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If you are planning to resolve a business dispute through arbitration in the UK, then the material prepared by our experts will be useful to you. It addresses the issue of TPF - third-party funding of international arbitration, which has become quite popular in recent years. It is a common case when the parties to the dispute, despite their financial position, incur significant legal and additional costs in order to resolve the dispute through international arbitration. Especially now, when a lot of businesses are going through hard times due to the restrictions caused by the pandemic. This is why they are increasingly resorting to financing arbitration with third party sponsors.

Who is a sponsor?

Sponsoring of international arbitration can be carried out by both a legal entity and an individual. An important condition is that this person should not be directly involved in the proceedings. The person finances one of the parties to the process, and in return receives a certain benefit, which the party and the sponsor agree on in advance. Typically, TPF will cover the parties' litigation and arbitration costs. In some exceptional cases, the sponsor may cover the costs of an opponent in a dispute.

What is the sponsor's benefit?

It should be noted that the TPF of international arbitration proceedings is beneficial for the sponsor. For example, the sponsoring party may receive a certain percentage of the compensation awarded if the sponsored party wins. Sponsorship often comes with a fixed fee. But there are even better deals. If a person intends to settle a commercial dispute through international arbitration and uses TPF for this, this may result in the financing person gaining control over the party.

Pros and Cons 

So, if you are interested in resolving the conflict by arbitration in the UK but the whole process, even according to rough estimates, will be too expensive and you understand that you cannot afford the entire amount of procedural costs, then attracting external funding is almost the only way out of provisions.

However, please note that most often sponsors conduct a case-by-case review, weighing the parties' respective requirements and potential penalties, before deciding whether to fund a particular proceeding.

An applicant party for funding can benefit from this scrutiny, as an outside perspective can help assess its odds in the case and form a sound strategy, and can also facilitate an early resolution of the dispute through arbitration.

On the other hand, using TPF to resolve a dispute through arbitration has its drawbacks.

If, as a result of arbitration, the dispute is resolved in favor of the sponsored party, then it will have to pay a significant part of the compensation to its sponsor.

Finally, another disadvantage is that doubts may arise about the impartiality of the arbitration. That is, when an arbitrator of a dispute in which a sponsor is present acts as counsel for the other party in another dispute financed by the same sponsor.

Cost recovery issues

As the use of TPF in international arbitration practice becomes more common, certain problems arise related to procedural issues. One such challenge relates to securing cost recovery.

On the one hand, the existence of a third-party sponsor in the arbitration should not be taken into account when deciding whether to secure the costs of the arbitration. This view is based on the arbitrators' right to decide on the allocation of legal costs at the end of the proceedings, and in practice arbitrators usually do not take third-party sponsors into account when deciding on this matter.

On the other hand, arbitrators should take into account the involvement of the sponsoring third party in the international arbitration process when deciding whether to secure the costs. So, if the sponsored party does not have material sources to initiate arbitration without the participation of TPF, the decision to secure the costs is the only means.

It should be noted that the number of institutions that are willing to become sponsors and provide funding to international  arbitration is growing rapidly these days. Many financial institutions, hedge funds and law firms have already entered this sector.

In these conditions, it becomes more and more important for a law firm to have an external legal consultant who accompanies the client's case in the framework of the international commercial arbitration procedure, an extensive network of offices in both Europe and Asia, as well as experienced international teams specializing in this area.

Find out more about how to peacefully settle a commercial dispute in England or other jurisdictions of your interest by ordering a comprehensive consultation on the amicable settlement of business disputes from the IQ Decision UK team. Reach out to us by filling the feedback form below.