Judicial review updates of TPF arbitration

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TPF arbitration reviewed
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The definition of third-party funding (TPF) is when, during a litigation or arbitration procedure, a third-party contributor provides financial support to one of the parties in the dispute in the form of a contract, and receives remuneration after the recipient wins the lawsuit.

TPF originated outside of China, where it is widely used in international investment arbitration and international commercial arbitration. It has also been put into practice in common law countries such as the UK, the US, Australia and elsewhere.

In 2022, some regional courts in mainland China responded to TPF for the first time. The Wuxi Intermediate People’s Court in Jiangsu province, in its rulings Su 02 Zhi Yi No. 13 (2022) and Su 02 Zhi Yi No. 14 (2022), explained the legal disputes, information disclosure obligations and other major issues related to TPF.

As China’s first international arbitration institution to explore TPF, the China International Economic and Trade Arbitration Commission (CIETAC) has obtained rich experience. In September 2017, the CIETAC Hong Kong Arbitration Centre took the lead and rolled out the Guidelines on Third-Party Funding of Arbitration, which specify the scope of funding, code of conduct and allocation of powers. This article comments briefly on the third-party financing aspect of Su 02 Zhi Yi No. 13 (2022), but does not represent any official position.

THE FACTS

In this case, company A and company B did not accept a 2021 CIETAC award and applied to Wuxi Intermediate People’s Court for non-enforcement of the award on the grounds that “the evidence on which the award was based was forged, company C concealed evidence sufficient to affect an impartial award, and the composition of the tribunal and the arbitration procedure were illegal”.

The applicants pointed out that the TPF procedure in the case was illegal: “Company C signed an arbitration funding agreement with a third party, and company A, among others, had objected to the intervention of the third party. But the CIETAC ignored the rule of closed hearings, instead condoning company C’s disclosure of the arbitration case to outsiders, undermining the CIETAC’s confidentiality requirement.”

THE COURT DECISION

The court rejected the applicants’ claim in its entirety. The judge pointed out that, first, in the case it could be seen from article 38 of the CIETAC rules that confidentiality is mainly for closed hearings. As the hearing of the arbitration case in question was not held in public, there was no procedural violation.

Second, disclosure requirements of TPF information in arbitration procedures is primarily concerned with conflict of interest and transparency. Company C had already made such a disclosure, parties to the arbitration had exchanged written and oral opinions about TPF, and the tribunal had examined the TPF and recorded it in the award. Therefore, CIETAC did not violate its rules in the procedure.

Furthermore, company A’s reason for its non-enforcement claim was, in fact, in response to the existence of what it considered to be a breach of confidentiality by company C. However, a claim of non-enforcement of the arbitral award on the grounds of procedural violations should point to those made by the CIETAC.

Finally, not all procedural issues presented in arbitration will result in setting aside or non-enforcement of the arbitral award. In a foreign-related arbitration, if a party applies for non-enforcement of an arbitral award on the grounds that the composition of the arbitral tribunal or the procedure of the arbitration is not in line with its rules, the court shall review whether such violation affects the fairness of the arbitration award.

In this case, company C disclosed the progress of the case to the third-party financier, and there were no facts suggesting that having a third-party financier would affect the fairness of the outcome of the award. Accordingly, the court held that the CIETAC did not violate its rules with respect to the issue of TPF.

Based on these factors, the Wuxi court rejected the applicants’ non-enforcement claim.

SOME SUGGESTIONS

This case is the first judicial review case involving TPF in mainland China, and the Wuxi Intermediate Court’s judgment is an excellent manifestation of judicial activism. Faced with the problem of no legal basis for TPF in China, the judge skillfully applied article 38 of the CIETAC rules, taking the assessment of whether the fairness of the substantive award was impeded or not as a guide, and adopting an inclusive and prudent approach to innovations in practice.

The author believes that the following points should be noted in future TFP practices.

If involving TPF, the parties should proactively report to the tribunal. The reporting obligation is the bridge that balances the confidentiality rules and the disclosure requirements. Suppose a party receives financial support from a third party in a particular case, it should promptly and voluntarily disclose to the arbitral tribunal, including, but not limited to, the subject receiving the financial support, the issues to be funded, the timing of the funding, the amount of the funding, and the degree of control of the financier.

If involving TPF, the arbitral tribunal should clarify the parties that are subject to confidentiality obligations. Since TPF involves three parties and their interests are inconsistent, in addition to the parties’ obligation to follow the confidentiality obligation, the third-party investors should also strictly honour the confidentiality obligation. For information obtained in the progress of the case, the third-party financier shall not pass on the information to others without authorisation.

If involving TPF, the tribunal should take the initiative to clarify the scope of the disclosure obligation. Confidentiality is a characteristic and advantage of arbitration that distinguishes it from litigation. The arbitral tribunal should limit the scope of the disclosure to avoid undermining the legitimate rights and interests of the parties and third-party financiers.

For example, in practice, many arbitration cases are settled and dismissed under the auspices of the arbitral tribunal. However, due to conflicts of interest, some third-party funders are more willing to close cases in the form of an award. Therefore, if the funding agreement has an explicit agreement on the manner of closing the case, the tribunal should require the parties to disclose such an agreement to improve the efficiency of the arbitration.

When the conditions are right, the establishment of an out-of-case cost guarantee mechanism can be explored. Article 4.3 of the CIETAC Hong Kong Arbitration Centre Guidelines on Third Party Funded Arbitration provides that: “An arbitral tribunal may, to the extent permitted by applicable laws or rules, consider whether the existence and extent of funding is a relevant factor when considering any application for security for costs.”

Because the third parties are not parties to the arbitration procedures, it is difficult for the tribunal to bind them to its arbitration. Therefore, appropriate security for costs would not only help to restrain potential misconduct by funded third parties, but also help to avoid the risk of abusing litigations.


Liu Leyang is an assistant to the secretary-general and Li Run is a case manager at CIETAC Hubei sub-commission

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