Third party funding in international arbitration has garnered a great deal of attention in recent years. Many of those opposed to the practice, or seeking to limit or control it, have been outspoken and engaged in efforts to regulate or abolish the practice. Up until now, much of that effort has focused on prospective legislative or rulemaking “solutions.” For example, regulation of third party funding looks to be included among the topics to be addressed by anticipated amendments to the ICSID rules. In a interview, Meg Kinnear, ICSID’s General Counsel, indicated that, while the institution does not propose to prohibit the practice in the amendments, ICSID does propose to add third party funding disclosure requirements to address and avoid possible conflicts issues. HKIAC rules likewise include disclosure requirements, but also expressly permit tribunals to take into account any funding arrangements when fixing and apportioning costs. Another proposal that has been argued for, especially by state entities, is making funders liable to post security for fees at the outset of the proceedings.
A case in U.S. federal court in California appears to have opened up a new front in the war against third party funding. In that case, the prevailing party in arbitration is seeking to enforce an award of fees and costs in its favor against the opposing party’s funder using already-existing common law concepts of joint liability. In that case, the claimant, Tradeline Enterprises Pvt. Ltd. (“Tradeline”) had brought unfair competition claims against respondents Jess Smith & Sons Cotton LLC and J.G. Boswell Co. (“Smith and Boswell”). Smith and Bowell allege that Arrowhead Capital LLC (“Arrowhead”) served as Tradeline’s funder in the matter. Smith and Boswell prevailed in the arbitration and were awarded fees and costs totaling $8.9 million. After obtaining a judgment confirming the award, which apparently remains unpaid, Smith and Boswell brought proceedings to add Arrowhead as a judgment debtor jointly responsible for payment of the award. Smith and Boswell contend that Arrowhead took a gamble and backed Tradeline in financing the arbitration, hoping to share in any potential award or settlement. The companies argue that Arrowhead knew, or should have known, the weakness of the Tradeline’s claims and that Arrowhead exerted substantial control over the arbitration of those claims. As a consequence, according to Smith and Boswell, Arrowhead should bear the consequences of those actions in the form of joint liability for the fees and costs award.
The case implicates broader issues beyond third party funding, such as the distinction between lender and owner liabilities. The case also creates a problematic parallel for contingency fee litigation. Many (if not all) of the factors that Smith and Boswell cite to justify joint liability could also be applied to law firms in contingent fee cases, such as financial risk/reward, knowledge of the merits of the case, and practical control of the litigation. These issues are beyond the scope of this post. Of interest here is that efforts to battle third party funding may spread beyond specific institutional rules regulating the practice to the creative and/or aggressive application of already-existing general principles of law. The case is Tradeline Enters. Pvt. Ltd. V. Jess Smith & Sons Cotton LLC et al., No 2:15-cv-08048 (C.D. Cal.).”