Discovery of Litigation Funding in Arbitration

There is currently much ferment regarding the question whether and to what extent information about third-party funding should be discoverable in litigation. For the most part, courts have ruled that such discovery is not available because a litigant’s financial backing is not relevant to the matter in dispute. But arbitration matters don’t always follow court rules and present some unique procedural circumstances. Consequently, there is a separate question whether third-party funding should be a subject of discovery in arbitration.

In determining the discoverability of third-party funding, the first consideration is the applicable procedural rules. Because arbitration is the creature of contract, the arbitrating parties are free to agree on whatever rules they wish. In theory, at the time that they choose to arbitrate, they can choose whether to adopt a rule that would make third-party funding arrangements discoverable.

But, as a practical matter, parties don’t choose their own procedural rules, they choose arbitration services, which have their own procedural rules. Sometimes, those in-house rules will be modeled on – or even copied from – widely adopted rules, such as the International Bar Association Rules on the Taking of Evidence in International Commercial Arbitration or the rules of the American Arbitration Association (AAA). In many cases, these standardized rules are guided, but not determined, by judicial procedural rules, so that arbitrators will look to court cases for guidance on how to resolve issues in discovery. Given that the leading arbitration-administering organizations, such as the AAA, do not currently have specific rules regarding to the disclosure of third-party funding arrangements, questions about such discovery will likely have to be resolved by applying general principles.

One relevant principle would make litigation funding discoverable to the extent necessary to determine whether an arbitrator might have a conflict of interest. Most standardized arbitration rules require the parties to disclose information that will enable arbitrator candidates to identify any potential biases or interests. Because litigation financing gives a third-party an interest in the outcome of the case, and because many litigation funding entities have their own investors, disclosure of the existence and identity of a third-party funder arguably would be required so that the arbitrator would be able to determine if she might have an indirect personal interest in the outcome of the case. Of course, such disclosure need not be made to the opposing party, but only to the arbitrators themselves.

To the extent that arbitrators will be guided by judicial decisions on the discoverability of third-party funding, there is ample precedent that such funding is not relevant and not discoverable to the substance of the dispute. This precedent typically turns on a couple of significant points: (1) that the facts relevant to an arbitrated dispute will almost always pre-date funding arrangements and therefore that evidence regarding the funding agreement will not tend to prove or disprove any fact that is material to the dispute; and (2) communications between counsel or client and the funder, while they may include descriptions of relevant facts, are protected by the common-interest privilege.

Keywords: litigation finance, third-party litigation funding, discovery, arbitration, conflicts of interest, common-interest privilege

Work Cited:  Daniel Pascucci, Discoverability of Third Party Funding Agreements in Arbitration – Part I (Jan. 30, 2019) available at https://www.natlawreview.com/article/discoverability-third-party-funding-agreements-arbitration-part-i