The indirect reforms and regulations of third-party funding in African arbitration

Oluwaseun Philip-Idiok

AELEX, Nigeria

ophilip-idiok@aelex.com

Osinachi Nwandem

AELEX, Nigeria

onwandem@aelex.com

Introduction

Third-party funding (TPF) is an arrangement or agreement between a party to an arbitration (the client) and a private or corporate individual who is not connected to the dispute (the funder), for the funder to wholly or partially finance the client’s expenses in an arbitration. These expenses include counsel fees, arbitrator fees, administrative fees, expert witness costs and so on. In exchange for the funding, the funder takes an agreed percentage of the proceeds of the arbitration in the event the client receives a favourable award.

The attraction of third-party funding is that a third party takes over a party’s legal expenses, allowing the party to channel its funds to its business or allowing the party to pursue claims it may not have been able to afford.

Why third-party funding?

Arbitration is largely becoming the preferred medium for the resolution of high-value and/or cross-border commercial disputes. One of the reasons is because arbitration offers the protection of confidentiality that public courts do not; it enables business entities to resolve their disputes privately while preserving their commercial reputations. Furthermore, in investment treaty arbitrations, it may be easier to enforce an arbitral award in a foreign jurisidiction against a sovereign state.

Despite the benefits of arbitration over traditional litigation, the drawback for commercial parties is the sometimes astronomical costs of successfully prosecuting claims in arbitration. We have seen the impact of the Covid-19 pandemic on the cashflow of businesses all over the world. One of the fallouts of this is the inability of businesses to finance the cost of resolving disputes that arose during the pandemic. In some instances, dissatified commercial parties have either resorted to exploring other alternative dispute resolution mechanisms or resorted to traditional litigation, in order to save costs that would have been expended in arbitration. Where there is an applicable legal framework supporting third-party funding within the jurisdiction, such affected businesses may have relished the opportunity to secure third-party funding to pursue their claims through arbitration. Third-party funding in arbitration is also appealing for the following reasons:

• It acts as a ‘stress test’ and ‘second eye’ on the legal merits of the case. This is because funders will usually seek legal counsel on the merit or demerits of the case in order to decide on funding a claim. The legal opinion of a second counsel may identify or address other issues that counsel originally engaged by the party may not have considered.
• It provides access to justice for under-resourced parties (particularly in investor treaty disputes) enabling a party to pursue a case that a lack of funding would have otherwise prevented.
• It shows that the funded party is taking the matter seriously and has a ‘fighting fund’ to pursue its claim(s).
• Subject to the parties’ agreement, third-party funding removes the risk of ‘losing’ because if the funded party is unsuccessful, the funder bears the costs.

Third-party funding of arbitration in Africa

Although the concept of third-party funding is not new in Africa, several countries are yet to allow its use by enacting appropriate legislation. This is largely because of the perceived ethical issues associated with third-party funding, such as the fear of the funder hijacking the arbitration proceedings. Another reason is because it is seen as champertous. Several African countries, especially common law African countries, prohibit champerty and maintenance. Champerty is a common law principle which is defined as ‘an illegal proceeding in which a person not naturally concerned in a lawsuit, engages to help the plaintiff or defendant to prosecute it, on condition that, if it is successful, that person will receive a share of the property in dispute.’[1]

It is arguable that the common law principle of champerty and maintenance only applies to litigation and its use in arbitration should not be penalised. Despite this argument, there may be problems when trying to enforce or recognise the arbitral award. If a country expressly prohibits champerty, third-party funding will therefore be contrary to that country’s public policy. Given that only the courts enforce or recognise arbitral awards, the courts are empowered to set aside or refuse to enforce an award if it conflicts with the country’s public policy.[2]

While African countries are yet to introduce laws expressly providing for the use of third-party funding in arbitration, this article will appraise the efficacy of the indirect attempts introduced by some African countries (Nigeria, Ghana and South Africa) to regulate third-party funding of arbitration.

Indirect reforms and regulation of third-party funding of arbitration in Africa

Nigeria

The tedious and cumbersome process of litigation in Nigeria has seen an increase in the use of arbitration as an alternative dispute resolution mechanism.

The law governing arbitration proceedings in Nigeria is the Arbitration and Conciliation Act of 2004 which neither provides for nor prohibits third-party funding of arbitration proceedings.

Although Nigerian courts have penalised third-party funding of litigation in Nigeria,[3] it is arguable that the Rules of Professional Conduct of the Legal Practioners Act 2007 has lifted the restriction on third-party funding by allowing legal practitioners to charge contingency fees in exchange for legal services. This in itself is third-party funding. It is further arguable that, if third-party funding of legal expenses or counsel fees in litigation is allowed, third-party funding of legal expenses or counsel fees in arbitration is by extension allowed and this should be extended to the funding of the entire arbitration.

The Nigerian Arbitration and Conciliation Act (Amendment) Bill (the Bill) to amend the Arbitration and Conciliation Act 2004 is pending before the National Assembly. A careful study of the Bill shows that while the Bill does not expressly provide for third-party funding, the Bill allows the inclusion of the cost of obtaining third-party funding as part of the cost of arbitration.

The Bill seems to give an implied approval of third-party funding by allowing the recovery of third-party funding costs. The Bill also expressly provides for the type of third-party funding[4] that can be recovered as costs; this is another indication that third-party funding of arbitration is allowed under the pending bill. Notwithstanding the above interpretation, the Bill is not enforceable unless passed into law. Until the Bill is passed into law, third-party funding arrangements in arbitration remain prohibited.

Ghana

The law governing arbitration in Ghana is the Alternative Dispute Resolution Act 2010 (ADR Act).[5] Upon a careful study of the Ghanaian ADR Act, there are no provisions on third-party funding.

Given the absence of a provision authorising third-party funding of arbitration in Ghana, and the common law doctrine of champerty and maintenance which is applicable in Ghana, third-party funding of arbitration remains prohibited in Ghana. Again, there is no judicial pronouncement approving third-party funding of arbitrations in Ghana.

In the absence of clear third-party funding provisions in the ADR Act or any Ghanaian judicial decision, third-party funding of arbitration in Ghana may be found contrary to public policy – thereby leading to non-enforcement of awards where proceedings have been funded by third parties.

South Africa

Like Nigeria, South Africa followed the common law doctrine of champerty and maintenance. Because of this, it prohibited third-party funding in arbitration. However, in 2004, South Africa relaxed its position and allowed third-party funding after the decision of the South African Supreme Court of Appeal in the case of Price Waterhouse Coopers Inc and Others v. National Potato Co-operative Ltd.[6] The Supreme Court of Appeal held that an agreement in terms of which a stranger to a lawsuit advances funds to a litigant on condition that their remuneration, in case the litigant wins the action, is to be part of the proceeds of the suit, is not contrary to public policy in so far as the claim is bona fide.[7]

The South African courts had another opportunity to reform the approach to third party funding in De Bruyn v. Steinhoff International Holdings N.V. and Others.[8] In De Bruyn, the High Court of South Africa provided a list of conditions which the funder and funded party must meet before a third-party funding arrangement will be valid:

• the third-party funding arrangement should be necessary to provide access to justice;
• the third-party funding arrangement should be fair and reasonable to protect the interests of the defendants;
• the third-party funding arrangement must not over-compensate the funders for assuming the risks of the litigation;
• the third-party funding arrangement must not interfere with the duty of the lawyers to act in the best interests of their clients; and
• the funded party must be able to give instructions and exercise control over the litigation in the funded party’s best interests.

The same court[9] further accepted the right of the funder to terminate the third-party funding arrangement where the dispute lacks any potential of success. According to the court, this is to be done only after obtaining independent advice from the funded party’s counsel.[10]

Although there are no laws on third-party funding, the above cases offer clarity on South Africa’s position regarding third-party funded proceedings and conditions for its recognition in arbitration. They affirm that champerty and maintenance are not applicable in third-party funding of arbitration. This also means that an arbitral award wherein a party was funded is not contrary to public policy and will be enforced.

Conclusion

Third-party funding of arbitration is still in its embryonic stage in Africa: South Africa appears to have embraced third-party funding to the greatest extent to date.

While an express provision for third-party funding of arbitration by the Arbitration and Conciliation Act in Nigeria is preferred, as it will settle the position of the law on the validity or otherwise of it, Nigerian courts can also rely on the decisions of courts in common law jurisidctions for the enforcement of third-party funding, pending the passage of the Bill into substantive law.

In the same vein, Ghana can take advantage of the immense benefits of third-party funding of arbitration by amending its ADR law to include provisions expressly allowing third-party funding of arbitration. While an amendment of the ADR is awaited, the Ghanaian courts can reform Ghana’s approach to third-party funding through their decisions – as was successfully implemented by the South African courts.