embrace the duty of disclosure and transparency in third party funding. It has been pointed out that the IBA Guidelines were an important milestone towards transparency since they were the first rules that directly address third party funding. Subsequently, international arbitration institutions are following this example and are now embracing the duty of disclosure and transparency in third party funding. For example, the ICSID Arbitration Rules96 and the ICC Arbitration Rules both require a party who is a beneficiary of third party funding to disclose the arrangement. It is therefore imperative to embrace disclosure and transparency in order to enhance the effectiveness of third party funding in international arbitration.
In addition, it is necessary for party representatives including lawyers to embrace third party funding and be equipped in certain aspects of the process in order to enhance the appropriateness of third party funding in international arbitration. It has been argued that it is important for lawyers to familiarize themselves with the various third-party funding providers and their investment criteria including their track records, expertise, and reputation within the industry in order to effectively advise parties about the suitability of third party funding arrangements. It has also been pointed out that it is necessary for lawyers and other party representatives to examine the benefits and risks of third-party funding before encouraging parties to take up the option.
Therefore, it is important for lawyers and party representatives to advise their clients about the implications of funding arrangements, such as the potential for conflicts of interest, confidentiality concerns, and the funder’s level of involvement in the arbitration process. It is also pertinent for lawyers and party representatives to develop capacity in the legal and commercial aspects of third-party funding such as negotiation of funding agreements, due diligence procedures, and understanding the funder’s return on investment expectations. Finally, building and maintaining relationships with thirdparty funders is also vital in order to better understand their investment criteria and to facilitate potential collaborations. The above measures are integral in enhancing the efficacy of third party funding in international arbitration.
*This is an extract from the Book: Promoting Rule of Law for Sustainable Development (Glenwood, Nairobi, January 2024) by Hon. Prof. Kariuki Muigua, OGW, PhD, Professor of Environmental Law and Dispute Resolution, Senior Advocate of Kenya, Chartered Arbitrator, Kenya’s ADR Practitioner of the Year 2021 (Nairobi Legal Awards), ADR Lifetime Achievement Award 2021 (CIArb Kenya), African Arbitrator of the Year 2022, Africa ADR Practitioner of the Year 2022, Member of National Environment Tribunal (NET) Emeritus (2017 to 2022) and Member of Permanent Court of Arbitration nominated by Republic of Kenya. Prof. Kariuki Muigua is a foremost Environmental Law and Natural Resources Lawyer and Scholar, Sustainable Development Advocate and Conflict Management Expert in Kenya. Prof. Kariuki Muigua teaches Environmental Law and Dispute resolution at the University of Nairobi School of Law, The Center for Advanced Studies in Environmental Law and Policy (CASELAP) and Wangari Maathai Institute for Peace and Environmental Studies. He has published numerous books and articles on Environmental Law, Environmental Justice Conflict Management, Alternative Dispute Resolution and Sustainable Development. Prof. Muigua is also a Chartered Arbitrator, an Accredited Mediator, the Managing Partner of Kariuki Muigua & Co. Advocates and Africa Trustee Emeritus of the Chartered Institute of Arbitrators 2019-2022. Prof. Muigua is a 2023 recipient of President of the Republic of Kenya Order of Grand Warrior (OGW) Award for his service to the Nation as a Distinguished Expert, Academic and Scholar in Dispute Resolution and recognized among the top 5 leading lawyers and dispute resolution experts in Band 1 in Kenya by the Chambers Global Guide 2022 and was listed in the Inaugural THE LAWYER AFRICA Litigation Hall of Fame 2023 as one of the Top 50 Most Distinguished Litigation Lawyers in Kenya and the Top Arbitrator in Kenya in 2023.
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