THIRD PARTY LITIGATION FUNDING IN TURKEY AND ITS PROS AND CONS

24.10.2018

 

Third-party litigation funding is not regulated by any Law Codes or Regulations in Turkey, thus there is not any official authority to rule or carry the third party funding procedures. But nowadays it is more popular especially in international commercial arbitration and investment arbitration, under the freedom of contract principle, with its rare features. Fundamentally, according to the principle the parties and funders can enter into third party funding agreements. The only restriction may occur is the public policy and mandatory provisions of Turkish law. unless breaching any of these principles and regulations the parties are free to behave.

There is no regulation or jurisprudence regarding third-party litigation funding, the fees and interests that can be charged by funders are sujective and depends on the requests of the parties and the funders. Teh parties and the funders can set the matter in dispute, merits of the claims, chance of success and enforceability and then determine the amount of the fees and interest rate within the scope of freedom of contract. The limitations may be the mandatory provisions and the good faith of article 2 of the Turkish Civil Code, which are applicable to all commercial transactions, since the contraact will be seen as a usual contract relation with some special consequences.

Termination of funding agreements is usually regulated by specific provisions therein. Therefore, the circumstances giving the right to termination depend on the contractual arrangements between the parties. In case of lack of provision, the Turkish Code of Obligations provisions should apply.

PROs of Third Party Funding

Financing arbitration by third parties provide various advantages especially to a party who benefits from the financing. In this article, even though a party who benefits from the financing is considered a claimant who initiates the arbitration proceeding, as it may be seen in ICSID case examples onwards, a respondent may also benefit from the financing through an arbitration funding agreement to be signed with funding companies.

The most important profit of the financing is undoubtedly to provide an opportunity to those who are lack of economic potential to resort to an arbitration as a result of the fact that expenses which may arise during the arbitration proceeding will be paid by the financing companies. In other words, that the financing companies assume risk of high arbitration costs is the most important advantage of third party funding of arbitration. Along with this advantage, granting a right to access to court, contributions to the possibility of concluding arbitration in favor of the claimant can be considered other benefits of third party funding.

The Right to Access to Court

It is justly accepted that third party funding provides a right to access to court. Those are not able to bring forward their rightful claims before courts or arbitration proceedings due to economic difficulties, might initiate arbitration proceeding with the support of third party funding companies. Therefore, the right to access to court will be granted easily by means of third party funding.

Positive Contributions to Successful Result in Arbitration

Before funding companies decide to finance an arbitration, they carry out a comprehensive due diligence. In general, due diligence is carried out by an experienced attorney through an outsourcing or by an in-house attorneys. Due to the fact that the financing company will face with a significant risk (not being paid in case of unsuccessful award) through an arbitration funding agreement to be signed with a claimant, it should conduct necessary technical and legal assessment with due care on dispute matter and claimant’s demand. As it is clearly understood from the abovementioned points, the general assessment carried out by the financing company, will facilitate the process of arbitration. Especially, the financing company will make contributions to the execution of arbitration in a prompt and effective way in order for the arbitration proceeding to conclude in favor of the claimant.

CONs of Third Party Funding

Obligation to Leave Some Part of Recovered Claim to Funding Company

Even though arbitration costs will be covered by the funding company as a result of the agreement to be signed with the claimant, 20% - 40% of the recovered claim will be paid to the funding company after the lawsuit is won. Therefore, a claimant who considers benefiting from a funding company should get a full-scale risk management analysis done and should make a decision accordingly. Namely, financing arbitration by third party funding companies provides a claimant with advantages; however, proportioning of the gains and losses after arbitration should be placed well. As a matter of fact, third party funding may cause a conflict of interest between the financing company and the claimant, because when we consider the financing process in terms of the funding company, it is obvious that the purpose of the funding company is only its investment profitability. When it comes to the claimant’s side, there might be different purposes and different expectations after a successful award. For example; an award rendered concerning a dispute on an exclusive distributorship agreement both has an effect on pecuniary damages and may set a precedent. A claimant may even expect an arbitration to give an award protecting commercial relations between claimant and respondent such as licensor and licensee, seller and buyer. This may also cause a conflict of interest between the claimant and the financing company.

Apart from the abovementioned drawbacks, the most important drawback of funding arbitration by third parties is that financing may violate the principle of confidentiality of arbitration. The confidentiality of arbitration proceeding is one of the most important advantages of the arbitration which may have an effect on being chosen as a resolution method of dispute. However, another important point which should be emphasized here is that the opinion of accepting clarity rather than confidentiality prevails during protecting the interest of state in international investment arbitration and resolving such disputes through an arbitration with the effect of non-governmental organizations. In an arbitration proceeding where the confidentiality constitutes importance, due to the fact that it may be unfavorable to give all information to the financing company, it is an obligation to conclude a separate non-disclosure agreement between claimant and financing company. In addition to this, including a provision which relates to confidentiality in the arbitration funding agreement provide benefits for claimant. Furthermore, the arbitration agreement should be reviewed broadly since some arbitration agreement may include provisions concerning confidentiality of arbitration proceeding and disclosure of information between parties explicitly or implicitly.

 

Att. Ayça Güntülü ALKAN