This article traces Singapore’s foray into TPF and also looks to the future of TPF in Singapore.
What is Third Party Funding?
1. A quintessential TPF arrangement involves a third-party funder who funds a party’s costs of legal proceedings. In exchange, the third-party funder is promised a share of the recoveries,[1] but only in the event of a successful claim or settlement.
2. In this regard, TPF is a form of “non-recourse” loan-financing, where repayment is contingent on success of a funded party’s claim.
Historical Context: Torts of Maintenance and Champerty
3. Historically, English common law has recognised the torts of maintenance and champerty since medieval times. These ancient torts originally arose to protect vulnerable litigants and to guard against potential abuse of the Court processes by, amongst others, corrupt nobles and royal officials.
4. Maintenance is the provision of assistance to a party by a person or entity that has no interest in the proceedings. Champerty is the maintenance of an action in return for a share in the proceeds of the action.
5. Singapore, as a former British colony, inherited these ancient torts. As recently as 2007, the Singapore Courts were still upholding these torts in both litigation and arbitration (see for example, Otech Pakistan Pvt Ltd v Clough Engineering Ltd [2007] 1 SLR(R) 989).
6. More recently however, there has been a paradigm shift in terms of public policy considerations. This is partly driven by the rising costs of dispute resolution and a growing concern that access to justice is being stifled.
7. Further, Singapore has been seeking to establish and maintain its position as a leading disputes resolution hub for the region and globally. This means keeping up with global
changes in attitudes towards TPF.
8. These changing policy considerations have fuelled the introduction of the TPF Framework in Singapore.
TPF Framework in Singapore
9. On 1 March 2017, the Civil Law (Amendment) Act 2017 was passed which abolished the [2] torts of maintenance and champerty altogether. Further, section 5B(2) of the Civil Law Act now provides:
“A contract under which a qualifying Third-Party Funder provides funds to any party for the purpose of funding all or part of the costs of that party in prescribed dispute resolution proceedings is not contrary to public policy or otherwise illegal by reason that it is a contract for maintenance or champerty.”
10. On the same day, the Civil Law (Third-Party Funding) Regulations (“TPF Regulations”) were [3] passed and new rules were included in the Legal Profession Act 2001 (“LPA”) and Legal [4] Profession (Professional Conduct Rules 2015) (“LPPCR”) (collectively, the “TPF Framework”).
11. These legislative amendments set out the TPF Framework in Singapore and are limited to “prescribed dispute resolution proceedings”. Initially, these were confined to international arbitration.
12. However, from 28 June 2021, via the Civil Law (Third-Party Funding) (Amendment) Regulations 2021, the TPF Framework has since been extended to cover domestic arbitration proceedings, certain proceedings in the Singapore International Commercial Court (SICC) and related mediation proceedings.
13. On the insolvency front, even prior to the amendments to the Civil Law Act in 2017, the Courts had allowed third-party funding agreements, such as the decision of the Singapore High Court in Re Vanguard Energy Pte Ltd [2015] 4 SLR 597 in 2015. Since then, insolvency law has progressively developed to encompass a range of third-party funding agreements, culminating in third-party funding provisions being incorporated into the Insolvency, Resolution and Dissolution Act 2018 (“IRDA”), which came into force on 30 July 2020.
14. Pursuant to the IRDA, a liquidator's ability to enter into third-party funding agreements (upon obtaining Court approval or authorisation of the committee of inspection[5]) is statutorily enshrined in respect of claims in relation to transactions at undervalue,[6] unfair preference transactions,[7] extortionate credit transactions,[8] fraudulent trading,[9] wrongful trading[10] and assessment of damages against delinquent officers of the company[11].
15. Overall, Singapore has adopted a light framework of regulation. In order to come within the ambit of the Singapore TPF Framework, “qualifying Third-Party Funders” must carry on the “principal business” of funding dispute resolution proceedings and have a paid-up share [12] capital of five million Singapore dollars, or the equivalent in foreign currency.
16. Pursuant to Section 5B(4) of the Civil Law Act, where a third-party funder fails to comply with the prescribed requirements, “rights of the Third-Party Funder under or arising out of the third-party funding contract affected by or connected with the disqualification or non-compliance are not enforceable by action or other legal proceedings, including arbitration proceedings.”
Potential issues with TPF
Increased potential for conflict of interests
17. The inclusion of a third-party funder enlarges the scope for conflicts of interests. For instance, a potential conflict may arise if the third-party funder is personally known to the parties, their counsel and/or the tribunal. This is exacerbated by the fact that the third-party funding industry remains highly concentrated.
18. This issue is to some extent addressed by the requirements of disclosure under Rule 49A of the LPPCR, which places the onus on the legal practitioner to disclose to the Court, tribunal and every other party to those proceedings, the existence of any third-party funding contract. Such disclosure is necessary to ensure the independence and impartiality of the arbitrator(s), which remain unaffected by the specific contractual terms of the funding agreement.
Funder control
19. Party autonomy is a sacrosanct principle of arbitration. Concerns have therefore been raised regarding the assumption of control over the arbitral process by a third-party funder, who retains the “power of the purse”. While the TPF Framework in Singapore has thus far remained silent on the issue of funder control, the Singapore Institute of Arbitrators Guidelines for Third Party Funders (2017) provides that funded parties are not permitted to “cede control or conduct of the dispute… except where and to the extent expressly permitted by the Funding Contract.”[13]
20. The issue of funder control has increased significance when it comes to negotiating settlements because of the potential divergence of interests between the claimant and the third-party funder. For instance, where a claimant is dissatisfied with the proposed settlement but funders wish to settle to “cash in” and vice versa. A judiciously drafted funding agreement should therefore spell out the demarcation of control (and ultimate decision-making rights) between the claimant and the third-party funder.
COVID-19 and TPF 21. TPF is typically utilised by two distinct groups. The first group consists of impecunious claimants who lack the financial “war chest” to enforce their legal rights. The second group consists of well-capitalised claimants who would prefer to shift the risk of non-recovery to[14]third-party funders for business reasons, thereby taking the funding off balance sheet.22. Regardless of which group the claimants belong to, the utility of TPF was brought to the fore during the COVID-19 pandemic and the concomitant border closures and lockdowns occasioned therefrom. In a survey conducted in 2021, Ernst & Young LLP stated that the appetite for claimants considering TPF options had more than doubled from pre-pandemic[15]levels.23. While the pandemic has arguably created a favourable market for third-party funders, it is of utmost importance that claimants are aware of their contractual rights under any funding agreement. A prudently drafted funding agreement ought to contain provisions regulating the funder’s control over the proceedings, a termination clause with stipulated grounds for termination and a method to resolve any disagreements between the claimant and the third- party funder. Conclusion 24. While, undoubtedly, the TPF industry has gained global traction in recent times, the investment criteria of third-party funders, such as “high quantum, moderate investment costs, an exceptionally high chance of success, a solvent respondent, and a claimant that is impecunious or wishes to share risks”,[16] places natural limits on the growth of the industry.25. However, there is one final frontier in Singapore, that of domestic litigation. On 10 January 2017, Senior Minister of State for Law, Ms. Indranee Rajah, had stated that the “[TPF][17]framework may be broadened in future after a period of assessment”. With TPF nowextended to international and domestic arbitration and international commercial court cases in Singapore, it remains to be seen whether the TPF framework will be expanded further, perhaps to cover domestic litigation in Singapore.
Authors:
Prakash Pillai, Partner, Clyde & Co Class Singapore | Managing Director, Class LLC
Junxiang Koh, Legal Director
Pi Wei Ng, Associate
[1] Victoria Sahini, ‘Harmonizing Third Party Litigation Funding Regulation’ [2015] CLR 861.
[2] See section 5A and 5B, Civil Law Act
[3] Section 107 Legal Profession Act 2001, which permit solicitors to refer TPF to clients provided that the solicitor does not receive any financial benefit from doing so.
[4] Rule 49A and 49B, Legal Profession (Professional Conduct) Rules 2015, which impose a duty on the funded party’s lawyer to disclose TPF and the identity of the third-party funder to the court or tribunal.
[5] Section 144(1)(g) of the Insolvency, Restructuring and Dissolution Act 2018.
[6] Section 224 of the Insolvency, Restructuring and Dissolution Act 2018.
[7] Section 225 of the Insolvency, Restructuring and Dissolution Act 2018.
[8] Section 228 of the Insolvency, Restructuring and Dissolution Act 2018.
[9] Section 238 of the Insolvency, Restructuring and Dissolution Act 2018.
[10] Section 239 of the Insolvency, Restructuring and Dissolution Act 2018.
[11] Section 240 of the Insolvency, Restructuring and Dissolution Act 2018.
[12] Section 4 Civil Law (Third-Party Funding) Regulations 2017
[13] https://www.siarb.org.sg/images/SIArb-TPF-Guidelines-2017_final18-May-2017.pdf
[14] Lisa Bench Nieuwveld & Victoria Shannon, Third-Party Funding in International Arbitration (Kluwer 2012).
[15] https://www.ey.com/en_uk/assurance/how-the-pandemic-is-changing-attitudes-towards-third-party-funding [16]Beisner, Miller and Rubin, ‘Selling Lawsuits, Buying Trouble: The Emerging World of Third-Party Litigation Financing inthe United States’ (US Chamber Institute of Legal Reform 2009)
[16] Beisner, Miller and Rubin, ‘Selling Lawsuits, Buying Trouble: The Emerging World of Third-Party Litigation Financing in the United States’ (US Chamber Institute of Legal Reform 2009) 6.
