Overcoming the Perils of Disclosing Privileged Information to Funders and Disclosure in International Arbitration

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I agree with the authors’ assertion that “New York judges are extremely unlikely to find a common legal interest between potential funders and plaintiffs or between investors in litigation-backed securities and plaintiffs.”  The common interest exception to waiver of the attorney client privilege typically extends to information disclosed to co-parties.  A potential funder has not developed a significant enough interest in the outcome of the underlying claim to enjoy the same protection from waiver as a co-party.  While a funder under contract with a funded party is normally not a co-party, the funder may create its own interest in the outcome (i.e. the Proceeds or lack thereof) by buying Litigation Proceed Rights.  This strengthens the argument in favor of extending the common interest exception to a funder under contract.  Taking this one step further, the authors view litigation funders as real parties in interest, in which case the common interest exception would indeed apply to the co-party funder.  However, funders may be hesitant to expose themselves to the potential underlying liability that becoming a party entails (e.g. counterclaims, costs orders, discovery orders, etc.).

By contrast, in international arbitration, the privilege rules are much less clear.  Arbitration is a creature of agreement, and most potential parties do not to state in the contract what privilege rules will apply in the event of a dispute.  Furthermore, most arbitral rules are intentionally silent on issues of evidentiary privileges in order to allow the parties and arbitrators to determine which privileges will apply.  We may then have a clash of legal cultures between the various ethical requirements and prohibitions of the parties’ home jurisdictions, the jurisdictions where the attorneys for both sides are licensed, the home jurisdiction(s) of the arbitrator(s), and the procedural seat of arbitration.

However, one advantage of international arbitration is that – at least on the commercial side – the parties can agree that the proceedings will remain confidential and they can agree with the tribunal on which evidentiary privileges will be honored.  Furthermore, there is no such thing as discovery in international arbitration.  Documents may be disclosed, but generally only through targeted requests for information that precisely identify the documents or information sought with sufficient specificity as to be granted by the tribunal.  Thus, if the parties can at least agree on which privilege rules will apply, then a funded party in an arbitration will likely be shielded from a general discovery request for “everything the funded party disclosed to its litigation funder,” which would likely be denied by the tribunal.  Instead, the requesting party would likely have to  describe and identify sufficiently the documents or information sought.  In order to request the right document in the right manner, the requesting party would have to know what documents and information the funded party disclosed to its litigation funder.  Furthermore, in order to take advantage of the possible waiver of the attorney-client privilege, the requesting party would have to know (and possibly prove) that the funded party disclosed that particular requested piece of information to its litigation funder.  In light of these procedural hurdles to disclosure, arbitration has – in practice – a much higher standard for waiver of an evidentiary privilege than traditional US litigation.  Thus, funders and funded parties would likely enjoy greater protection of information shared between them in arbitration than in litigation.

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