Third-party funding is a feasible option

Vamilson José Costa

As demonstrated in the latest articles published on this section, prior to electing an arbitration chamber, it is necessary to analyze the interests of the parties involved, in addition to reflecting upon several matters that may interfere in the development of the arbitration. Among them, there is the high cost of the arbitration procedure, which includes the fees to be paid to the arbitration chamber and the fees to be paid to arbitrators, experts and attorneys; the parties’ economic situation; the amount of time they are willing to wait until the dispute’s definitive solution; and the country’s economic scenario.

In spite of the significant cost, the arbitration has the advantage of being the fastest way to solve disputes, far more effective than the judicial approach. In this context, a method capable of enabling the establishment or continuation of an arbitration procedure is gradually becoming popular: third-party funding (or TPF) in arbitration.

It refers to specialized investment funds that provide litigants with a possibility of financing the arbitral procedure and/or the expenses involved, in exchange for a percentage of the amount received by the party in case of success. This portion of the compensation is based on the dispute’s risk, measured by means of a prior due diligence in which the fund analyzes the matter discussed, the profile of the arbitrators and attorneys involved, as well as the chance of success of the party that contracted the funding.

Common in European countries and in the United States, the method associated to TPF has been growing in Brazil mostly due to the economic crisis, which causes companies to lower their costs to the very minimum. In this scenario, TPF is interesting to both investors who wish to diversify their investments and the ones involved in the arbitration who wish to limit the high risks and costs of litigations.

Moreover, in light of the agility of the arbitration procedure, TPF attracts investors who expect short and medium term profits by offering a varied portfolio:

– financing all or part of the expenses involved in the establishment of the arbitration, with the assumption of the risk for collecting costs and compensation only in case of success of the funded party;
– providing the amount of the costs to the funded party and compensation for an interest rate previously agreed regardless of the arbitration’s result, in addition to a bonus in case of settlement or award favorable to the funded party;
– acquisition of credits of the arbitral award with a discount and assumption of the risks involved in the award’s enforcement, which allows for the funded party to have liquidity in its cash flow.

It is important to emphasize that once this theme is relatively new in Brazil, there is no legal provision relating to third-party funding in arbitration. What is possible to notice is the creation of guidelines by the arbitration chambers, such as the Administrative Resolution 18/2016, issued by the Center for Arbitration and Mediation of the Chamber of Commerce Brazil-Canada (CAM-CCBC). By means of this resolution, the institution intends to avoid conflict of interests between TPF and the arbitrators, advising the funded party to present the full identification of the fund that provides the resources, so to ensure transparency in the procedure and to avoid attempts to annul the award by the opposite party, claiming lack of information or impediment of the arbitrators.

In spite of the absence of specific regulation, third-party funding in arbitration is a financially feasible alternative that benefits the continuation of the arbitration procedure. TPF may even be a possible solution to reduce the significant number of arbitration procedures stayed or dismissed due to lack of payment of costs and arbitrators’ fees, especially to the parties that currently face financial problems.

Before deciding for third-party funding, it is important to consider the tax aspects involved, which will be further discussed in the next article.