The cost of arbitration proceedings poses a significant challenge for certain parties, who may be deterred by the cost of the arbitration process. The Arbitration and Mediation Act 2023 (AMA)[1] introduced the practice of third-party funding (TPF) to Nigeria’s arbitration landscape, as a modern means of managing the cost, thereby increasing the access to arbitral remedies. The financial burden of the affected parties is lifted by the third-party funder, who provides financial support to one of the parties involved in the arbitration process (typically the claimant) in exchange for a portion of any financial award that may be obtained. This is particularly beneficial for parties who may have meritorious claims but lack the financial resources to pursue them.
The introduction of third-party funding in Nigerian practice is a welcome development, as part of the bulk changes brought about by the Act, these torts have been abolished for TPF concerning arbitration. Consequently, TPF is now permitted in Nigeria-seated arbitration and arbitration-related proceedings in any Nigerian court. In May 2023, the Arbitration and Mediation Act was signed into law in Nigeria, thereby abolishing the torts of champerty and maintenance for third-party funding in respect of both Nigeria-seated arbitration and proceedings arising out of such arbitration in Nigerian courts. The inclusion of third-party funding provisions in the recently enacted Arbitration and Mediation Act, 2023 (AMA) introduces a paradigm shift by offering parties who are unable to fund their participation in arbitration proceedings a lifeline.
It will be valid to affirm that a party can fund arbitration costs for another party in the hope of sharing from the gains of the party if the party’s claim succeeds SECTION 61. If a party enters a Third-Party Funding Agreement on, Before or after the commencement of arbitration, the party is mandated to immediately notify the other party, arbitral tribunal and arbitral institution where applicable Section 62, To avoid conflict of interest it’s advisable to notify.
FUNDING A PARTY
A third-party funder is any legal or natural person who is not a party to the dispute but who enters into an agreement either with a disputing party affiliate of that party, or a law firm in order to finance the party’s cost of proceeding in return for reimbursement depending on the outcome. The third-party funder enters into a contract to grant hoping for premium payment after the dispute.
Access to justice: Parties with meritorious claims but limited financial resources pursuing arbitration will be aided by the funder, covering the cost associated with these processes thereby narrowing the disparity. Without TPF, the arbitration process may disfavour the financially incapable, powerless, or unprivileged party either through the process or the outcome. All individuals should have a fair right to seek and obtain a fair and effective resolution to their disputes.
Although TPF was principally introduced as a necessary tool for financially incapable parties, it has now been characterized more by a choice rather than a necessity. While parties who may be able to pay the arbitration costs may choose not to, others may be willing to pay but unable to[2]. TPF is still a tool of “access to justice” that is not necessarily relevant to just the cost-benefit analysis.
Risk mitigation: Minimizing the likelihood and impact of potential risks that may arise due to lack of funds. The funder can help mitigate measures to navigate the arbitration process and enhance their chances of achieving a favourable outcome while minimizing uncertainties. The funded party is relieved of cost pressures and cash-flow issues related to the legal costs of the arbitration
Cost efficiency: The TPF funding arrangements often provide parties with greater cost predictability by establishing fixed or capped funding amounts. They help reduce financial barriers to participation, sharing the financial risk, providing cost predictability, enabling efficient resource allocation, encouraging settlement and leveraging expertise to streamline proceedings. TPF will thus have a positive impact on settlements because the financially stronger parties will lose the power to impose a one-sided settlement agreement and will have a bigger incentive to negotiate a (more favourable) settlement at an earlier stage of the dispute because of the increased leverage of the adversary provided for by the TPF.
Enhance case strategy: Funders will carry out due diligence and analyse cases on the merits and demerits before funding. This analysis may assist the claimant in shaping its case strategy and encourage early settlement once the opposite party is made aware that the claim has the backing of a funder.
While there are many benefits third-party funding can offer, it also has the potential of drawbacks and challenges.
Conflict of interest: Third-party funder may have interest that contradicts with those of the funded parties. The involvement of a funder may cause more doubts about the independence and impartiality of arbitrators thereby making arbitrators withdraw and delaying the award. This affects settlement dynamics by influencing the parties’ willingness to negotiate and settle disputes. The problems that can arise – both at the stage of concluding the funding agreement and the stage of the arbitration proceedings as such are usually the result of a conflict between: (i) the client’s interest (i.e. achieving the for him or her most favourable outcome) and (iii) the funder’s interest (i.e. achieve the biggest return on investment)[3]. Funders may have financial incentives to prioritize financial returns over settlement, which could prolong matters and increase cost.
Confidentiality: Since arbitration is private unless otherwise agreed to by the parties, all information relating to the proceeding shall be kept confidential except where disclosure is required. The funder requires the disclosure of several documents including the agreement(s) from which the dispute arose and the facts which gave rise to the dispute, there exists a risk that information shared by the claimant to its counsel may lose its privilege upon disclosure to the funder.
Nigerian National Petroleum Corporation v. Statoil Nigeria Ltd & Anor (2013)[4] The case involved complex arbitration proceedings in the oil and gas sector, highlighting the financial and procedural intricacies of such disputes, though not directly about TPF, cases like this illustrate the potential financial burdens in high-stakes arbitration, underscoring the end for a mechanism like TPF to balance resources.
The evolution of modern arbitration practices over the years unlike Arbitration and Conciliation Act (ACA), AMA 2023 bill makes provisions for TPF and expressly excludes the application of the common law principles of maintenance and champerty to TPF of arbitration proceedings seated in Nigeria and consequently enforcing such contract by any court with Nigeria. Nigeria made efforts to join the increasing number of countries that have codify TPF thereby making attractive the choice of Nigeria as an arbitral seat. Notwithstanding the efforts, TPF is still novel and unexplored in Nigeria presently.
CONCLUSION
The incorporation of third-party funding into the Nigerian Arbitration and Mediation Act 2023 marks a significant evolution in the country’s dispute resolution landscape, offering a clear guide. Third-party funding provides crucial financial support for individuals with legitimate claims who might otherwise be unable to pursue justice or defend against unfounded claims. By enabling access to necessary resources, TPF will help in ensuring that financial limitations do not hinder the pursuit of justice. It empowers parties with strong cases but limited funds to compete against wealthier opponents, such as large corporations. Through TPF, the arbitration process becomes more equitable and accessible, affirming that justice should be a fundamental right for everyone, regardless of economic status, rather than a privilege reserved for those with significant financial means. As Nigerian arbitration practice evolves, it will likely draw on both local and international authorities to navigate the complexities of third party funding.
[1] section 62 (AMA) 2023
[2]Third party funding of international arbitration (july,2024) https://www.burfordcapital.com/blog/international-arbitration-funding
[3]LAMM and HELLBECK refer to this inconvenient situation as a “Bermuda Triangle of divergent interests”. C. LAMM and E. HELLBECK, “Third-party funding in investor-state arbitration” in B. CREMADES and A. DIMOLITSA (eds.), Dossier X: Third-party Funding in International Arbitration, Paris, ICC Publishing S.A., 2013, 107.
[4] Statoil (Nigeria) Ltd . v. Nigeria National Petroleum Corporation & 2 others (2014) N.W.L.R. (pt. 1373) https://strenandblan.com/wp-content/uploads/2023/01/Third-Party-Funding-of-Arbitration-in-Nigeria-
