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For parties with potential success in arbitration, third party funding may be the option to avoid the fronting of high legal fees and costs in time of Covid-19.

27 Jun 2024 | Dioputra Ilham Oepangat

As companies are likely to brace themselves for the financial impact of the Covid-19, it would be safe to assume that several budgeting cuts may be introduced as a response to the anticipation of a deteriorating global economy.[1] As a result, this may also affect budgets which a company had initially planned on spending for already generally high legal costs in arbitration proceedings. Where legal costs (attorney fees and administration costs) may generally be too high for a company to bear in this current economic situation, Third Party Funding (TPF) of legal costs may be a viable option to consider for companies. TPF allows a party to circumvent having to pay by itself a considerable amount of funds up-front to initiate arbitration proceedings, with the “catch” that if a claim is granted by an arbitral tribunal, the damages awarded to the claimant is shared between the TPF and the claimant. 

What is Third Party Funding in a Nutshell?

TPF is an alternative funding mechanism, whereby a third-party finance the legal costs in a dispute proceeding. The third-party funder (Funder) is usually a company which conducts its business specifically in financing claims, either for arbitration or even litigation. In this mechanism, a party who possesses a claim in arbitration may opt to finance its claim through a Funder, who would initially pay the administration as well as attorney fees. In return, if the claim is granted and damages are then awarded by the arbitral tribunal in their award to the claiming party, the funder then would receive a share of the damages awarded.

TPF has been increasingly used in international arbitration for the past 6 years. This is due to the fact that costs in international arbitration are relatively high, causing companies, who have a strong claim, but a low budget allocated for legal costs, to resort to funding from other third parties.

Popular Funding Schemes in Third Party Funding

In TPF, the funding relationship occurs most frequently between a party who possesses a claim in arbitration (claimant) and a Funder. Initially, a claimant would have to propose to a funder that it has a strong claim. This proposal would then be reviewed by the Funder to determine the case position and likelihood of success of the claim. If the Funder deems that the likelihood of success is high, then the claimant and the Funder would enter into a funding agreement. The two most common funding schemes are outlined as follows:

• Based on the percentage of the claim

In this scheme, the Funder commits to funding the legal costs of the arbitration on the condition that if the claim is successful and awarded damages, the Funder receives a percentage share of the damages awarded. The usual percentage which is ultimately received by the Funder is 30-50% of the total damages awarded in the arbitration.

• Based on a multiple of the total legal costs covered by the Funder

In this scheme, the funder would calculate the total costs incurred by the claimant in the arbitration (administrative and attorney fees). After the final arbitration award has been rendered in favor of the claimant funded by the Funder, the Funder would receive a return in the form of a multiple of the total legal costs incurred during the arbitration. In practice, funders usually receive a profit of 3x or 4x of the total legal costs covered by the funder.

Legal Framework of TPF in Indonesia and Asia

The phenomenon of TPF has only picked up in recent years and as a consequence, even Singapore, which has been long considered as a “safe seat” of arbitration, had only enacted its regulation on TPF in 2017 through The Civil Law Act and the Civil Law (Third-Party Funding) Regulations.[2] This regulation explicitly allows and regulates the business of TPF. 

Indonesia, on the other hand, does not currently possess explicit regulations pertaining to TPF for disputes. In other words, there is no regulation in Indonesia which prohibits the usage of TPF in Indonesia. To corroborate TPF feasibility in Indonesia, there has even been precedent of usage of TPF by Indonesian parties. Though not in an arbitration, but in a class action suit, seaweed farmers brought an action against PTTEP Australasia Pty Ltd. in a class action suit in 2016, whereby the Funder, Harbour Fund II, had funded all the costs of the plaintiff in the case.[3]

Thus, in conclusion, TPF may be a viable alternative for funding, if a company is confident that their claim may have a high chance of success in arbitration. In the current economy battle with Covid-19, a TPF may even become more attractive as budget cuts would then not be a hindrance to initiating an expensive claim.

[1]        Tri Indah Oktavianti, “Thousands laid off, forced to take unpaid leave in Jakarta as companies hit hard by COVID-19” https://www.thejakartapost.com/news/2020/04/06/thousands-laid-off-forced-to-take-unpaid-leave-in-jakarta-as-companies-hit-hard-by-covid-19.html

[2]        See No. S68 Civil Law Act (Chapter 34) Civil Law (Third-Party Funding) Regulations 2017

[3]        Rebecca Henschke, "Indonesian Seaweed farmers sue in major oil spill case" https://www.bbc.com/news/business-37256064