SOUTH AFRICA: THIRD PARTY FUNDING UNDER THE NEW AFSA INTERNATIONAL ARBITRATION RULES
The Arbitration Foundation of Southern Africa (AFSA) is one of the leading arbitral institutions in South Africa and is generally first choice for parties wishing to resolve commercial disputes in the country through an administered process.
Since the promulgation of the South African International Arbitration Act in December 2017, and arising out of the resultant growth in AFSA’s international case load, AFSA has recently published a revised set of international arbitration rules, which came into effect on 1 June 2021 (Rules).
The Rules are aligned with international best practice and are comparable to the rules of other popular international arbitral institutions, including the International Court of Arbitration of the International Chambers of Commerce and the London Court of International Arbitration.
The Rules introduce a number of noteworthy provisions, including expedited arbitration procedures in certain cases, summary judgment type procedures, the availability of urgent interim relief procedures, confidentiality and virtual hearings.
However, one of the most interesting additions to the Rules is Article 27 which governs third party funding arrangements for international arbitrations administered by AFSA. Although arrangements of this nature are permitted under the Rules, what is noteworthy is the fact that once such a funding arrangement has been concluded, the identity of the third-party funder must be disclosed to the other parties to the arbitration as well as the arbitral tribunal and the AFSA Secretariat.
A ‘Third-Party Funder’ is defined under Article 27 as any person who is not a party to the arbitration, but who enters into an agreement with a party to provide material or financial support for all or part of the costs of the arbitration by means of a donation, grant or in exchange for remuneration or reimbursement dependent on the outcome in the arbitration.
There are a number of benefits for a litigant obtaining third party funding including, amongst other things:
- The reduction in legal expenditure means that cash flow is freed for the core operations of the business;
- Although a funder will receive a portion of the proceeds if the claim is successful (and will generally receive nothing if the claim is unsuccessful), the litigant receives the benefit of being able to prosecute a claim, without expending financial resources and with the prospect of a commercially beneficial outcome;
- A claim can be pursued in circumstances where the litigant may not have had funds to otherwise do so or prefers to de-risk himself or herself from a commercial perspective, which facilitates improved access to justice;
- Notwithstanding the receipt of funding, the litigant (depending on the terms of the funding arrangement) generally retains full control of the litigation and remains the decision maker on issues such as strategy or settlement;
- Depending on the complexity and/or quantum of the claim, funding may enable the litigant access to ‘premium’ attorneys, counsel, arbitrators and/or experts that the litigant would not otherwise have been able to afford;
- The funder is generally sophisticated, well versed in litigation processes and often has its own ‘in-house’ committee of experienced practitioners who can provide input from a strategic perspective; and
- Funders will generally only fund matters with strong prospects of success and recoverability, as vetted by their own independent advisors or experts. Disclosure of funding sends a clear message to the other side regarding the strength of the case and the fact that the cost of litigation is not going to deter or impede prosecution of the claim. This can incentivise settlement in some cases.
There are, however, a number of downsides or concerns raised in respect of third-party funding, including:
- There are significant upfront costs involved in concluding third-party funding agreements. A party’s legal team will usually need to put in place confidentiality arrangements, conduct due diligence on the funder and assist in the negotiation and conclusion of the funding agreement. Whilst funders will generally obtain their own opinion on the merits and prospects of success, the party’s legal team will need to provide a comprehensive brief which may include its views on the merits;
- There is an increased vulnerability for a security for costs application to be bought against a party that has secured third-party funding;
- While, in general, the litigant retains control over the litigation, the roles and responsibilities must be clearly agreed including the litigant’s discretion when it comes to issues of settlement;
- The terms of the funding agreement must be carefully negotiated and agreed. It is best to avoid fixed amounts to be funded as these may be exceeded with the result that any further funding requires an additional share of any proceeds collected. Litigants are advised not to limit the funding to the arbitration since an award may be taken on review or appeal which will similarly need to be funded. In addition, the litigant should ensure it is adequately protected in the event of an adverse costs award(s);
- Where an event, non-disclosure or evidence that arises down the line proves adverse to the prospects of the claim, the funder may have a right to, among other things, cease funding and reclaim all amounts funded to date; and
- Disclosures made to the third-party funder could potentially result in a waiver of the privilege between a lawyer and its client.
Although each case should be considered individually, in many circumstances the advantages of third-party funding are likely to far outweigh the risks. This is particularly so in circumstances where, arising out of the COVID-19 pandemic, we are seeing an increased reluctance to pursue legitimate claims given the legal costs involved with litigation and arbitration.
From a commercial perspective, it makes sense to retain the prospect of receiving 60% of a claim as opposed to 100% of nothing if the claim cannot be pursued due to financial constraints.
Third-party funding arrangements are becoming an increasingly common feature in arbitration proceedings, and we are likely to see a similar uptake across Africa in the short-term.