Third party finance in international arbitration

In our study, third party funding in international arbitration is discussed. Third-party funding is when a third party that is not a party to the arbitration proceeds by providing economic support to one of the parties to the arbitration proceedings to cover the costs of the arbitration. If the party to whom the financier has covered the costs is successful in the proceedings, the financier will be entitled to a benefit at the rate determined over the economic benefit obtained at the end of the trial in return for the costs and expenses it has covered, and will not be able to claim any rights in case of failure in the trial. In other words, the financier will have to cover the arbitration costs of the funded party free of charge. Third-party funding was first put into practice through the funding of cases in national courts. In this context, although litigation funding is mainly used in cases in national courts, in our study, third-party funding has been handled only in terms of arbitration proceedings, and when necessary, comparisons have been made by including the differences between it and litigation funding. In this context, our thesis, which deals with third party funding in international arbitration, has been divided into sections with 3 main titles and sub-titles related to these titles. In the first main part of our study, the basic concepts of arbitration and third party funding in international arbitration are explained. Subsequently, the advantages and disadvantages of arbitration proceedings were given and an introduction was made to the issue of third-party funding, which developed in the face of "excessive costs", which is considered as one of the disadvantages of arbitration. In the second main part, the definition of third party funding, its history, legal nature, the law to be applied to the basis of the agreement and the elements of the agreement are examined. In the third main section that follows this, the problems that can be experienced in the implementation of third party funding are tried to be examined by concretizing. In this context, firstly, the obligation to disclose the third party funding to the arbitration parties or the arbitral tribunal was examined. Following this title, the confidentiality issue of third-party funding is discussed in terms of the financier, the funder, the lawyer of the funded party, and the other party of the arbitration proceedings. Afterwards, the role of the financier is explained by expressing how and in what way the responsibility for the costs of the arbitration will occur as a result of the arbitration. Finally, in terms of arbitration costs, the decisions of the arbitral tribunal regarding the claimant's collateral are discussed, and the effect of the funding agreement on the claimant's collateral is discussed. The reason for explaining the basic concepts in arbitration and international arbitration in the first part of our study is to better understand third party funding. Because the effect of third party funding differs in terms of cause, effect and content according to the basic concepts explained here. Here, first of all, the concepts of arbitration and international arbitration are mentioned and their meanings are tried to be conveyed. Then, in our first sub-title, the arbitration agreement, which is the founding element of arbitration, is explained in the context of the proportionality of the arbitration proceedings. If there is an arbitration agreement between the parties, any of the parties will no longer be able to file a lawsuit in national courts in terms of disputes that may arise between them. Because, in case of litigation in national courts, the other party may file an objection to arbitration and may prevent the case from being heard in national courts. In this context, it seems possible for the plaintiffs, who are in poor financial condition and who have bound themselves with an arbitration agreement, to seek their rights only with third party funding. After the explanations regarding the arbitration agreement were made, the issue of arbitrability was briefly mentioned. While explaining this subject, explanations are given on the basis of objective arbitrability and subjective arbitrability, which are generally used in the doctrine. Then, in the second sub-title, the distinction between institutional arbitration and ad hoc arbitration is explained. If the parties choose to arbitrate in favor of institutional arbitration centers, the arbitration rules of this center become current in terms of the functioning of the arbitration proceedings. Various aspects of third-party financing are regulated by some institutional arbitration centers. However, since there are no comprehensive pre-arranged rules in ad hoc arbitration, the problems regarding third party funding will be resolved on the basis of the choice of the parties regarding the substantive and procedural law. In our third sub-title, the differences between commercial arbitration and investment arbitration are discussed. While some privileges are foreseen for the claimant in investment arbitration, there is no such separation between the parties in commercial arbitration. These privileges envisaged in investment arbitration are also important in terms of third party funding. For example, it would not be wrong to state that there are serious advantages for the plaintiff in investment arbitration in providing collateral in terms of arbitration costs. Because in this type of arbitration, the freedom of the investor to seek rights is more important, and the provision of collateral is generally subject to much more difficult conditions than commercial arbitration. In our last sub-heading, the advantages and disadvantages of arbitration are given. In the second part of our study, after giving place to the definition of third-party funding and its historical development, its basics are mentioned in principle. Subsequently, the legal nature of the agreement was included and compared with typical agreements. Then, the law to be applied to the basis is given and the parties of the third party funding agreement are explained and tried to be examined in the context of its main elements. Finally, the Priorities Agreement, which is a special case, is included. Under the title of third party funding, which is our second main title, the third party funding agreement was explained in general terms and compared with similar institutions. In this context, based on the distinction between third-party funding in the broad sense and third-party funding in the narrow sense, which is accepted in the doctrine, legal expense insurances of the potential party to the arbitration proceeding are based on success-based attorneyship fee agreements (Contingency fee, conditional fee) financed by a third party that is not a party to the dispute. (ATE, BTE), loan agreements and their differences from legal aid are given. After this determination, the definition and history of third party financing and the first application of the funding agreement in the modern sense are mentioned in the first sub-title. In our second sub-title, the principle of access to justice, which constitutes the principled basis of third-party funding, is explained. In this section, the maintenance and champerty bans imposed on third party funding in the Medieval England are explained and the process leading to the removal of these bans in line with the principle of access to justice is explained. Because the party with an insufficient economic situation, which has bound itself with the arbitration agreement, cannot apply to arbitration because it cannot cover its expenses, and when it applies to the national courts, it cannot assert its rights on any platform because it faces an arbitration objection. Third-party funding makes it possible for people who are strongly convinced that they are right, but whose economic situation is bad, to seek their rights. In our third subheading, the legal nature of the third party funding agreement is explained. Here, first of all, the main acts of the parties in the funding agreement have been tried to be revealed. Subsequently, the essential performances of the third party funding agreement and the ordinary partnership agreement, confidential ordinary partnership agreement, conclusive loan agreement, factoring agreement, assignment of receivables agreement and the results of the agreements based on luck and chance are examined comparatively. Although the funding agreement has some common points with almost all of the above-mentioned agreements, except for the secret ordinary partnership agreement, it has been determined that it does not fully match. However, when the party rights and obligations in the confidential ordinary partnership agreement are examined in detail, it has been determined that they are compatible with the party rights and obligations in the third-party funding agreement. As a result, it has been concluded that the legal nature of the third party funding agreement may be a confidential ordinary partnership agreement. In the fourth sub-title, the law to be applied to the basis of the funding agreement is explained. In this context, first of all, general principles regarding the applicable law are given. Then, based on the criterion of whether the parties have chosen the applicable law in the funding agreement, first of all, if such a choice is made, explanations regarding the law to be applied to the basis are given. Subsequently, it was stated that if the parties did not make any choice regarding the law to be applied to the merits, the applicable law would be determined by the dispute resolution authority. Considering that the dispute resolution authority may be national courts as well as institutional or event-based (ad-hoc) arbitration committees, explanations on how to determine the applicable law according to these possibilities are given. In our fifth sub-title, it is discussed together with the elements of third party funding agreement. In this title, the main rights, debts and obligations in the funding agreement are mentioned. In this context, firstly, the provisions that may be in the content of the agreement in order to be accepted as a third party funding agreement are stated. Subsequently, explanations were made about the identities and characteristics of the financiers and those who were financed in the agreement, and examples in practice were included. Financiers who are parties to the agreement; There may be banks and investment funds, as well as public or private companies whose sole business is to finance arbitration and litigation proceedings. It is also seen that non-profit associations finance lawsuits in line with their aims. The other party of the agreement, the beneficiary of the financing, can be anyone who has a justified case. Secondly, the confidentiality agreement that the parties usually signed before starting the negotiations of the funding agreement was mentioned. In the process until the signing of the funding agreement between the parties, the legal, financial and administrative dimensions of the claims of the funder are investigated, in other words, due diligence studies are carried out. A confidentiality agreement is signed in terms of the confidentiality of the information obtained here. Generally, an exclusivity agreement is signed between the parties while the due diligence process continues. Thirdly, the due diligence work carried out by the financier following the confidentiality agreement signed by the parties is explained. At this stage, known as the due diligence stage, the financiers examine all the information and documents regarding the dispute and determine the probability of winning the case. This stage is very important for financiers. Because they will not be able to get their expenses back in case the party they provide financing fails. In the fourth section, which follows these explanations, it is explained how the financiers determine the financing offer and the probability of winning, with which methods and on what basis. At the end of this stage, after the financier and the funder reach a mutual agreement on their expectations from the funding agreement and on financial issues, the agreement negotiations are replaced by the agreement. In the fifth part, instead of examining all the possible provisions of the funding agreement between the parties, the rights and obligations of the parties that will give the agreement its character are examined under the headings of financial issues and control of the case. Under the heading of financial issues, issues such as the amount of payment to be made to the funded person, how this amount will be determined, the role of unexpected situations, and the gains and losses of financiers are discussed in general terms. On the other hand, in matters of control of the case, the prohibition of purchasing the case was accepted as the top line, and the issues of how and in what way the efficiency of the financier in the trial could be established. Following these, in the last part of the sixth section, the termination of the agreement is mentioned and the conditions and how the agreement is terminated and the scope of the regulations are given. In our sixth sub-heading, there are explanations regarding the Priorities Agreement, which determines the rules in which order and to what extent the amount to be shared will be shared if the funding agreement is successful. In the third part of our study, the main problems that third-party funding has created in practice are discussed. In the first sub-title discussed in this section, the issue of whether it is obligatory to disclose the existence of funding has been discussed. What is meant by the obligation to disclose; It is the debate about whether the party using the funding should be obliged to disclose to the other party or the arbitral tribunal that it has used the funding. Afterwards, it was discussed why this necessity was needed. It is stated here that it has more than one result, and it is stated that the most important result is the need for the impartiality and independence of the arbitrators. Following this, the problems that may be encountered in case of necessity of disclosure are pointed out and opinions in this direction are given. On the other hand, the opinions that it is obligatory to disclose the existence of funding are also explained by giving examples from the relevant arbitrator's decisions. Finally, the place of this issue in some institutional arbitration centers and the UNCITRAL model law has been included and comparisons have been made in terms of the scope of regulations in this direction. In the second sub-heading following this, the effects of the third party funding agreement on the concept of confidentiality and the problems that may arise are included. The explanations under this heading started with the disclosure of confidentiality in arbitration proceedings. Subsequently, the scope of this secrecy was expressed. Following these explanations, the effects of the funding agreement on confidentiality are discussed in three parts. In this context, firstly, it was discussed whether the information to be shared by the funded party with the financier violates the confidentiality of the arbitration proceedings established in accordance with the arbitration agreement between the funder and the other party. As a result of the discussion, it was concluded that sharing the events with the financier after the arbitration proceedings started would violate the confidentiality of the arbitration proceedings. In addition, it has been stated that confidentiality will be violated in terms of information, documents and trade secrets that the financed party will share with the financier for due diligence before the arbitration proceeding. Afterwards, the regulations and opinions that bring solutions to this violation are included. Finally, under this sub-title, it is discussed whether the information provided by the lawyer of the party financed within the scope of the funding agreement will violate the legal confidentiality obligations of the lawyers. As a result, it has been stated that the breach will not occur due to consent, if the client, that is, the funder, authorizes his lawyer to share information and documents regarding the arbitration proceedings with the financier or approves the sharing made on this matter. In fact, it has often been stated that the provisions regarding the sharing of information and documents between the lawyer and the financier are included in the funding agreement and in the attorneyship agreement between the funded and the lawyer to prevent violations. In our third sub-heading, first of all, what the litigation costs are, is explained by taking the distinction between party litigation costs and arbitration litigation expenses as a basis and with examples. Subsequently, explanations are given on how the expenses incurred will be shared. In this context, result-based cost sharing, proportional sharing and the American rule, which are among the methods related to the sharing of litigation expenses, are explained. As a result of these general explanations, it has been discussed whether the funding agreement will have an effect on the judgment of litigation expenses. Under this title, firstly, whether the litigation expenses paid by the financier can be borne by the losing party or not has been discussed within the framework of the judicial decisions and the views in the doctrine. It has been concluded that the payments to be requested from the financer after the payment is made by the financier, in other words non-gratuitous payments, can be taken from the other party as litigation expenses, otherwise they cannot be received. Secondly, the issue of whether the amount to be paid to the financier, determined in accordance with the financing agreement from the proceeds to be obtained as a result of the proceedings, will be accepted as a trial expense has been discussed within the scope of different opinions and arbitral awards. It was concluded that it would not be reasonable in terms of the obligations imposed on the losing party to charge the losing party with this amount to be paid to the financier, and it was concluded that it could not be accepted as a litigation expense. Thirdly, it has been discussed whether the financier will be responsible for the litigation expenses incurred against the funder in case the funder fails in the arbitration proceedings and loses. It is stated here that a decision cannot be made about the financier, since the financier is not a party to the arbitration agreement between the parties to the arbitration proceeding, and therefore it has been concluded that he will not be liable for the expenses of the arbitration proceedings. Finally, under this title, it was discussed whether the expenses incurred by the financier during the due diligence stage can be considered as litigation expenses. It has been stated that there are two criteria to make a decision here. First of all, as in the discussion on whether the expenses incurred by the financier are litigation expenses, it will first be checked whether they are requested back by the financier. However, it is not enough for the financier to ask for the cost back. In addition, it was concluded that the final decision should be made by looking at the criteria of whether the data obtained during the due diligence stage is used in the execution of the case during the arbitration proceedings. Finally, in the fourth sub-heading, firstly, the issue of providing security in terms of litigation expenses is explained. In this regard, it has been stated that the authority of the arbitrators to decide on the provision of collateral is sometimes separately and explicitly stated, and sometimes it is accepted that their authority on temporary protection measures also includes the authority to decide in this direction. Following these explanations, it has been discussed in the light of which criteria the examination for providing collateral will be made by the arbitral tribunal. By making a distinction here, it has been concluded that in terms of commercial arbitration, the economic situation of the party and its behavior in order not to be responsible for litigation expenses will be examined. It has been stated that the newly introduced regulations in terms of international investment arbitration have ended the discussions to a great extent, and the criteria in this regulation are included. Subsequently, the effect of the funding agreement on the decision to provide collateral is discussed. In this context, firstly, opinions that the funding agreement has no effect on the decision to provide collateral are included. The first of these views states that if the finding of a funding agreement is a criterion for the decision of whether to provide a guarantee, the proceedings would be unnecessarily prolonged. The second view argues that while none of the broad financing models are taken as criteria, the funding agreement should not be an exception. On the other hand, the opinions expressing that the funding agreement should not be taken into account are; they object that it is unfair for the financiers to make profits without any damage by the hit-and-run method, and on the grounds that the financiers mostly fund the claimants who are in poor financial condition. When the place of these views in commercial and investment arbitration practice is examined, different results are reached. Considering the effect in commercial arbitration, it is often emphasized that it is necessary to compare the economic situation of the party applying for third-party financing at the time of signing the arbitration agreement with the economic situation at the time of filing an arbitration case. Although it is seen that the general practice in the jurisprudence until the last ICSID change was looking for the plaintiff's maliciousness, it was concluded that the economic status of the plaintiff would be one of the criteria with the new regulation.