Imagine you're a small business owner. You've entered a contract with a larger company and unfortunately, they've breached the agreement, causing significant losses to you. The contract includes an arbitration clause, forcing both parties to resolve disputes through arbitration.
While arbitration offers benefits like confidentiality, speed and the ability to choose expert arbitrators, it also involves substantial costs.
Legal fees, arbitrator charges and other expenses can accumulate quickly, making the pursuit of justice seem financially daunting.
This scenario is common for many individuals and businesses in Kenya. However, there's a potential solution that could level the playing field: third-party funding in arbitration.
Third-party funding involves an external party, with no prior connection to the dispute, providing financial support to a claimant in arbitration. In return, the funder receives a portion of the awarded amount if the case is successful.
This arrangement allows parties without sufficient resources to pursue claims without bearing the financial risk. Essentially, it enables access to justice for those who might otherwise be priced out of the arbitration process.
Consider a Kenyan coffee cooperative that has entered into an export agreement with an international buyer. When the buyer fails to pay for shipments, the cooperative faces the prospect of costly arbitration proceedings. Without third-party funding, they might abandon their claim due to prohibitive costs.
With funding, they could pursue their case and potentially recover their losses, protecting the livelihoods of hundreds of small-scale farmers.
Globally, this model has gained significant traction. In countries like the United Kingdom and Australia, legal reforms have embraced it, leading to increased access to justice. Asian hubs such as Singapore and Hong Kong have implemented targeted legislative changes to regulate and promote third-party funding, enhancing their appeal as arbitration centres.
By adopting this model, Kenya could position itself as the premier arbitration hub in East Africa, outpacing competing centres while attracting international disputes.
In Kenya, the legal stance on third-party funding, however, remains uncertain. Section 46(c) of the Advocates Act (Cap. 16) specifically invalidates "any agreement by which an advocate... stipulates for payment only in the event of success in such suit or proceeding."
While this provision directly targets contingency fee arrangements between clients and their advocates, not third-party funding arrangements, it reflects Kenya's historical caution toward outcome-contingent financing of disputes. Some legal scholars argue this provision's underlying principle might extend to third-party funding arrangements in arbitration.
The Law Society of Kenya's Code of Standards of Professional Practice and Ethical Conduct 2016 similarly discourages arrangements that might commercialise disputes. Consequently, Kenyan parties in arbitration typically fund their legal costs independently or seek assistance from non-profit organisations offering pro bono services.
Given the rising costs associated with initiating and sustaining arbitration proceedings, there's a growing argument that Kenya is ready to recognise third-party funding.
This would require amending the Arbitration Act to explicitly permit and regulate funding arrangements while ensuring these arrangements don't conflict with the professional ethics principles underlying Section 46. Clear distinctions between prohibited advocate-client financial arrangements and permitted third-party funding would need to be established.
Critics argue that this model could erode the foundational principles of the dispute resolution process, transforming it from a justice-seeking mechanism into a commercial enterprise. There's concern that allowing arbitration financing might prioritise the monetisation of claims over the pursuit of fair outcomes.
In the Kenyan context, this raises concerns about vulnerable parties being exploited through predatory funding arrangements, especially given the limited financial literacy in some sectors.
Additionally, some fear that third-party funding could lead to an increase in unmeritorious claims and potential conflicts of interest.
However, these concerns can be mitigated through robust regulation. A comprehensive Kenyan framework for this model should include mandatory disclosure of funding arrangements to arbitrators, caps on funder returns, minimum capital requirements for funders and specific provisions preventing funders from controlling case strategy.
Arbitral institutions could establish a register of approved funders with a code of conduct tailored to Kenyan realities.
For small and medium enterprises (SMEs), third-party funding could be particularly beneficial. Often, SMEs hesitate to pursue valid claims due to financial constraints. With this system, they could engage in arbitration without the fear of crippling costs, promoting fairness and encouraging ethical business practices.
Embracing third-party funding in Kenya represents an opportunity to democratise access to arbitration. By removing financial barriers and establishing appropriate regulatory safeguards, Kenya can enhance its dispute resolution landscape, strengthen its economic competitiveness and ensure that arbitration becomes a viable option for all parties with legitimate claims, not just those with deep pockets.
The writer is a Partner and Head of Dispute Resolution, Maina & Onsare Partners Advocates
