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Champerty is dead; long live champerty

In the first of our series considering what (if any) changes should be made to the Arbitration Act 1996, James Clanchy of Lexis® PSL Arbitration argues that there is no need to follow the examples of Hong Hong and Singapore which introduced statutory and regulatory reforms for third party funding in 2017.

By James Clanchy · On January 31, 2018


The 20th anniversary of the Arbitration Act 1996 (AA 1996) was an opportunity for arbitration practitioners in England, Wales and Northern Ireland to consider whether the statute might benefit from updating.

The anniversary coincided with reforms at two other important seats of arbitration, Singapore and Hong Kong, which have seen the legalisation of third party funding (tpf) in international arbitration.

In Singapore, regulations contemplated in statutory amendments of March 2017 are already in place and tpf providers have opened offices in the jurisdiction.

tpf has become a hot topic in certain parts of the international arbitration community, notably amongst specialists in investor-state arbitration

In Hong Kong, following a public consultation and a report by the law reform commission in 2016, legislation was passed in June 2017. Regulations have been drafted by the justice department but an advisory body to monitor and review the new regime has not yet been appointed.

In the last few years, tpf has become a hot topic in certain parts of the international arbitration community, notably amongst specialists in investor-state arbitration. Insurance has been funding claims and defences in commercial arbitrations since the nineteenth century without statutory intervention or regulation to govern its participation but tpf is perceived in some quarters as a new and potentially dangerous phenomenon. With an eye to the developments in Singapore and Hong Kong, the question has been posed, therefore, as to whether amendments should be made to the AA 1996 to deal with it.

The combination of funding and the prospect of a share in the proceeds of a successful claim raises the spectre of champerty, which, together with maintenance, had been abolished as a crime and a tort in the Criminal Law Act 1967. Another 50 years passed before similar measures were taken in Singapore and Hong Kong.

As a reminder, maintenance is the giving of assistance or encouragement to a party to an action by a person who has neither an interest in the action nor any other motive recognised by the law as justifying his interference. Champerty is a kind of maintenance in which the maintainer receives a share of the subject matter or proceeds of an action.

Following the 1967 reforms, the present position under English law is that a contract for the funding of litigation should only be struck down as champertous if it is contrary to public policy or otherwise illegal or improper, e.g. if it confers disproportionate control of the claim upon the funder.

The legislative reforms in Hong Kong and Singapore, where champerty had survived, have given it a new lease of life in the international arbitration community and have fuelled calls for regulation of tpf at other seats.

However, the 1967 legislation in England was not accompanied by regulations for funders and, instead, relied on the continuing development of the common law.

Climate change in international arbitration

The Institute for Ethics and Regulation at Queen Mary University of London’s Centre for Commercial Law Studies joined forces with the International Council for Commercial Arbitration (ICCA) in 2013 to form a task force to study tpf in arbitration and to issue guidance about it.

The institute had this to say about tpf: ‘Third Party Funding has been described as “the climate change in international arbitration.” Funder participation in international arbitration gives rise to a host of complex procedural, structural and ethical issues, such as security for costs, allocation of costs, potential tensions between funders, parties and counsel in managing the dispute, transparency and disclosure, confidentiality, attorney ethics, arbitrator conflicts of interest, and tribunal powers.’

Insurers’ monitoring of proceedings…has been a winning formula

These are issues which many seasoned commercial arbitration practitioners are used to encountering in arbitrations in which a party’s costs are being funded by an insurer.[1] The rationale for treating them as new and vital issues in the context of tpf was contained in the task force’s preliminary report in 2014: ‘before-the-event insurers may be presumed to be less directly involved in the specifics of case management than third-party funders are’.

That presumption, as the same commercial arbitration practitioners would confirm and as is clear from the standard terms in many insurance policies, is false: insurers are usually more, not less, involved in case management than are modern funders.

Insurers’ monitoring of proceedings, ensuring adherence to budgets and to high standards of professional conduct, has been a winning formula: hundreds, if not thousands, of claims and defences are funded by insurers every year in international commercial arbitration.

Insurers have provided funding in some of the largest ever commercial arbitrations, eg the Solitaire arbitration, in which Gard was reported to have provided around £50 million.

Against that background, the arrival of a small number of modern funders is hardly likely to cause climate change, however ambitious they might be to exercise similar levels of control over the arbitrations which they fund in the particular sectors which they favour.

The survival of champerty

The task force’s draft report, published in September 2017 for a short public consultation, recognised that insurers were, in fact, involved in case management.

Without exploring the reasons for insurers’ quiet success, the task force (which contains no insurers in its membership) decided that insurance should be brought within its working definition of tpf and should be made subject to some of the same regulations (eg in relation to disclosure of their participation) as for tpf. It suggested that as insurance companies may exert influence in selecting an arbitrator or making case management decisions, it would be fair for recommendations for new regulations to include them on the basis that these activities make them functionally identical to modern tpf providers.

The notion that a level of influence or control in case management is something which ought to cause concern, and which justifies regulation, would be alien to ordinary users of commercial arbitration whose claims and defences are supported by, and/or responsibly managed by, insurers.

It might be appropriate for insurers and their users to consider whether regulation could usefully be introduced in their arbitrations, eg in relation to disclosure, but this must be a matter for them. The generally accepted principle in the international arbitration community is that self-regulation is preferable to legislation or to regulation imposed by outsiders.

Anxiety about the influence of third parties has reared its head again

A recognition that insurers’ influence in litigation was beneficial, and in the interests of the administration of justice, was one of the reasons why the Law Commission recommended reforms in 1967. The Commissioners noted in their report: ‘…there is widespread throughout our society the beneficent practice of third party liability insurance, under which insured persons are entitled to indemnity against damages and costs awarded against them in actions based upon negligence, nuisance or breach of statutory duty and under which the conduct of the proceedings is normally in the hands of the insurers.’

Anxiety about the influence of third parties has reared its head again, fifty years later, in the international arbitration community. It is curious that insurance, respected and undisturbed in 1967 and in the iterations of the Arbitration Act, is in the task force’s firing line.

An explanation lies in the treatment of tpf in the recent reforms in Singapore and Hong Kong, where champerty had survived. (It also remains alive and well in Ireland, another common law jurisdiction, as confirmed in an Irish Supreme Court decision in May 2017 in Persona Digital Telephony Ltd and anr v The Minister for Public Enterprise, Ireland and others [2017] IESC 27.)

As recently as 10 years ago, in Otech Pakistan Ltd v Clough Engineering Ltd [2007] 1 SLR 989, the Singapore Court of Appeal confirmed that champerty applied in arbitration just as it did in court litigation. It cited with approval Lord Denning MR in Re Trepca Mines Ltd (No. 2) [1963] Ch 199 (a pre-1967 legislative reform case): ‘The common law fears that the champertous maintainer might be tempted, for his own personal gain, to influence damages, to suppress evidence, or even to suborn witnesses.’

In making reforms to permit tpf in international arbitration, the Singapore government was unable to draw upon case law of the kind which has developed in the English courts, and which has refined their approach to funding, over the last 50 years. Instead, it had to resort to regulation. An appetite for regulation and an admiration for Singapore’s growth as an arbitral seat have combined to turn Singapore’s predicament into a model to emulate, particularly for practitioners and academics unfamiliar with the long-established participation of third parties, such as insurers, in commercial arbitrations.

In England, though, 50 years on, there should be no need for further statutory intervention. The English courts have already developed guidelines as to when funders cross the line between good case management and impermissible champerty.

Rigorous steps short of champerty: the Excalibur standard

This dividing line was drawn by the English courts when making indemnity costs orders against funders in the notorious Excalibur litigation.[2]

For Christopher Clarke LJ, at first instance ([2014] EWHC 3436 (Comm)), champerty was ‘behaviour likely to interfere with the due administration of justice’. That sort of behaviour would include the kind of activities described by Lord Denning in Re Trepca Mines Ltd (No. 2) cited above. Clarke LJ expressed the hope that his costs order would send a message that funders should take ‘rigorous steps short of champerty … particularly in the form of rigorous analysis of law, facts and witnesses, consideration of proportionality and review at appropriate intervals.’ This level of case management is normal for insurers.

The English courts have already developed guidelines as to when funders cross the line between good case management and impermissible champerty.

Dismissing a protestation from the Association of Litigation Funders (ALF) that exercising greater control over the conduct of litigation would run the risk that a funding agreement would be champertous, Tomlinson LJ in the Court of Appeal ([2016] EWCA Civ 1144) said this about the activities identified by Christopher Clarke LJ: “…rather than interfering with the due administration of justice, if anything such activities promote the due administration of justice. For the avoidance of doubt I should mention that on-going review of the progress of litigation through the medium of lawyers independent of those conducting the litigation, a fortiori those conducting it on a conditional fee agreement, seems to me not just prudent but often essential…’

Of course, arbitrators do not have third party costs orders in their armoury. However, under the AA 1996, they are able to take account of a party’s conduct when making awards of costs. This was illustrated in Essar Oilfield Services Ltd v Norscot Rig Management Pvt Ltd [2016] EWHC 2361 (Comm). In that case, it was the funded party which was the beneficiary of the arbitrator’s indemnity costs award. A tribunal would likewise be able to consider whether, in line with the Excalibur standard, a party and its funder had taken rigorous steps to test their own case and the reasonableness of their actions and make an indemnity costs order against the funded party.

The common law as a guardian of ethics

In Singapore and Hong Kong, on the other hand, no such positive duty to take rigorous steps short of champerty has been imposed on funders in the new regulations there. Guidelines issued by the Singapore Institute of Arbitrators (SIArb), and based on the ALF Code of Conduct, leave it to the funder and its customer to agree the extent of control which may be ceded to the funder. Similarly in Hong Kong, a draft code of practice for funders, prepared by the Department of Justice, includes an undertaking not to ‘control or direct the funded party as to the conduct of the arbitration’ but does not include any duty to conduct ongoing reviews of progress. Such a laissez-faire regime may be attractive to some funders, and funded parties’ lawyers, but it could run foul of common law principles which have emerged in English case law.

At the same time, in a surprise move, the Singapore International Arbitration Centre (SIAC), has published a practice note for arbitrators in cases involving ‘external funding’, a term which appears to encompass insurance. These regulations would apparently allow arbitrators to conduct enquiries into private insurance arrangements without regard to coverage and confidentiality issues. No such interference exists in any comparable regulations in England. The ICCA-Queen Mary Task Force’s draft report proposed a carve out for maritime arbitration on the basis of its long tradition of funding by costs insurers but no such carve out is mentioned in the SIAC practice note. Parties, their insurers and lawyers remain uncertain as to the implications and bemused as to why they should have been caught up in the post-champerty regime in Singapore.

Meanwhile the English common law continues to construct a principled and commercially sensible regime for tpf, which extends access to justice for commercial parties. There is no need for a new statutory and regulatory overlay. The AA 1996 does not need amending for the sake of tpf in arbitration.

James Clanchy is a member of the Lexis®PSL Arbitration team.

[1]James Clanchy, Money Makers, New Law Journal, 24 June 2016

[2] James Clanchy, Rigorous steps short of champerty, New Law Journal, 17 March 2017

 

 

James Clanchy

James Clanchy

James is a solicitor and a Fellow of the Chartered Institute of Arbitrators. He is a member of the Lexis®PSL Arbitration team and is also an arbitrator in independent practice. He has more than 25 years’ experience of ad hoc, trade association, institutional and investment arbitrations, including four years (2008 – 2012) as Registrar of the London Court of International Arbitration (LCIA), and two years as a case assessor and claim handler for legal costs insurers and third-party funders. He is a member of the ICCA-Queen Mary Task Force on Third Party Funding in Arbitration. The views expressed in this post are not necessarily those of the task force or of LexisNexis or of any other organisation with which he is associated.




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