Third-Party Funding in International Arbitration
With London continuing to wrestle with uncertainty over third-party litigation funding following the UK Supreme Court's decision in PACCAR, and New York seeking to relax restrictions over litigation funding deals, funding arbitrations in London and New York—the world's biggest litigation funding centers and two of the most commonly used arbitration seats—is at an inflection point.
In July 2023, the UK Supreme Court delivered its decision in PACCAR, holding that litigation funding agreements, which entitle funders to payment based on a percentage of the amount of damages recovered, are subject to contingency-fee agreement regulations (known in the UK as “damages-based agreements” or “DBAs”), causing wide-ranging uncertainty over the enforceability of existing funding agreements. The UK Supreme Court acknowledged that “the implications of the issue [were] significant” because “the likely consequence in practice would be that most third-party litigation funding agreements would [become] unenforceable as the law currently stands” unless they complied with the restrictive regulatory regime that applies to damages-based agreements.
Following PACCAR, funders were quick to contend that it did not extend to funding agreements that remunerate funders on the basis of a multiple of the amount advanced or of the litigation costs paid out, as opposed to a percentage of any damages awarded (and recovered). Uncertainty also arose around the ability of funders to rely on severance clauses in existing funding agreements to remove offending clauses. It has been reported that several arbitrations have since been commenced under funding agreements, especially given it has proven difficult for several funders to amend their pre-existing agreements. Several new funding deals have also been delayed as a result. Pending another Supreme Court ruling, however, uncertainty over the enforceability of funding agreements in London will ensue.
Hoping to assuage fears of London becoming less attractive as both a litigation funding and arbitration forum, on March 19, 2024, the then UK government introduced a bill to restore the position that existed before PACCAR (such that funding agreements are not deemed damages-based agreements). That bill, however, was not passed into law due to the general election called for July 4. It is currently unclear whether the new Labor government will introduce similar legislation. If not, uncertainty over the enforceability of funding agreements in London will persist.
Meanwhile, across the pond, the New York City Bar has been pushing to change New York State rules to allow law firms to assign or pledge fees in exchange for outside financing. Such an amendment would clear up any lingering uncertainties over the likely conflict of third-party funding agreements concluded by law firms with New York's prohibition on fee sharing with non-lawyers. And while the courts in New York (and the US at large) take a broad, permissive approach to third-party funding, which is regarded as neither unusual nor per se impermissible (provided client consent is given and the attorney's independence and attorney-client confidentiality is preserved), the recent trend has been for funders to directly transact with law firms, either by funding an entire portfolio of cases or by providing non-recourse loans and taking a portion of any successful awards. It is on this basis that the New York City Bar has proposed that funding to law firms tied to the results of specific cases be permitted, provided, again, that lawyers must not allow their judgment to be impaired by the relationship with the funder. It also would require law firms to notify clients of financial arrangements that could impact their representation. Specifically, provided the notice requirements are observed, the proposed rule would allow lawyers or law firms to “pay, assign, pledge or grant security interests in earned or unearned legal fees on account of legal services rendered to one or more specific clients to satisfy obligations legally incurred by the lawyer or law firm to a nonlawyer in connection with the practice of law.” This proposal is now with the State Bar Association of New York, which if in agreement, will then submit it for approval to the four appellate divisions of the New York State Supreme Court for adoption to the rules of professional conduct.
It is likely that, one way or another, it will take several more months before the status of funding agreements in London is once again certain. The turmoil caused by PACCAR, however, has once more allowed New York to emerge as a safer venue for funding deals. In turn, this is expected to continue to boost New York's attractiveness as an arbitration venue, as uncertainty across the pond persists.
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