1.1 Introduction
Surely, Arbitration in Nigeria is widely recognized as a preferred method for resolving commercial disputes. As confidence and familiarity has increased, age old biases about cost have also dissipated. It remains the case however, that the costs of constituting a tribunal as well as the counsel, expert and related administrative cost can be significant. The recourse to third-party funding of arbitration was conceived as a device which will increase access to arbitration by all parties, regardless of their financial standing.
Third-party funding allows an external entity to finance a party’s arbitration costs in exchange for a share of the potential award. This article examines the application of third-party funding in Nigeria in light of the Arbitration and Mediation Act (AMA) 2023, as well as its benefits and the real challenges within the Nigerian context.
1.2 Third Party Funding in Arbitration
Third-party funding in arbitration is a process where an external entity, usually a professional litigation funder, provides financial resources to a party involved in arbitration. These funds cover legal fees, arbitrator fees, and other associated costs. In return, the funder receives a portion of the arbitration award if the funded party wins. Traditionally, the practice of funding litigation by a third party was alien under common law and in Nigeria. This is because under the principle of maintenance and champerty, a person with no legitimate interest was now allowed to fund parties in litigation.[1] This practice was extended to arbitration initially but it appears that the AMA 2023 has taken a great leap by abolishing the torts of maintenance and champerty and recognizing third-party funding in Nigeria.[2]
Specifically, Section 62 of the Act acknowledges the validity of third-party funding agreements, making Nigeria one of the few African nations with a legal framework explicitly addressing this issue. The Act also outlines the obligations of parties involved in such agreements, which ensures transparency and fairness in the funding process.
Section 62 of the Act allows any party to an arbitration agreement to seek third-party funding, provided they disclose the existence of the funding agreement to the arbitral tribunal and the other parties involved. It is submitted that this requirement for transparency aims to prevent conflicts of interest and ensure the integrity of the arbitration process. This disclosure is required whether the funding agreement is reached before the commencement of the arbitration or after the commencement.[3]
In comparison, jurisdictions like the United Kingdom, Singapore, and Australia have well-established frameworks for third-party funding in arbitration. In the UK, for instance, third-party funding is governed by the Arbitration Act 1996, coupled with industry guidelines from the Association of Litigation Funders which provides a comprehensive regulatory environment. Similarly, Singapore’s amendments to the Civil Law Act (Cap. 43) in 2017 legalized third-party funding, with regulations ensuring transparency and mitigating conflicts of interest. Nigeria’s adoption of similar provisions in the AMA 2023 aligns it with these global practices, although it is submitted that further developments may be needed to fully realize its potential.
1.3 Why Third-Party Funding is Necessary in Nigeria
The growth of arbitration in Nigeria has been driven by marketing of its efficiency and cost effectiveness as well as its facilitation of business which is the contrary to litigation in state courts whose reputation for delay and unpredictability was not good. Arbitration is usually recommended for high value commercial disputes and in businesses where time is critical. Even in lower value disputes, promptness of decisions over disputes is highly desirable for continuity in business. The problem is that parties involved in some disputes may benefit from arbitrations selling points but yet may not be able to bear costs.. Third-party funding of viable cases becomes necessary in a situation like this.
By opening access to parties to pursue legitimate claims without all the burden of cost, third-party funding can transform arbitration from a financial burden into a manageable risk. This is particularly important in Nigeria, where businesses often face substantial financial pressures. Moreover, third-party funding helps level the playing field in disputes where there is a significant disparity in resources between the parties. It is submitted that the introduction of third-party funding under the AMA 2023 is likely to encourage more businesses to opt for arbitration, knowing that they have the option to secure financial backing.
1.4 Practical Challenges and Considerations in Nigeria
Notwithstanding its advantages, there are still challenges with the implementation of third-party funding in Nigeria. Many questions arise. Who will be willing to fund an arbitration? What happens when the party being funded loses? Will the third-party funder be obligated to cover the costs of the loss? Will the other party who has won be able to reap the fruit of the award? The questions are a lot more.
It is usual that a party initiating or defending arbitration may be required to give security for costs. An order to this effect can have a chilling effect. Section 62(3) of AMA 2023 envisages a situation where a party who has been made aware of a third party-funding arrangement brings an application that the party who has entered the third-party funding arrangement gives security for costs of the entire proceedings. When this happens, the Act allows the funded party to provide an affidavit stating that the funder has agreed to cover the adverse costs order and the affidavit will be relevant in deciding on the application for security for cost. It is submitted that this provision is fair as it protects the interest of the other party who is funding him or herself. It is also submitted that the requirement of an affidavit stating that the funder has agreed to cover the adverse costs should be mandatory and not merely permissive as suggested in the Act. This ensures fairness.
The implication of the above is that third-party funders may be reluctant to fund arbitrations when there is a likelihood that if the party being funded loses, they will also have to cover the adverse parties cost. Third-party funders will need to be circumspect and conduct proper due diligence before agreeing to fund a party. The high skill and experience of independent legal advice will be required as to the chances of potential disputes. The corollary is that third party funding will not be abused to pursue frivolous cases and it will promote a practice where the parties are willing to conduct their cases on its merit.
1.5 Conclusion
Third-party funding in arbitration is a promising opportunity for businesses in Nigeria as it offers a viable solution to the financial challenges often associated with arbitration. However, the successful implementation of this third-party funding will require careful consideration of the unique practical application and challenges in Nigeria. It is submitted that Banks, Insurance companies and other financial institutions should take interest in this opportunity in Nigerian Arbitrations.
By
Associate Jamaldeen Bamidele
