In a Minute Resolution dated November 22, 2017 in I.M. Bongar & Co., Inc. v. Alcatel Phils., Inc. (available at www.pdrci.org), the Supreme Court affirmed the decisions of the Regional Trial Court (“RTC”) and the Court of Appeals on appeal in a construction arbitration case, even if the RTC did not have jurisdiction over the original action, “to prevent the miscarriage of justice in its truest sense.”
The case arose from a complaint for the unpaid balance of the subcontract price filed by Alcatel Philippines, Inc. (“Alcatel”) against I.M. Bongar & Company, Inc. (“IMBCI”) and Stronghold Insurance Company, Inc. with the trial court, despite the stipulation in the subcontract to refer any dispute between the parties to arbitration by three arbitrators under the CIAC Rules. The subcontract required IMBCI to install aerial and conduit cables for the Philippine Long Distance Telephone Company Fast Track Project in the Metro Manila area.
The Supreme Court applied its previous rulings that the arbitration clause in a construction contract, such as the subcontract, “is considered by law as an agreement by the parties to submit existing or future controversies between them to CIAC jurisdiction, without any qualification or condition precedent.” However, considering that the case had been pending for more than 20 years, it said that to require Alcatel to file a claim in arbitration with the CIAC “would no longer be an act of justice but oppression.” It then decided the appeal on the merits and ruled in favor of Alcatel, after finding that IMBCI failed to fulfill its obligations in accordance with a construction schedule that was part of the subcontract, among others.
Third-party funding, while not common in the Philippines, is not a new concept. Although previously accepted only in certain jurisdictions such as the United Kingdom and Australia, thirdparty funding has grown exponentially over the past decade and is now recognized as a fast growing trend.
As observed by the American Bar Association Commission on Ethics 20/20, third-party funding activities “have become increasingly prominent in recent years, leading to significant attention in the legal and popular press, scrutiny by the state bar ethics committees, and scholarly commentary.” More, third-party funding is no longer confined to court litigation but has expanded to international arbitration as well.
What is third-party funding? A simple online search yields several definitions and different business models. In a nutshell, third-party funding is an agreement where a person not party to a dispute (third-party funder) funds the litigation and/or arbitration expenses of a party to the dispute (funded party) in exchange for a share in the award if the funded party is successful. The agreement is usually on a “non-recourse” basis such that the third-party funder bears all the risks of not getting anything in return, in case the claim of the party funded is unsuccessful.
The usual benefits of third-party funding are: (1) it gives parties with meritorious claims access to justice in the face of rising litigation costs; and (2) the involvement of a third-party funder with commercial expertise may mean that the litigation is carried out more proficiently, with more consideration of the possible risks and benefits of the litigation.
Traditionally, funding by a non-party to a dispute is prohibited as it is considered a form of maintenance and champerty— which are criminal offenses in common law jurisdictions. “Maintenance” is defined as “an officious intermeddling in a lawsuit by a non-party by maintaining, supporting or assisting either party, with money or otherwise, to prosecute or defend while “champerty” is “a bargain between a stranger and a party to a lawsuit by which the stranger pursues the party’s claim in consideration of part of any judgment proceeds .
Although several common law jurisdictions have declassified maintenance and champerty as criminal offenses, saving provisions were included in the laws that were later used in courts to question the propriety of third-party funding.
For instance, while the Criminal Law Act 1967 of England and Wales abolished, among others, maintenance and champerty as criminal offenses, “[a] saving provision gave them a continuing half-life as its provisions did not affect ‘any rule of law as to the cases in which a contract is to be treated as contrary to public policy or otherwise illegal’.” New South Wales in Australia also declassified maintenance and champerty as criminal offenses in the Maintenance, Champerty and Barratry Abolition Act 1993 7 but a saving provision similar to the Criminal Law Act 1967 was included. Section 6 provides that the Act “does not affect any rule of law as to the cases in which a contract is to be treated as contrary to public policy or as otherwise illegal.”
However, recent legal developments in common law jurisdictions have removed such cloud.
In Australia, courts have confirmed that third-party funding does not contravene public policy for states that have abolished maintenance and champerty as criminal offenses. In the 2006 landmark case of Campbells Cash and Carry Pty Limited v Fostif Pty Ltd., the High Court of Australia held that by abolishing the crimes of maintenance and champerty “any wider rule of public 10 policy…lost whatever narrow and insecure footing remained for such a rule.” 11 According to the High Court opinion: “The difficulties thought to inhere in the prosecution of an action which, if successful, would produce a large award of damages but which, to defend, would take a very long time and very large resources, is a problem that the courts confront in many different circumstances, not just when the named plaintiffs represent other or not just when named plaintiffs receive financial support from third party funders. The solution to that problem (if there is one) does not lie in treating actions financially supported by third parties differently from other actions. And if there is a particular aspect of the problem that is to be solved, in the first instance, through the procedures that are employed in that kind of action, it is not to be solved by identifying some general rule of public policy that a defendant may invoke to prevent determination of the claims that are made against the defendant.
In addition to court litigation in common law jurisdictions, international arbitration has also accepted third-party funding.
In Asia, Singapore and Hong Kong—the Asian hubs of international commercial arbitration and dispute resolution— recently made changes in their respective laws allowing or that will allow third-party funding.
Singapore, where third-party funding of disputes was previously prohibited, passed the Civil Law (Amendment) Act 2017 on 10 January 2017 abolishing the tort of maintenance and champerty and allowing qualified professional third-party funders to fund international arbitration.
In Hong Kong, the Legislative Council of Hong Kong passed on 14 June 2017 the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill 2016, which will allow third-party funding in international arbitration. Similar to other common law jurisdictions, Hong Kong also prohibited maintenance and champerty.
In the Philippine, however, there is still doubt as to the validity of third-party funding. Third-party funding is not expressly prohibited but is also not expressly allowed. Unfortunately, Philippine jurisprudence provides minimal guidance. While the Supreme Court is consistent in ruling that “[i]n this jurisdiction, we maintain the rules on champerty, as adopted from American decisions, for public policy considerations,” such ruling is limited to agreements between lawyers and their clients. The rationale for the prohibition is that “[l]awyers who obtain an interest in the subject-matter of litigation create a conflict-ofinterest situation with their clients and thereby directly violate the fiduciar y duties they owe their clients,” 14 which, arguably, does not apply to third-party funders.
Due to the growing acceptance of third-party funding in international arbitration, it may be the right time for the Philippines to consider moving in the same direction as Singapore and Hong Kong. This is particularly relevant in enforcement of international commercial arbitral awards in the Philippines considering that under the Special Rules of Court on Alternative Dispute Resolution (Special ADR Rules), a Philippine court may set aside or refuse enforcement of an arbitral award if it finds, among others, that “the recognition or enforcement of the award would be contrary to public policy