Third-Party Funding Under The New Arbitration And Mediation Act 2023

INTRODUCTION

Individuals and businesses find themselves involved in legal disputes that demands substantial financial resources to cover legal fees, court expenses and other related expenses. Consequently, securing financial support to initiate and sustain legal proceedings till resolution is not just an option but a necessity. Third-party funding (TPF) – a practice where an external financier steps in to provide financial assistance to either party to a dispute in exchange for share of the potential judgment or settlement sum, has therefore gained popularity as a means of financing legal claims. This can be crucial for ensuring access to justice, particularly in cases where financial resources might otherwise be a barrier.¹Historically, the practice of third-party funding was considered contrary to public policy and therefore deemed illegal. The principle of maintenance and champerty², historically rooted in English common law, refers to the unethical and often illegal practice of financially supporting another party's litigation in exchange for a share of the proceeds. These practices were originally deemed contrary to public policy due to concerns about encouraging frivolous lawsuits, promoting conflict, and undermining the integrity of the legal system. However, attitudes towards maintenance and champerty have evolved over time, and many jurisdictions, including Nigeria, have enacted legislation or developed case law to regulate or even permit third-party funding under certain circumstances.

In context, the new Arbitration and Mediation Act 2023 ("the Act" or "the AMA") introduces a modern framework for arbitration, offering clearer guidelines and regulations on various aspects of arbitration practice including third-party funding. The new Act specifically provides that the torts of maintenance and champerty, do not apply in relation to third-party funding of arbitrations seated in Nigeria and related to proceedings in any court within Nigeria.³ This article therefore delves into the concept of third-party funding, its significance, and the impact of the new Act on how it is applied in Nigeria. We will explore the changing landscape of legal claims financing and its implications for arbitral parties and funders alike.

RELEVANCE OF THIRD-PARTY FUNDING ARRANGEMENT.

Considering the substantial cost involves in initiating and maintaining a legal action, not everyone has the financial capacity to cover these costs independently. This gap has paved the way for third-party funding,⁴ a system where financial backers step in to support litigants, sharing in the risk in exchange for a portion of any awarded damages or settlement money. This arrangement is especially crucial for enabling individuals and smaller entities to engage in legal battles they might otherwise have to forego.

Third-party funding serves as a lifeline for those with legitimate claims who, without financial backing, might not be able to pursue justice or defend against baseless claims. It is a tool that democratizes access to the legal system, ensuring that financial constraints do not impede the pursuit of justice. By supporting parties with strong cases but insufficient funds, TPF levels the playing field against more financially robust opponents, such as large corporations or entities. Through TPF, the legal system becomes more equitable and accessible legal system for all individuals and businesses. It underscores the idea that justice should not be a luxury afforded only to those with substantial financial resources but a fundamental right accessible to all, regardless of their economic standing.

ANALYSIS OF THIRD - PARTY FUNDING UNDER THE ARBITRATION AND MEDIATION ACT

The AMA marks a significant evolution in the legal landscape for Third-Party Funding (TPF), explicitly recognizing and supporting its role in arbitration. In contrast to the repealed Arbitration and Conciliation Act⁵, the AMA explicitly acknowledges and recognizes the concept of third-party funding. Third-party funding in arbitration refers to a practice where an entity or individual, known as a third-party funder⁶, provides financial support to one of the parties involved in an arbitration proceeding. The funder's role is to finance some, or all the costs associated with the arbitration in exchange for a share of the potential award or settlement. The terms of the third-party funding agreement⁷ determine the extent of the funder's obligations, which may include covering the counter-party's costs and providing security for the opponent's costs if ordered by the arbitral tribunal. This progressive step is a clear departure from the previous legal framework, aligning Nigerian law with jurisdictions like Singapore and Hong Kong.⁸ This clarification has helped dispel the doubts and uncertainties regarding the applicability of TPF to arbitration practice in Nigeria.

It is equally worth noting that the Act does not impose specific form and conditions for validity of the TPF but only mandates disclosure of the existence of the funding arrangements and the identity of the third-party financier, to other party(ies) involved, the arbitral tribunal, and where applicable the arbitration institution. Accordingly, parties to a TPF are at liberty to negotiate and agree on the terms of their funding arrangement and are not obligated to disclose the specific terms of the TPF to any other party to the arbitration. This approach strikes a balance between maintaining the confidentiality of the funding agreement's details and promoting transparency to manage any potential conflicts of interest.

In the same vein, the implications of the provisions Act for parties and third-party funders are significant and worth considering. For prospective parties to an arbitration, the statutory recognition of TPF offers access to justice without financial constraints, particularly in complex commercial disputes. It alleviates the financial burden of dispute resolution and potentially encourages the pursuit of valid claims that might have been too costly to advance. For third-party funders, the Act offers a clear, legitimate framework for investing in arbitration disputes, providing much-needed certainty and confidence.

This legal framework not only benefits the parties directly involved but also enhances Nigeria's position as an attractive destination for arbitration. By removing uncertainty and establishing clear rules around TPF, the Act fosters a more conducive environment for dispute resolution, positioning Nigeria as an emerging hub for international arbitration.

Challenges of Third-Party Funding

• High Financial Burden of Third-Party Funding: When a party wins a case, third-party funders typically reclaim their initial investment along with a substantial share of the damages awarded. This arrangement can greatly reduce the compensation that the claimant ultimately receives. Additionally, if the arbitration outcome is unfavourable, the party may face further financial liabilities.
• Potential Conflicts of Interest: Third-party funding agreements can lead to conflicts of interest that may not always be apparent. As funders focus on maximizing their returns, they might influence decisions in ways that do not align with the parties' best interests, raising questions about the fairness and impartiality of the arbitration process.
• Challenges Regarding Confidentiality and Privilege: The laws governing confidentiality and privilege vary widely, making it complex to share information with funders. It is essential for parties to negotiate confidentiality or non-disclosure agreements with funders to protect sensitive information. Even though sharing information is necessary to obtain funding, parties must carefully consider which details are crucial to disclose to minimize risks.
• Risk of Improper Influence on Proceedings: The involvement of third-party funders can increase the risk of undue influence on the arbitration proceedings. Funders with a direct financial interest in the outcome might interfere, potentially complicating settlement talks, causing delays, and complicating negotiations. Moreover, funders might suddenly withdraw their support according to the terms of the funding agreement, jeopardizing the party's ability to continue in the arbitration. To prevent these issues, it is important to limit the funder's influence in the proceedings and set clear guidelines for the withdrawal of support.⁹

PRACTICAL CONSIDERATIONS

The explicit endorsement of Third-Party Funding (TPF) by the Act in Nigeria has effectively addressed previous uncertainties regarding its applicability in arbitration settings, while also ensuring that concerns tied to the traditional legal doctrines of maintenance and champerty are mitigated in this context. This shift acknowledges the unique nature of arbitration, where disputes are strictly defined by the underlying agreement between the parties, thus limiting the potential for arbitrary litigation.

Given the significant costs associated with arbitration—ranging from arbitrator fees to administrative expenses—it is essential for funders to conduct thorough due diligence on the dispute's merits before committing resources. This is especially pertinent for foreign financiers who, not being familiar with local laws and practices, may benefit from the insights of a local legal expert. Such an expert can evaluate the potential claimant or respondent and the dispute's strengths under local laws, advising on both the merit of the case and the selection of arbitrators.

Similarly, parties seeking funding must vet potential financiers carefully to understand their track record and reputation. Since the Act allows parties to freely negotiate TPF agreements, engaging a legal expert to review the terms proposed by the financier. This safeguard ensures that the terms of funding are equitable and that the funded party retains certain rights, preventing the financier from exerting undue influence over the arbitration process.

The Act also champions transparency by mandating the disclosure of funding arrangements not only to the opposing party but also to the arbitral tribunal and, where relevant, the arbitration institution. This disclosure ensures all parties are aware of any potential conflicts of interest and understand the dynamics at play, including who has a vested interest in the dispute's outcome. Such knowledge can influence strategic decisions, including whether to pursue a settlement.

SUPPORTING ARBITRATION THROUGH LEGAL INNOVATION

The provisions of the Arbitration and Mediation Act, 2023 validating the concept of third-party funding, marks a significant moment for arbitration practice in Nigeria. This significant legislation, which embraces third-party funding (TPF), positions Nigeria alongside leading arbitration jurisdictions such as Singapore and Hong Kong. This move not only signals Nigeria's commitment to fostering a more arbitration-friendly environment but also aligns with international best practices, thereby creating a more conducive environment for dispute resolution, positioning Nigeria as an attractive destination for international arbitration.

At SimmonsCooper Partners, we recognize the transformative impact of the Act on arbitration practices in Nigeria. Our firm is at the forefront of navigating these changes, offering advisory services to equip businesses and legal practitioners with the insights and tools needed to effectively engage with the new arbitration landscape, including deepening the understanding of third-party funding provisions, fostering a culture of sophisticated arbitration practice, and ensuring ethical engagement with the new legal framework. In an era where navigating legal complexities is becoming increasingly crucial, our expertise is essential for clients aiming to leverage arbitration for dispute resolution.

Footnotes

^{1. Lord Justice Jackson, "Review of Civil Litigation Costs: Final Report" (2010) at para 4.10,}

^{2. Maintenance involves the improper interference by a third party in a lawsuit by supporting one party without a justifiable reason, while champerty specifically refers to the support of litigation in exchange for a portion of the outcome.}

^{3. Section 61 of the Arbitration and Mediation Act 2023 ("the AMA").}

^{4. Gruenfeld, D. L., Roin, B. N., & Shavell, S., "The Role of Third-Party Litigation Funding in Patent Litigation: Empirical Findings" (2019) 167(6) University of Pennsylvania Law Review 1585-1636.}

^{5. Arbitration and Conciliation Act, Cap A18 Laws of the Federation of Nigeria 2004 ("ACA")}

^{6. Section 91(1) of the AMA, 2023}

^{7. See, Section 91(1) of the AMA, 2023 for the definition of "Third-Party Funding Agreement."}

^{8. See Section 61 of the AMA}

^{9. Norton Rose Fulbright, "The third-party funding debate- we look at the risks" https://www.nortonrosefulbright.com/zh-hk/knowledge/publications/6c843d32/the-third-party-funding-debate-we-look-at-the-risks#:~:text=Third%2Dparty%20funding%20arrangements%20may,the%20funder%20and%20an%20arbitrator. Accessed 15th April 2024}

For further details or to explore how third-party funding can benefit your arbitration strategy, please contact us at info@scp-law.com or visit our website at www.scp-law.com.