To the best of our knowledge, funding contracts generally require arbitration to resolve disputes. While arbitration has significant appeal, it may not always be the optimal arrangement for reasons laid out below. Therefore, the model contract defaults to New York courts as the forum for dispute resolution.

Arbitration’s Appeal and Downsides

Arbitration has one significant advantage over courts: secrecy (confidentiality). Even the fact of the dispute can be kept secret, which preserves the secrecy of the underlying financing if that funding is secret. Moreover, the documents involved in the arbitration can be kept confidential. Another advantage, identified by Victoria Shannon, is parties’ ability to negotiate privilege rules. (Admittedly she was discussing the fact that funders investing in an arbitration face much less risk of privilege waiver or discovery than funders of a lawsuit, but the point is the same.) Finally, arbitration can be relatively quick.

One problem with arbitration, particularly international arbitration, are conflicts of interest. Arbitrators may be partners at law firms, and their firm may have a relationship with a funder or funders. Indeed, they themselves may have worked with a funder. Or perhaps the funder is run by a former law partner of the arbitrator. No formal process currently exists for identifying these conflicts and excluding arbitrators on that basis. And conflicts may be of such proximity / remoteness as to pass muster under arbitrators’ ethical duties but nonetheless be troublesome to parties.

These hidden potential conflicts are less likely to remain concealed in the model contract context, because the arbitration would involve the funding contract itself and thus the fact of funding and the identity of the funder are known to the arbitrators. Nonetheless that doesn’t mean the arbitration faces no such conflict risks. Again, the arbitrator may believe the conflict too remote to disclose, or perhaps secondary funders or co-investors, not named as parties, create such conflicts. Unless the funding contract elects courts to resolve disputes, plaintiffs need to be aware of and investigate the conflicts rather than risk having the arbitrator fail to disclose.

The conflicts of interest issues are described in full by Marc J. Goldstein here.

Another major downside, which could work against either the funder or the plaintiff, is the significant difference in procedure. By going to arbitration, the parties waive a jury trial and yield their right to extensive discovery, as well as forgoing the other protections and leverage created by the rules of American litigation.

From the public policy perspective, transparency and the reputation markets that develop in its wake are self-evidently good. In addition, there is simply something intuitively sensible in having the parties that invoke the judicial system for their funded case presenting themselves to the same system to resolve disputes about the funding.

But transparency is also to the benefit of the parties to the litigation funding agreement. From the perspective of repeat players, whether plaintiff or funder–courts offer a significant advantage: transparency and precedent. Although it is more typical to think of plaintiffs as one-off players who use financing to access justice not otherwise available, litigation financing can also be used by corporate plaintiffs for balance sheet reasons, that is, simply a type of corporate finance. Those plaintiffs are the kinds of repeat players who could be advantaged by the development of precedent and the transparency that comes with the court system. Transparency, in particular, facilitates the emergence of reputation markets and these can help repeat-play plaintiffs to better vet potential funders.

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