International arbitration at a glance
Investors, project financers, and parties from different jurisdictions that execute contracts are now insisting on a Dispute Resolution (DR) clause that provides for Alternative Dispute Resolution (ADR) mechanisms for the resolution of any disputes that arise. The specific ADR mechanism of preference is arbitration. Arbitration is especially preferred because of its bedrock of party autonomy and finality, with limited grounds for setting aside an arbitral award and even more stringent conditions for lodging an appeal.
The notable international arbitration centers include the London Court of International Arbitration (LCIA), the International Centre for Settlement of Investment Disputes (ICSID) under the auspices of the World Bank) and the International Chamber of Commerce (ICC) as well as the Singapore International Arbitration Centre (SIAC) and Hong Kong International Arbitration Centre (HKIAC).
In Uganda, the Arbitration and Conciliation Act, Cap 5 (Laws of Uganda 2024) domesticated the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (“New York Convention”).1 It also domesticated the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States 1966 (“ICSID Convention”).2 Having ratified and subsequently domesticated both Conventions,3 Uganda is thus obliged to enforce awards presented to its courts for enforcement by States that have adopted both conventions, in accordance with the relevant terms of the respective conventions.
Challenges of international arbitration
The key challenge faced in international arbitration is the issue of the expenses associated with arbitration. Many parties argue that the purpose of international arbitration will not be achieved because of the expenses involved, (which in some instances are two-fold), the fees levied by the arbitral tribunal, and the fees levied by an appointing authority (in instances where the appointment is institutional).
The other major challenge is the issue of the impartiality of the arbitral tribunal, especially considering the nature of an arbitral award i.e. final and binding. Cognizant of this issue, the International Bar Association released a 2024 revised edition of its Guidelines on Conflicts of Interest in International Arbitration. The Four Tiers of Disclosure4 were expounded to cater for various scenarios which could amount to bias and those that are not considered as bias at all. The key test for all these tiers is whether a reasonable person, called upon to determine the existence of bias, would give rise to justifiable doubts of the arbitrator’s impartiality, basing on the facts as presented to them. It is to be noted that the bias must be so apparent that it is reasonably impossible for the Arbitrator/Tribunal not to be conflicted.
Another core issue, related to impartiality, is the issue of high likelihood of fraud in arbitral matters. Because of the nature of the privacy of arbitral proceedings, hence their limited scrutiny, fraud perpetrated by the parties, their counsel and, in some instances, the arbitral tribunal is a fundamental challenge. More recently, the integrity of arbitration as the most viable path for alternative resolution of disputes was shaken by the PID Decision5 wherein the High Court of Justice (The Business and Property Courts of England & Wales) found that the entire arbitral process was marred by the Respondent and its officials and agents.
However, notwithstanding the challenges enumerated above, arbitration is still a growingly preferred mode for resolution of disputes for reasons discussed. Finally, the last challenge with arbitration is the issue of costs. It is in this premise that an increasingly popular arrangement is gradually taking root in the Arbitration community known as “Third Party Funding”.
Third party funding expounded
Simply put, Third Party Funding is an arrangement where an entity/person that is not party to an arbitral dispute agrees to offer financial support to one of the parties to the dispute. This is usually in exchange for consideration like shares (in the event that one of the parties is a corporate person) or even a percentage of the proceeds from the award, should the arbitration be determined in favour of the funded.6
Third Party Funding is not a new concept in the adversarial mode of resolution of disputes having commenced, albeit with much pessimism, during the Greek and Roman trials. In as much as it has faced controversy, especially because of the danger of compromise of the process, it is still a wide spread and acceptable practice in many jurisdictions worldwide.
Opposition of Third Party Funding is largely premised on the torts of champerty and maintenance respectively which prohibit a third party with no interest in a matter (or contract or dispute) from reaping future proceeds arising from the matter (or contract or dispute). In Re Trepca Mines Ltd.7 Lord Denning MR, in explaining the tortious nature of champerty said:
“The reason why the common law condemns champerty is because of the abuses to which it may give rise. The common law fears that the champertous maintainer might be tempted, for his own personal gain, to inflame the damages, to suppress evidence, or even to suborn witnesses.”
The Halsbury’s Laws of England, vol. 9, define maintenance as the giving of assistance or encouragement to one of the parties to litigation by a person who has neither an interest in litigation nor any other motive recognized by the law as justifying his interference.
As explained in Re Trepca Mines, the main challenge with champertous or maintenance arrangement is the high likelihood of interference in the contractual or dispute resolution process by the funder owing to the benefit that they hope to reap in the future.
However, the proponents of Third Party Funding argue that it enables persons who would otherwise not have been able to access justice to access the same and rather than throwing the baby out with the bath water, they propose that guidelines be put in place to regulate third party arrangement. It is to this end that certain states and arbitral institutions have either amended their legislation or provided guidelines to regulate Third Party Funding.
Considerations made by States and arbitral institutions
Among the States that have notably legalized third party funding is Nigeria.8 Section 61 of the Arbitration and Mediation Act, 2023 excludes the application of the torts of maintenance and champerty respectively to third party funding of arbitral proceedings conducted in any Court in Nigeria and also to arbitral proceedings where Nigeria is the Seat of the Arbitration. The party relying on the third party funding is however mandated to formally disclose the same to the tribunal and all other parties (section 62) at the earliest opportunity.
The other notable State is Singapore (a major preference for international arbitrations) which enacted the Civil Law (Third Party Funding) Regulations 2017,9 that provide for a detailed regulation of third party funders. On its part, Hong Kong also amended its legislation and in addition enacted a code of practice to specifically guide Third Party Funding.10
The common threads running across the legislation in respect of all these states is the limitation or in some cases total exclusion of the state laws relating to champerty and Maintenance11 as well as notification to all parties to the arbitration in respect of the third party funding. All these threads are safeguards to an easily abusable arrangement.
Recognizing the growing need to recognize Third Party Funding, ICC incorporated it in the 2021 Modification to the ICC Rules. Article 11(7) obliges parties relying on Third Party Funding to promptly inform the ICC Secretariat, the ICC Tribunal, and any other party of the existence and identity of any non-party which has entered into “an arrangement for the funding of claims or defenses and under which it has an economic interest in the outcome of the arbitration.” On the part of ICSID, rule 14 of the 2022 Revision to the ICSID Rules provides for full written disclosure of any Third Party Funder to the Secretary General as soon as is reasonably practical. Further, General Standard 7 of the IBA Guidelines makes it mandatory to disclose all external interests that a party has, including any third party funding. The rationale for this is to ensure that anything that may bias the arbitral tribunal/proceedings should be disclosed before commencement of the arbitration.
The position of Uganda in respect to champerty and maintenance
Champerty and maintenance are expressly prohibited under the laws of Uganda; specifically in relation to advocates agreeing to a percentage of fees contingent to successful conclusion of a court case.12 In the case of Byenkya-Kihika & Co. Advocates v Fang Min,13 Mubiru J, whilst acknowledging the importance of contingency fee agreements in enabling indigent persons obtain justice, nevertheless stressed that such an arrangement was, notwithstanding its numerous advantages, still prohibited.
In an attempt to regulate champertous agreements, the Advocates Act, Cap 295 (Laws of Uganda 2024) provides that the same can be enforced only where the agreements leading to the contingency fees are in respect to a gross sum or salary, are in writing, signed by the person to be bound and contain a certificate signed by a notary public to the effect that the person bound by the agreement had explained to him or her the nature of the agreement and appeared to understand the agreement. The parties are further required to send a copy of the said certificate to the Secretary of the Law Council (the body that regulates Advocates in Uganda).14
In respect to champertous agreements that are not between advocate and client, statutory legislation is generally silent save for the Contracts Act, Cap 284 (Laws of Uganda 2024) which renders unenforceable contracts of an illegal nature or that are contrary to public policy.15 The only exception is where the same was executed in utmost good faith with no knowledge of the illegal nature of the contract.16
Is Uganda ready to transition to Third Party Funding?
In a country whose GDP is approximately 5.3%17 affordability to justice remains next to impossible. In arbitration matters, the impossibility is more glaring given the expenses involved.
It is because of this that legislative draftspersons needs to urgently consider the advantages which currently outweigh all the risks involved with Third Party Funding. This can be done, for example, by establishing a select technical committee that shall benchmark on the progress made by States that have legalized third party funding and put in place the necessary regulatory regime. These include a detailed “Know Your Third Party Funder” checklist which will eliminate or reduce Third Party Funders that are on anti-terrorism/anti money laundering watch-lists and also a detailed guide as to the requirements that all Third Party Funders should meet including full disclosure by the Funded Party.
Further, the Arbitration and Conciliation Act, Cap 5 (Laws of Uganda 2024) would have to be amended to expressly provide for Third Party Funding not only for international but also for domestic arbitrations; explicitly excluding any manner of illegality of a tortious nature save for instances where there is present an illegality or an agreement totally contrary to any manner of Public Policy.
Legislating Third Party Funding shall very critically require an amendment to the Existing Laws that totally prohibit which are the Advocates Act, the Contracts Act and the Advocates (Professional Conduct) Regulations as discussed.
Yet another amendment would be to the Anti Money Laundering Act Cap 118 (Laws of Uganda 2024) where specific requirements are developed in respect to persons that wish to be recognized as Third Party Funders. This is most especially important considering that Uganda, in taking significant steps, finally exited the Financial Action Task Force (FATF) Grey List on February 23, 2024. Key among these significant steps taken was an amendment in the years 2022 and 2023 laws relating to companies, partnerships, trusts and co-operative societies in Uganda which now provide for mandatory filing of information relating to all beneficial owners in an entity. Most recently, more stringent compliance measures in respect to beneficial ownership compliance were introduced by amendments to the several regulations which are: Companies (Beneficial Owners) (Amendment) Regulations 2024, Partnership (Beneficial Owners) (Amendment) Regulations 2024, Trustees Incorporation (Beneficial Owners) (Amendment) Regulations 2024 and the Cooperative Societies (Beneficial Owners) (Amendment) Regulations 2024.
With all the amendments and structural compliance requirements in force, legalization of Third Party Funding shall go a long way in promoting not only international but also domestic arbitration in Uganda, a country that is slowly getting to appreciate the reality that arbitration is the quickest and cheapest mode of resolving disputes.
Ann Namara Musinguzi; MCIArb
Managing Partner, Namara Musinguzi & Co. Advocates
info@namaramusinguziadvocates.com
1 Part 111 of the Arbitration and Conciliation Act Cap 5.
2 Part IV of the Arbitration and Conciliation Act Cap 5.
3 Uganda adopted the New York Convention on 12th February 1992 and the ICSID Convention on 14th October 1966.
4 These tiers are; the Non-waivable red list, waivable red list, orange list and green list.
5 The Federal Republic of Nigeria v Process & Industrial Developments Limited [2023] EWHC 2638 (Comm).
6 In the PID Case, there was presence of third party Founders whose consideration for funding the enforcement of the Final Award was acquisition of shares in the Respondent.
7 [1962] 3 ALL ER 351.
8 Nigeria’s Arbitration and Mediation Act 2023 repealed the Arbitration & Conciliation Act Cap A18.
9 These Regulations were amended by the Civil Law (Third Party Funding) (Amendment) Regulations 2021 to provide for Third Party Funding in Domestic Arbitrations.
10 Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance, 2017 which came into force on February 1, 2019. Further in December 2018, pursuant to Section 98P of the Amended Ordinance, a detailed code of practice was issued to guide third party funding arrangements.
11 The explanatory note to the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance 2017 explains the reason for the amendment as thus: “An Ordinance to amend the Arbitration Ordinance and the Mediation Ordinance to ensure that third party funding of arbitration and mediation is not prohibited by the common law doctrines of maintenance and champerty; and to provide for related measures and safeguards.” Section 5A(1) of the Singapore Civil Law Act 2020(Revised Edition) completely abolishes the torts of champerty and maintenance save for instances of illegality and contract being contrary to public policy.
12 Section 55(1) of the Advocates Act Cap 295, reg. 26 of the Advocates (Professional Conduct) Regulations SI 267-2.
13 Miscellaneous Cause No. 0052/2022 (Commercial Division).
14 Sections 48, 50 and 51 of the Advocates Act Cap 295 further expounded in Shell(U) Ltd & 9 Others V Muwema & Mugerwa Advocates & Solicitors & Uganda Revenue Authority SCCA No. 2 of 2013.
15 Section 19(1) of the Contracts Act Cap 284 and the case of Elizabeth Kobusingye V Annet Zimbiha Court of Appeal Civil Appeal No. 69/2019.
16 Section 19(2) of the Contracts Act Cap 284.
