The Investment Treaty Arbitration Review: Evolution of the Third-Party Funder

I Introduction

Third-party funding, also referred to as legal finance or litigation finance, is now an integral part of the landscape of international arbitration. The number of funded arbitrations reported by law firms has continued to increase year on year. According to a recent survey by Global Arbitration Review, law firms reported 249 funded arbitrations, a significant increase on the 176 in the previous year.2

This increase is a result of a combination of increased awareness about third-party funding and a shift in the type of parties that use it. Historically, parties primarily turned to third-party funding when they did not have the funds to pursue their own claims. However, third-party funding is increasingly being used by major corporates who see it as a means of diversifying risk, keeping legal spend off balance sheet and monetising claims that otherwise might never be pursued.

Several international arbitral institutions and international organisations now expressly recognise third-party funding in their rules, and numerous treaty-based bodies have also addressed it as part of discussions about wider reforms in the investor-state dispute settlement (ISDS) system and the conduct of those disputes.

These developments put third-party funding on a more concrete footing in international dispute settlement, both in international commercial arbitration and ISDS. In general terms, investment treaty claims remain attractive to funders owing to the combination of (1) the potential for large rewards as compared to the investment in legal fees and (2) the relatively low enforcement risk. With increased awareness of the financial benefits of keeping legal spend off balance sheet, it is likely that third-party funding will increase in popularity with ISDS claimants in the coming years.

Conversely, respondent states regard third-party funding as causing a proliferation of unmeritorious claims. As further explored below, despite the lack of empirical evidence that these concerns are well-founded, initiatives such as the United Nations Commission on International Trade Law (UNCITRAL) Working Group III leave open the possibility that there will be more restrictive regulation of third-party funding in ISDS in the future.

II Third-party funding financial arrangements

i Types of third-party funding arrangements

In the simplest terms, a third-party funder is any person or entity who provides financial support to a party involved in an actual or potential dispute, where that funder has no control over the management of the case, with a view to receiving a return on that original financial investment.3

The International Bar Association Guidelines on Conflicts of Interest in International Arbitration state that 'the term “third-party funder” refer[s] to any person or entity that is contributing funds, or other material support, to the prosecution or defence of the case and that has a direct economic interest in, or a duty to indemnify a party, for the award to be rendered in arbitration'.4

The changes in the use of third-party funding from parties with insufficient funds to pursue claims, to the adoption of the funding model by parties who wish to make more nuanced decisions on how to manage the legal and financial risks of potential disputes, has led to innovations in the types and the complexity of third-party funding models offered to parties.

Capital investment

The simplest form of funding is capital investment in a single case. A third-party funder will provide a certain level of invested funds, on the condition that if the case is successful, the funder will receive the repayment of those funds plus a multiplier of that amount or a percentage of the overall realised proceeds from the win.5 Depending on the precise arrangement between claimant and funder, the funds provided may be used for purposes other than the financing of the arbitration itself, including to maintain the claimant company during the arbitration proceedings or to repay debts.6

This type of financial arrangement can be used to fund any or all stages of an arbitration from the jurisdictional phase through to the merits or enforcement stages of the award. The investment by the funder is made on a non-recourse basis, meaning the claimant is not obliged to repay the funds if they are unsuccessful in the arbitration.

Portfolio-based financing

Increasingly, parties, funders and law firms are financing multiple claims through portfolio-based funding either by financing the law firm directly or by funding multiple claims for the same corporate. This spreads risk across several claims and enables third-party funding to be provided for proceedings with no substantial upside for the funder (for example, financing the legal spend necessary for a regulatory investigation).7

For example, if a business had multiple claims in different sectors or jurisdictions then the funder would create a funding model that spreads the risk across the different claims. Portfolio-based funding can thus be particularly useful where the company has numerous ongoing or potential disputes or regularly engages in dispute resolution proceedings.

Monetisation of an award

Even where a claimant has funded an arbitration itself, it can be beneficial to obtain third-party funding at the enforcement stage. This enables the claimant to fully or partially monetise the award immediately, without engaging with the risks of enforcement or set-aside proceedings and without needing to reach a settlement with the respondent. In return for a discount to the face value of the award, the claimant can monetise or sell the award to a funder who then takes the associated enforcement risks.8

ii Terms of third-party funding arrangements

The first step in the negotiations between a funder and a party seeking funding is to sign a non-disclosure agreement (NDA), to ensure that common interest privilege is maintained. In some jurisdictions, an NDA also ensures that there is no waiver of attorney–client privilege or the attorney work-product doctrine.9 First, the claimant will make a business case to the funder presenting the merits of its claims, potential damages and why it should be funded.

Factors that will affect the way in which the financing is offered include issues such as:

  1. the complexity of the claim;
  2. the level of funding required;
  3. the risk involved, including the realistic prospect of a positive award;
  4. the enforcement prospects for realising that award; and
  5. the time it will take to receive the award.

The funder will also consider whether there are any other entities that have a priority interest in the proceeds of the award.

The funder then carries out its own due diligence on the case, assessing the merits, damages and enforcement risk prior to providing indicative terms and entering into an exclusivity arrangement. Once due diligence has been carried out and a decision to fund has been reached, the parties will enter into a funding agreement alongside a waterfall priorities agreement and, where necessary, a security over future proceeds. The funding agreement sets out the fee structure, addresses how the claimants should manage approaches for settlement from the other side, and specifies the very few circumstances and conditions in which the funder can withdraw from the agreement.10

III Evolution of regulation on third-party funding

i National Regulation of third-party funding

The third-party funding of litigation and arbitration was historically prohibited under the common law doctrines of maintenance and champerty. English law refused to recognise these types of legal arrangements, because of public policy concerns that the involvement of interested third parties would lead to frivolous, manufactured claims or inflate damages.11

England and Wales abolished the crimes and torts of maintenance and champerty in 1967 and a more supportive and flexible approach to this type of litigation funding gradually emerged.12 That relaxation of the approach to maintenance and champerty has been followed in recent years by jurisdictions such as Hong Kong and Singapore, which have put in place specific legislation to regulate third-party funding.13 The new legislative frameworks introduced in these important dispute resolution hubs include disclosure requirements for details about the funder and regulation on the content of funding agreements.14

In the context of ISDS, regulation of third-party funding is increasingly occurring at the international level, including in recently adopted international treaties, amendments to the International Centre for Settlement of Investment Disputes (ICSID) Arbitral Rules and through discussions on potential broader reform of the ISDS system with the UNCITRAL Working Group, to reach an international consensus among states on these issues.

ii International regulation of third-party funding in ISDS

Provisions in recently adopted treaties generally require that disclosure of third-party funding is made at the time of the submission of the claim, or immediately after the funding is received or a funding agreement is concluded.15 For example, Article 8.26 of the European Union–Canada Comprehensive Economic and Trade Agreement provides that where a disputing party benefits from third-party funding, it must disclose to the other disputing party and the tribunal the name and address of the third-party funder at the time of the submission of a claim or as soon as the funding agreement is made.16

Some provisions in recent investment treaties also provide that tribunals shall take third-party funding into consideration when deciding to order security for costs.17

Additionally, the Member States of ICSID recently approved a comprehensive set of amendments to the ICSID rules for arbitration and conciliation for resolving disputes between foreign investors and states.18 Prepared in consultation with stakeholders since November 2016, six working papers were issued, the last one in November 2021. The amended rules are due to come into effect on 1 July 2022.

The new rules to be approved include certain mandatory disclosure requirements for third-party funding and will enable tribunals to order disclosure of further information from the funding arrangement.

iii Possible future regulation: UNCITRAL Working Group III on ISDS reform

The UNCITRAL Working Group III (the Working Group) is working on a comprehensive reform of the existing ISDS regime, focusing on government-led reform to the system while receiving broad input from interested stakeholders. If the proposals of the Working Group are ultimately implemented by states on a multilateral level, the reforms may become applicable to more than 3,000 existing international investment agreements.

In this context, the Working Group has addressed concerns about the use of third-party funding in the ISDS system, which has significantly increased in recent years.19 The Working Group's draft provisions indicate that the scope of regulation on third-party funding in this potential UNCITRAL text would be much more comprehensive than the current provisions contained in the Amended ICSID Rules or any recently adopted international treaties.

The Working Group has proposed definitions of the key third-party funding terms in the context of ISDS and potential regulation models for the use of third-party funding in ISDS and its potential effect on ISDS claims.20

Proposed third-party funding regulation models for ISDS

The Working Group has put forward various models for regulating third-party funding and considered several factors, including the need to ensure the integrity of proceedings and to ensure the continued availability of access to justice for claimants with insufficient financial resources.

The Working Group put forward a prohibition model that would prohibit third-party funding in ISDS, to address states' concerns that third-party funding aggravates the structural imbalance in ISDS, increases the number of ISDS cases, frivolous claims and the amount of damages. The proposals under this model include:

  1. preventing the submission of claims if the claimant has entered into a third-party funding arrangement;21
  2. that the consent of the respondent22 for a claim against it would require that the claimant has not entered into an agreement on, or received, third-party funding;23 and
  3. denial of the benefits of the protection of the investment treaty to an investor who raises a claim if that investor has entered into an agreement or received third-party funding.

The effect of a party's failure to comply with these requirements is likely to result in the claim being dismissed or a finding that the tribunal lacked jurisdiction over the claim.

The Working Group also proposes an access to justice model, a sustainable development model and a restriction list model. The access to justice model would require the claimant to show that it is pursuing its claim in good faith and would not be able to bring it without the use of third-party funding.24 Under the sustainable development model, a claimant would be allowed to use third-party funding if its investment met certain sustainable development criteria of the respondent state.25 The restriction list model would only exclude third-party funding in certain specific circumstances, which include whether the funding is provided on a non-recourse basis for a success fee or other forms of monetary reimbursement that are dependent on the outcome of the arbitration; where the expected return for the funder exceeds a reasonable amount; or where the cases the funder funds against the respondent states exceeds a reasonable number.26

Although the legislative work completed by UNCITRAL is based on consensus, the adoption of an instrument or text is not binding on states. The implementation of the reforms, including the possible use of a multilateral instrument, is still under consideration between states.27 The extent to which the Working Group proposals will result in wholesale reform of ISDS thus remains unclear.

IV Scope of disclosure of third-party funding in international arbitration

Pervasive concerns regarding third-party funding include (1) the management of conflicts between third-party funders and arbitrators, and (2) the ability of successful respondent states to collect on their adverse costs awards if faced with an impecunious claimant and a non-party funder who is not liable for adverse cost awards.

There is a growing consensus that the disclosure of the identity of the funder is important in proceedings to safeguard against conflicts with arbitrators.28 Recent revisions to the rules of arbitral institutions have favoured a mandatory disclosure requirement of the use of third-party funding and the identity of the funder, to mitigate against the risk of conflicts with arbitrators.

There is currently no consensus on whether disclosure of the funding agreement itself is required, but the developing trend appears to be against this. Recent case law suggests that tribunals will typically be willing to order the disclosure of funder identity but resistant to more far-reaching orders sought by respondent states in the absence of genuine concerns regarding security for costs.

i Arbitral institutions and international organisations

International Chamber of Commerce 2021 Arbitration Rules

The International Chamber of Commerce (ICC) 2021 Arbitration Rules provide for the mandatory disclosure of the identity of the funder if third-party funding is being used by a party to the arbitration. Article 11(7) provides that, to assist arbitrators in complying with their duties regarding conflicts, any party must inform the Secretariat, arbitral tribunal and other parties 'of the existence and identity of any non-party which has entered into an arrangement for the funding of claims or defences and under which it has an economic interest in the outcome of the arbitration'.29

Hong Kong International Arbitration Centre

Similarly, the Hong Kong International Arbitration Centre (HKIAC) has provided for mandatory third-party funding disclosure requirements. Article 44(1) of the HKIAC Rules provides that if a funding agreement is made, the funded party must communicate to all other parties, the arbitral tribunal and HKIAC, the fact that a funding agreement has been made and the identity of the third-party funder.30

Vienna International Arbitral Centre

The Vienna International Arbitral Centre (VIAC) Rules of Investment Arbitration and Mediation 2021 also provided for mandatory disclosure of the existence of third-party funding and the identity of the funder in the party's statement of claim, or answer to the statement of claim, or immediately on concluding a funding agreement.31

Article 13a(3) of the VIAC Rules further provides that the tribunal may order the disclosure of specific details of the 'third-party funding arrangement and/or the third-party funder's interest in the outcome of the proceedings, and/or whether or not the third-party funder has committed to undertake adverse costs liability'.32

Centre for Arbitration and Mediation of the Chamber of Commerce Brazil-Canada

The Centre for Arbitration and Mediation of the Chamber of Commerce Brazil-Canada (CAM-CCBC) recognises that the presence of a third-party funder can raise 'reasonable doubts as to the impartiality or independence of the arbitrators due to possible past or current relationship between the arbitrator and the third-party funder'.33 To avoid potential conflicts of interest, the CAM-CCBC recommends that parties report the existence of third-party funding to the institution as early as possible.34 Arbitrators will then be sufficiently informed to allow them to complete conflict checks and the information will also be shared with the other party.35

Amended ICSID Arbitration Rules

Revisions to the ICSID Rules require that a party must provide notice, disclosing the name and address of the third-party funder, when registering the request for arbitration or when concluding the third-party funding agreement after registration.36 This information will be transmitted to the arbitrators to prevent conflicts and ensure the independence and impartiality of the arbitrators.37 Rules 14(3) and 14(4) empower the tribunal to order the disclosure of further information regarding the funding agreement and the non-party providing the agreement, and the funding agreement and the non-party funder.38

During reforms to the ICSID Rules, two states had requested that the funding agreement be disclosed with the notice; however, this was not added by ICSID because the funding agreement 'may be privileged or confidential'. However, the amended Rule 14(4) does allow the tribunal to order disclosure if it is relevant in the circumstances of the case.39

ii Recent case law on funding disclosure

An examination of recent case law where tribunals considered respondent states' requests for the disclosure of details about funders demonstrates that tribunals are likely to order disclosure of the details of the funder but stop short of ordering disclosure of the terms contained in the funding agreement itself.

Bacilio Amorrortu v. The Republic of Peru

The respondent had requested the tribunal to order the claimant to (1) disclose the names of the funders with which the claimant had entered into an agreement, to confirm that the funding arrangement included provision for the payment of an adverse costs award and (2) provide copies of the relevant agreement, in particular the information concerning costs awards and information pertaining to what elements of the conduct, termination or settlement of the arbitration would require funder approval.40

The claimant agreed to disclose the name of the funder to the tribunal for conflict of interest purposes and also to the respondent, subject to a confidentiality undertaking. However, the claimant objected to the disclosure of the terms of the funding agreement because a claimant is not required to demonstrate sufficient financial standing to meet an adverse costs award for investor-state arbitration.41

The tribunal found that the identity of the funder should be disclosed on the basis that it be kept confidential, finding this sufficient to deal with the conflict of interest issue.42

On the security for costs concerns, the tribunal determined that no inference could be drawn that the claimant (a natural person suing in his own capacity) was at risk of not paying an adverse costs award. The tribunal recognised that there were many reasons why a claimant may use third-party funding, including risk management and the validation of the merits of the claims by an objective third party.43

Regarding the third-party funder's influence on the proceedings, the tribunal found that the respondent had not provided any reason for this concern other than the existence of a third-party funder arrangement. The tribunal found that the claimant was not required to establish that he is free to negotiate and terminate the arbitration as he sees fit.44

The tribunal also highlighted an important 'access to justice' issue.45 The tribunal stressed that there is no additional requirement on the claimant to prove that he has the financial capacity to meet any potential adverse costs award or that he is 'the master of his own litigation'. Rather, the burden was on the respondent to establish the need for special protective measures to be put in place. The tribunal found that there were no circumstances raised by the respondent to justify more disclosure in the case, aside from the simple fact that the claimant was using a third-party funding arrangement.46

The tribunal ordered the claimant to disclose the identity of the funder and rejected the respondent's other application for disclosure of the terms of the funding arrangement.47

South America Silver v. Bolivia

Bolivia requested the tribunal to order the claimant to disclose the identity of the funder, to safeguard the proceedings against conflicts,48 and the terms of the funding agreement. Bolivia argued that (1) the claimant did not have sufficient economic means to bear the costs and expenses of the arbitration and would not be able to reimburse the costs of Bolivia, and (2) there was no evidence that the funder was obliged to reimburse Bolivia's expenses and, therefore, it was necessary to disclose the details of the funding agreement.

The tribunal found that the existence of a third-party funding arrangement alone was not sufficient to grant a security for costs. For the purposes of transparency, the tribunal accepted Bolivia's request for disclosure of the name of South America Silver's funder.49

The tribunal rejected the request for disclosure of the terms of the financing agreement, given the rejection of the security for costs order based on the existence of a funding arrangement. Therefore, the tribunal found that it was not relevant under these circumstances to determine whether the third-party funder would be liable for an eventual costs award in favour of Bolivia.50

Muhammet Çap v. Turkmenistan

This case involved a rare decision by a tribunal to order the claimants to disclose details about a funding arrangement.51

Turkmenistan had requested disclosure in the proceedings on whether the claimants had entered into a third-party funding arrangement and, if so, what the terms of that arrangement were. The application was initially refused, as the tribunal was not persuaded there were sufficient reasons to make such an order.52

Turkmenistan later made another application on grounds for disclosure, including to ensure there were no conflicts with the arbitrators and because of concerns that the third-party funder may withdraw at any time and evade an adverse costs award.

The tribunal found that the claimants should disclose the names, details and terms of third-party funding,53 for reasons of transparency regarding arbitrator conflicts and because the respondent was making an application for security for costs. The tribunal was also sympathetic to the respondent's concern that the claimants would not meet the costs of the order and that the third-party funder may not be liable as a non-party to the arbitration, because in another ICSID case involving Turkmenistan as respondent, the order for costs had not been paid.54 The tribunal ordered the claimant to advise the respondent of the 'nature of the arrangements concluded with the third-party funder(s)', including 'whether and to what extent it/they will share in any successes that Claimants may achieve in this arbitration'.55

The claimants refused to produce the funding arrangement. Although Turkmenistan requested the French courts to compel the production of the funding arrangement, the French courts declined to do so.56

Guaracachi America v. Bolivia

Tribunals in other cases have not been persuaded that the disclosure of a funding agreement was required to ensure that there were no conflicts.

In this case, the respondent requested disclosure of the funding agreement to ensure that the agreement did not contain a provision that the funder would not bear any adverse costs, and to ensure that there was no conflict of interest in the arbitration regarding the identity of the funder.57

The tribunal refused disclosure because the respondent state failed to specify what the conflict of interest created by the funding agreement would be. The tribunal also found that 'the applicable provisions governing conflicts of interest in the present proceedings do not foresee the production of document by the parties but rather disclosure by the arbitrators upon becoming aware of circumstances that could create a conflict of interest'.58

iii Challenges with funding agreement disclosure

The potential disclosure of funding arrangements presents several concerns for the integrity of arbitral proceedings.

The disclosure of a funding agreement to all parties may potentially prejudice the funded party, thus placing the party at a disadvantage, and could disclose sensitive strategic information about the case. For example, the UNCITRAL Working Group proposes to potentially allow a tribunal to disclose the expected rate of return for the funder. This could lead to certain inferences being drawn about the relative strengths and weaknesses of the case; for example, the disclosure of the risk rating or rate of return agreed with the funder in the agreement may lead to certain biases being created. The parties would have to adopt stringent confidentiality measures to protect the sensitive strategic and commercial information contained within the agreement to ensure that the funded party was not placed at a disadvantage in the proceedings.

The Working Group also proposes to potentially disclose any rights of the funder to control or influence the management of the claim or proceedings, or to terminate the funding arrangement, which could prejudice the funded party in negotiations with the other side. It is important to highlight that most funding agreements expressly state that the funder has no ability or right to control, manage or influence the claim or settlement thereof.

As discussed above, numerous tribunals have found that disclosure of a funding agreement was not necessary or appropriate, including to safeguard against conflicts or to assess the funder's influence in settlement negotiations. The disclosure requirements regarding the existence and identity of a funder alone can ensure the necessary protections are present in terms of managing conflicts and maintaining the integrity of the proceedings.

In the Working Group's proposals, some of the concerns about the legitimacy of third-party funding or the potential harm it may cause to the integrity of proceedings are based on outdated assumptions. Among these is that third-party funding increases the number of ISDS claims brought against states or increases the amount of damages claimed, which are not supported by the data on the third-party funding market.59

Reputable funders engage in a rigorous assessment of the merits of potential ISDS claims and weed out claims that have little chance of success.60 The involvement of a funder may actually indicate that the case is meritorious because the funder, acting as an objective third party in assessing the strengths of the claim, thinks it is likely to succeed.61 There is some empirical support for the proposition that funded claimants are at least as successful on their merits as claims brought in a broader sample of investment arbitration cases.62

V Third-party funding and awards on costs

i Influence of third-party funding on decision on security for costs

For years, respondent states have raised concerns regarding the potential inability to recover costs particularly when a dispute involves an impecunious claimant who had brought a claim with the help of a funder.63

The Working Group's Draft Provisions set out two options in an attempt to address the issue of security for costs in the context of third-party funding. The first option is that when a party is using third-party funding, security for costs should be mandatory except for certain specific exceptions, including when the funded party can establish that the respondent state was responsible for the impecuniosity, that it is not able to pursue its claim without the funding or that the funder would cover any adverse cost decision against the funded party.64 The second option proposes that it is left to the discretion of the tribunal as to whether to order the funded party to provide security for costs.65

However, states' concerns are not supported by data on enforcement of awards. An ICSID survey of compliance with awards of costs between 1966 and 2017 found that 'most awards in favour of States are paid'.66

Furthermore, investment tribunals under the ICSID and UNCITRAL regimes determining these issues have consistently recognised that the existence of third-party funding is not, in itself, sufficient grounds to grant security for costs. However, case law does recognise that the presence of third-party funding may be a relevant factor to consider along with others (for example, a history of failing to pay costs awards).

The small number of successful applications for security for costs in this context demonstrate how rare the remedy is in ISDS:67 of nearly 70 known applications for security for costs orders, only a handful have been granted.68

Herzig v. Turkmenistan

The tribunal in this case made the rare decision to grant an order for security for costs to a respondent state in an investor-state arbitration proceeding (based on outcomes in published decisions).69 The decision was subsequently rescinded owing to access to justice concerns because of the claimant's subsequent contention that it could not obtain security at commercially reasonable rates.70

Turkmenistan argued that a security for costs order was necessary because the claimant was insolvent, a third party was funding the claim and arbitration costs, and that the funding agreement excluded the funder's liability for an adverse costs order. Turkmenistan pointed to its experience of 'arbitral hit-and-run' cases, including Muhammet Çap v. Turkmenistan, as discussed in Section IV, above, which Turkmenistan alleged involved the same third-party funder (La Française) and argued that only a security for costs order could ensure that third-party funders remain at the same risk level for costs as a nominal claimant.71

The claimant argued that there is a high threshold met only in exceptional circumstances for security of costs, particularly in the ICSID system, citing the case of EuroGas v. Slovak Republic (see below).72

The tribunal found that the bankrupt claimant was relying on third-party funding and that the funder was expressly not liable under the agreement for any ultimate adverse costs order in the respondent's favour.73 The tribunal made a factual finding that it would be impossible in these circumstances to pay an adverse cost order.74 The majority of the tribunal found that Turkmenistan would be unduly prejudiced without an order for security for costs.75

As noted above, this decision was subsequently rescinded owing to concerns regarding access to justice for the claimant.76

Bay View Group LLC and another v. Republic of Rwanda

Rwanda argued that the requirements for granting a costs order as set out in the Herzig case were met because the claimants were insolvent, and the arbitration was funded in a way that was analogous to third-party funding, so it could be inferred that the third party was not liable to pay any adverse costs award.77 The claimants argued that Herzig was not good law as the decision was rescinded.78

The tribunal rejected the order for costs.79 The tribunal accepted that an order should be granted only in exceptional circumstances80 and found that even though the Herzig decision had been rescinded, that did not invalidate the helpful analysis of the principles by the Herzig tribunal.81 The tribunal here distinguished the facts of the case from those in Herzig, as here the claimants were not in liquidation82 and the arbitration was funded by a parent company and could not be equated to a third-party funder with no interest in the case.83 There was also no funding contract that explicitly excluded the funding of a costs award.84 The tribunal did accept that, in this case, there was the possibility that the claimants would not have the means to satisfy a costs order made against them. However, the tribunal found that itself does not amount to exceptional circumstances justifying the granting of a costs order.85

Manuel García Armas and others v. Bolivarian Republic of Venezuela

A Permanent Court of Arbitration tribunal ordered the claimants to provide security for costs in this case.86 The UNCITRAL Rules, under Articles 26(1) and 26(3), provide for the use of interim measures. The claimants were asked to prove that they could honour a costs award.87 The tribunal found that the claimants had not demonstrated their solvency88 and that there were exceptional circumstances because the funding agreement itself excluded the funder's liability for an adverse costs order. The tribunal also found that the denial of justice risk would be greater for the respondent state if it could not collect on an adverse costs award.89

Eskosol SpA in liquidazione v Italian Republic

An ICSID tribunal refused to grant a security for costs order90 in circumstances where the claimant was bankrupt and thus unlikely to pay an adverse costs order and there were no terms of the third-party funding agreement that provided for liability of the funder for adverse costs.91 The tribunal also distinguished the case from the facts in the earlier case of RSM v. Saint Lucia, discussed below, in that there had been no history of abusive behaviour by the claimants. The tribunal also discussed whether an ICSID tribunal was empowered to protect the right of a claimant or a state to collect on a possible costs award but declined to resolve the question.92

In this case, there was an 'after the event' insurance policy in place that covered an amount over what Italy sought in security and this was found to be sufficient protection for the respondent.93

EuroGas v. Slovak Republic

In this 2015 decision,94 the tribunal found that the combination of financial difficulties and third-party funding, which the tribunal acknowledged had become common practice, does not necessarily constitute exceptional circumstances that justify an order for security for costs.95 The tribunal described the facts in the RSM v. Saint Lucia decision (see below), as 'exceptional'96 and stressed that no such exceptional circumstances were present in this case.97

RSM v Saint Lucia

For the first time in the history of ICSID, the tribunal in RSM issued a security for costs order based on factors including that the claimant had a 'proven history' of failing to comply with costs orders, that it did not have sufficient financial resources itself and that it was funded by a third-party funder.98 The tribunal noted that the third-party funding supported its concern that the claimant may not comply with a costs order awarded against it and whether the third party would assume responsibility for paying for it.99 The tribunal found that it was not justified in these circumstances to burden the respondent with the risk of the uncertainty of whether or not a third party would pay the potential costs order.100

This constituted sufficient grounds and the exceptional circumstances required to order the claimants to provide security for costs.101

ii Future developments: recovery of third-party funding costs

An area in which further developments can be expected is the extent to which a successful claimant can recover third-party funding costs through a costs award.

At the domestic level, recent cases show a trend towards the recoverability of such costs (at least in England and Wales). In Tenke Fungurume Mining SA v. Katanga Contracting Services SAS,102 the English courts rejected a challenge to an ICC award on the basis that the tribunal erred by awarding the victor its third-party funding costs in excess of its powers.103 The judge did not depart from the earlier English case of Essar v. Norscot, which upheld an arbitral tribunal's decision to award funding costs incurred by the claimant on the basis that these were 'other costs' within the meaning of the 1996 Arbitration Act.104

It is unclear, however, whether a similarly permissive approach will be adopted in ISDS. It has been reported that in Dominion Materials v. Panama, a currently unpublished ICSID case, the claimant had requested reimbursement of US$32.4 million in third-party funding fees.105 The arbitrators found that the question of whether third-party funding fees could be recovered in investor-state arbitration remained unresolved. The arbitrators found that although these costs could be recovered in certain circumstances, the costs had to be reasonable. In this case, the funding fee was three time higher than the claimant's costs of representation and, therefore, were not reasonable. The tribunal declined to order reimbursement of the funding fee.106

A similarly restrictive approach is suggested by the UNCITRAL Working Group. Its draft provisions set out two options for the allocation of costs relating to third-party funding. The first proposes that '[e]xpenses related to or arising from third-party funding (including the return paid to the third-party funder) shall not be included in the costs of the proceedings, unless determined otherwise by the tribunal'.107 This exclusion from the definition of the costs of the proceedings would make the fees non-recoverable.108 The second option proposes that costs relating to third-party funding, including the return paid to the third-party funder, shall be borne by the funded party and should not be recoverable.109 The Working Group notes, however, that both options provide discretion to the tribunal to include the expenses as the costs of the proceedings or to allocate those expenses to the parties when it considers it reasonable to do so.110

VI Conclusion

Third-party funding has evolved as a tool to enable businesses to diversify and manage their legal risk and is no longer only used by claimants without sufficient funds to bring claims.

The increasing popularity of third-party funding has led regulators, international arbitral institutions and arbitral tribunals to grapple with how best to address some of the challenges presented by this innovative approach to financing international arbitration. The first solution to concerns about potential conflicts between third-party funding and arbitrators has been to mandate the disclosure of the existence of third-party funding in proceedings. This is increasingly becoming a feature of international arbitral rules and recently adopted international treaties, and is regularly mandated by international tribunals in procedural orders.

However, there is less certainty for parties on whether a funding agreement may have to be disclosed in proceedings and whether a funded party will have to provide security for costs.

As has been discussed, several tribunals have found that the disclosure of the funding agreement was not necessary or appropriate, rather the disclosure of the existence and identity of the funder alone can ensure the necessary protections are present to prevent conflicts.

Although states continue to raise concerns about the risk of funded claimants failing to comply with costs awards, the small number of successful applications for security for costs demonstrates how rare the remedy is in investor-state arbitration. Tribunals have recognised that the existence of third-party funding alone in a case is not sufficient grounds to grant security for costs.

Finally, some of the concerns about the legitimacy of third-party funding in an ISDS context or the potential harm it may cause to the integrity of proceedings are based on arguably outdated assumptions. A number of the assumptions underlying the UNCITRAL Working Group's proposals, including that third-party funding increases the number of ISDS claims brought against states or increases the amount of damages claimed, are not supported by the data on the third-party funding market or industry. It remains to be seen whether the reforms proposed by the Working Group will be implemented and, if so, what effect those reforms will have on third-party funding.


Footnotes

1 Christiane Deniger is a senior vice president at Burford Capital. Paul Brumpton is a partner and Eileen Crowley is an associate at White & Case LLP.

2 Burford, 'Volume 2. The use of third-party funding in international arbitration' (Arbitration Analytics Series), at https://www.burfordcapital.com/media/2310/burford-arbitration-analytics-series-volume-2.pdf; see GAR 100 survey (Global Arbitration Review, 14th Edition, Jul. 2021), at https://globalarbitrationreview.com/survey/gar-100/2021 (web pages last accessed 1 Apr. 2022).

3 There are a number of similar definitions of third-party funding set forth by international institutions, international organisations and in more recently adopted international treaties. The United Nations Commission on International Trade Law (UNCITRAL) Working Group provided the following definition: '“Third-party funding” is any provision of direct or indirect funding or equivalent support to a party to a dispute by a natural or legal person who is not a party to the dispute through a donation or grant, or in return for remuneration dependent on the outcome of the proceeding.' See UNCITRAL, Possible reform of investor-State dispute settlement (ISDS), Draft provisions on third-party funding (2021) p. 2.

4 UNCITRAL Working Group paper, 'IBA Guidelines on Conflicts of Interest in International Arbitration', at 14–15, General Standard 6, commentary (b); see also, for discussion, V Sahani, M Smith and C Deniger, 'Third-Party Financing in Investment Arbitration' in Christina L Beharry (ed.) Contemporary and Emerging Issues on the Law of Damages and Valuation in International Investment Arbitration (2018), p. 28.

5 International Council for Commercial Arbitration, 'Report of the ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration' (Apr. 2018), p. 18, at https://cdn.arbitration-icca.org/s3fs-public/document/media_document/Third-Party-Funding-Report%20.pdf (last accessed 1 Apr. 2022).

6 ibid., p. 39–40.

7 ibid., p. 38–39.

8 ibid., p. 42.

9 Sahani, Smith and Deniger, op. cit. note 4, above, p. 33.­

10 ibid., p. 34.

11 See, for example, Re Trepca Mines (No. 2) [1963] Ch 199, 220, Lord Denning noted that: '[t]he 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'.

12 Criminal Law Act 1967, s 13, s 14.

13 By contrast to the legislative regulation of third-party funding in Hong Kong and Singapore, there is no legislative underpinning for third-party funding in England and Wales and it is partly self-regulated by the funding industry. For example, in contrast to Hong Kong's Code of Practice as described above, in England and Wales funders can voluntarily elect to be members the Association of Litigation Funders, which is a self-regulating body. The Code of Conduct for Litigation Funders was published in November 2011. The Code requires funders to behave reasonably and also sets the standards for capital adequacy of funders as well as setting out the limited reasons for funders to withdraw from a case. See Association of Litigation Funders, Code of Conduct for Litigation Funders, available at https://associationoflitigationfunders.com/code-of-conduct/ (last accessed 1 Apr. 2022). Similarly, while there is mandatory disclosure of the use of third-party funding in Hong Kong, in England and Wales disclosure is voluntary, save only for the tribunal's power to order disclosure.

14 See Hong Kong Arbitration and Mediation Legislation (Third-party funding) (Amendment) Ordinance 2017, 98U (1); Code of Practice for Third Party Funding of Arbitration (effective 7 Dec. 2018), 2.12–2.16, at http://gia.info.gov.hk/general/201812/07/P2018120700601_299064_1_1544169372716.pdf. There is no requirement to disclose details of the funding agreement except as ordered by the arbitral tribunal – Hong Kong Code of Practice for Third-party funding of Arbitration, 2.11. Singapore Legal Profession (Professional Conduct) Rules, Article 49A, at https://sso.agc.gov.sg/SL/LPA1966-S706-2015 (web pages last accessed 1 Apr. 2022).

15 Investment Protection Agreement between the European Union and Vietnam [2019], Article 3.37 (EU–Vietnam Investment Protection Agreement); Investment Protection Agreement between the European Union and Singapore [2018], Article 3.8; Indonesia-Australia Comprehensive Economic Partnership Agreement [2020], Article 14.32 (2); International Centre for Settlement of Investment Disputes (ICSID), Proposed Amendments to the Regulations and Rules for ICSID Convention Proceedings, to enter into effect on 1 July 2022, Rule 14(2).

16 Comprehensive Economic and Trade Agreement between Canada and the European Union and its Member States, [2017] OJ L 11/23, Article 8.26.

17 EU–Vietnam Investment Protection Agreement, Article 3.37(1) provides for a disclosure requirement if a disputing party is benefiting from third-party funding and that this includes the name and address of the third-party funder and the existence and the 'nature' of the funding arrangement The treaty also provides at Article 3.37(3) that the tribunal will take into account whether there is third-party funding when assessing whether to make an order for security for costs and will take into account whether the disclosure requirements were complied with when making a provisional award on costs. See also EU–Vietnam Investment Protection Agreement, Article 3.48 (Security for cost) and Article 3.53 (Provisional Award).

18 ICSID, 'ICSID Administrative Council Approves Amendment of ICSID Rules' (21 Mar. 2022), at https://icsid.worldbank.org/news-and-events/communiques/icsid-administrative-council-approves-amendment-icsid-rules (last accessed 1 Apr. 2022).

19 See Section II, below.

20 Draft Provision 1.2 defines 'third-party funder' as 'any natural or legal person who is not a party to the proceeding but enters into an agreement to provide, or otherwise provides, funding for the proceeding'. Draft Provision 1.4 in turn defines 'third-party funder' as 'any provision of direct or indirect funding or equivalent support to a party to a dispute by a natural or legal person who is not a party to the dispute through a donation or grant, or in return for remuneration dependent on the outcome of the proceeding'. See ibid., (n 2) p. 2.

21 UNCITRAL Working Group III, Possible reform of investor-State dispute settlement (ISDS), Draft provisions on third-party funding, Initial Draft Comments, Draft provision 2, Option B.

22 Consent requirement for claim in recent international investment agreements – EU–Vietnam Investment Protection Agreement, Article 3.36; Australia–Hong Kong, Article 24; and United States–Mexico–Canada Agreement, Article 14.D.5.

23 UNCITRAL Working Group III, Possible reform of investor-State dispute settlement (ISDS), Draft provisions on third-party funding, Initial Draft Comments, (n 20), Draft provision 2, Option C.

24 ibid., para. 19.

25 ibid., para. 22.

26 ibid., Draft Provision 5, 1 (a)–(d).

27 The work plan provides for a completion of the overall reform of the ISDS regime by 2024 with the final adoption of any reforms through the United Nations process taking place by 2025. See UNCITRAL Secretariat, Contribution to the open call for input for Working Group on Business and Human Rights' report on 'Human Rights-compatible International Investment Agreements (IIAs)' (21 Apr. 2021), at https://www.ohchr.org/sites/default/files/Documents/Issues/Business/WG/Submissions/Others/UNCITRAL.pdf (last accessed 1 Apr. 2022).

28 An important, but under-discussed, issue is the extent to which arbitrators are required to make disclosures. The International Bar Association Guidelines on Conflicts of Interest, which are applicable to arbitrators, identify potential conflicts relevant to third-party funding, including repeat appointments as arbitrators in the same funded cases, when a funder hires counsel and a lawyer from that same law firm sits as arbitrator on the board of funders (Non-waivable red list, Section 1). The reference in Section 3.4 of the Orange List to 'an entity that has a direct economic interest in an award to be rendered in the arbitration' has also been interpreted as a reference to third-party funding. Similarly, the arbitrator declaration provided in the schedules of the Amended ICSID Rules requires arbitrators to disclose professional, business and other significant relationships, within the past five years with any third party funders (See ICSID Amended Rules, Arbitrator Declaration, p. 226, at 4(a)(iv), at https://icsid.worldbank.org/sites/default/files/documents/amended_rules_en.pdf (last accessed 1 Apr. 2022); See ICSID Additional Facility Arbitration, Rule 23.). Notably, however, in the ICSID case of Canepa Green Energy Opportunities I, S.á.r.l. and Canepa Green Energy Opportunities II, S.á r.l. v. Kingdom of Spain, a challenge to an arbitrator by Spain on the basis that he had failed to disclose that he sat on the investment committee of a third-party funder was rejected. Although the arbitrator had failed to disclose this relationship to a funder initially, in circumstances where the funder had funded another case for the claimant, the other two unchallenged arbitrators found that the non-disclosure and other considerations were not sufficient to disqualify him from the tribunal (ICSID Case No. ARB/19/4, Decision on the Proposal to Disqualify Mr Peter Rees QC (19 Nov. 2019)).

29 International Chamber of Commerce, Rules of Arbitration (entered into force 1 Jan. 2021, Article 11, https://iccwbo.org/dispute-resolution-services/arbitration/rules-of-arbitration/#article_11 (last accessed 1 Apr. 2022).

30 Hong Kong International Arbitration Centre (HKIAC), 2018 HKIAC Administered Arbitration Rules, Article 44(1), at https://www.hkiac.org/arbitration/rules-practice-notes/administered-arbitration-rules/hkiac-administered-2018-2#44 (last accessed 1 Apr. 2022).

31 Vienna International Arbitral Centre (VIAC), VIAC Rules of Investment Arbitration and Mediation 2021, Article 13a(1), at https://www.viac.eu/en/investment-arbitration/content/vienna-rules-investment-2021-online (last accessed 1 Apr. 2022).

32 ibid., Article 13a(3).

33 Centre for Arbitration and Mediation of the Chamber of Commerce Brazil-Canada (CAM-CCBC), Recommendations regarding the existence of third-party funding in arbitrations administered by CAM-CCBC, AR 18/2016, Article 3, at https://ccbc.org.br/cam-ccbc-centro-arbitragem-mediacao/en/administrative-resolutions/ar-18-2016-recommendations-regarding-the-existence-of-third-party-funding-in-arbitrations-administered-by-cam-ccbc/ (last accessed 1 Apr. 2022).

34 ibid., Article 4.

35 ibid., Article 5.

36 Pursuant to Amended ICSID Rules, Rule 36(3). See Working Paper #6, p. 20, para. 11. The working group rejected the automatic disclosure of the funding agreement with the third-party funding notice under Rule 14(1), recognising that the funding arrangement may be privileged or confidential; see ICSID Working Paper, Proposals for Amendment of the ICSID Rules (ICSID Working Paper) #5, at p. 279, paras. 42–43; see ICSID Working Paper #6, p. 18, Rule 14(4).

37 id.

38 id.

39 Discussion of these issues in ICSID Working Paper #6, para. 11, at https://icsid.worldbank.org/sites/default/files/documents/ICSID_WP_Six.pdf (last accessed 1 Apr. 2021); ICSID Working Paper #5, para. 42; ICSID Working Paper No. 4, para. 54; ICSID Working Paper #3, para. 56; ICSID Working Paper #2, para.139; ICSID Working Paper #1, paras. 262–63.

40 Bacilio Amorrortu v. The Republic of Peru (Permanent Court of Arbitration (PCA) Case No. 2020-11), Procedural Order No. 2 (19 Oct. 2020), para. 1.

41 ibid., Procedural Order No. 2, para. 6., citing Hesham Talaat M. Al-Warraq v. Indonesia, UNCITRAL (21 Jun. 2012), at para. 109.

42 ibid., (n 39), para. 8.

43 ibid., para. 9.

44 ibid., para. 10.

45 ibid., para. 11.

46 id.

47 ibid., para. 12.

48 South American Silver Ltd v. The Plurinational State of Bolivia (PCA Case No 2013-15), Procedural Order No. 10 (11 Jan. 2016), paras. 28–30.

49 ibid., para. 79.

50 ibid., paras. 80–81, 84.

51 Muhammet Çap & Sehil Inşaat Endustri ve Ticaret Ltd. Sti. v. Turkmenistan, ICSID Case No. ARB/12/6, Procedural Order No. 3 (12 Jun. 2015), para. 13.

52 id.

53 id.

54 ibid., paras. 10–12.

55 ibid., (n 50).

56 IA Reporter, 'Analysis: Arbitrators hearing large-scale construction dispute decline to broaden their jurisdiction beyond expropriation claim and dismiss case on the merits' (12 May 2021), at https://www.iareporter.com/articles/analysis-arbitrators-hearing-large-scale-construction-dispute-see-no-evidence-that-claims-were-assigned-to-third-party-funder-decline-to-broaden-their-jurisdiction-beyond-expropriation-claim-and-di/ (last accessed 1 Apr. 2021).

57 Guaracachi v. Bolivia, UNCITRAL, PCA Case No. 2011-17, Procedural Order No. 13 (21 Feb. 2013), para. 8.

58 ibid.; see also Oxus Gold plc v. Republic of Uzbekistan, in which the tribunal noted that the third-party funding had no effect on proceedings and terms of the funding arrangement were not relevant (Final Award, 17 Dec. 2015, p. 63, para. 127).

59 International Legal Finance Association, comments on 'UNCITRAL WG III TPF Reform Proposals', pp. 6–13, at https://uploads-ssl.webflow.com/5ef44d9ad0e366e4767c9f0c/61088589e63c5979a9f22599_ILFA%20comments%20UNCITRAL%20WG%20III%20TPF%20Reform%20Proposals%20FINAL.pdf (last accessed 28 Apr. 2022).

60 id.

61 Ina Popova and Katherine Seifert, 'Gatekeeping, Lawmaking and Rulemaking: Lessons from Third-Party Funding in Investment Arbitration' in Private Actors In International Investment Law ( Fach Gomez, ed., Springer, 2021); Nigel Blackaby and Alex Wilbraham, 'Third-Party Funding in Investment Treaty Arbitration' in Arbitration Under International Investment Agreements: A Guide to the Key Issues (2d ed, OUP, 2018), at 26.12.

62 Ina Popova and Katherine Seifert, op. cit. note 61, above.

63 UNCITRAL Working Group III, Possible reform of investor-state dispute settlement (ISDS), Draft provisions on third-party funding, Initial Draft Comments, para. 51, p. 12/14.

64 ibid., Draft Provision 9, Option A, p. 12/14.

65 ibid., Draft Provision 9, Option B, p. 12/14.

66 ICSID Secretariat, 'Survey for ICSID Member States on Compliance with ICSID Awards' (2018), p. 5.

67 See International Legal Finance Association (ILFA), comments on UNCITRAL Working Group III TPF Reform Proposals, Appendix 2 – Decisions on Security for Costs Applications (2015–2021), at https://uploads-ssl.webflow.com/5ef44d9ad0e366e4767c9f0c/61088589e63c5979a9f22599_ILFA%20comments%20UNCITRAL%20WG%20III%20TPF%20Reform%20Proposals%20FINAL.pdf (last accessed 1 Apr. 2022).

68 Giulia Previti, 'Recently published decision confirms exceptional nature of security for costs', Burford (7 Dec. 2020), at https://www.burfordcapital.com/insights/insights-container/security-for-costs-ruling/ (last accessed 1 Apr. 2022)); ILFA submission, Appendix 2 – Decision on Security for Costs Applications (2015–2021), op. cit. note 67, above.

69 Dirk Herzig as Insolvency Administrator over the Assets of Unionmatex Industrieanlagen GmbH v. Turkmenistan, (ICSID Case No. ARB/18/35), Decision for Security for Costs (27 Jan. 2020), para. 83; Christina L Beharry, ICSID Review, Foreign Investment Law Journal (Volume 36, Issue 1, Winter 2021), pp. 14–23.

70 IA Reporter, 'Majority in Unionmatex v. Turkmenistan Agrees to Rescind Security for Costs Order' (26 Jun. 2020), at https://www.iareporter.com/articles/majority-in-unionmatex-v-turkmenistan-agrees-to-rescind-security-for-costs-order/ (last accessed 1 Apr. 2022).

71 Dirk Herzig as Insolvency Administrator v. Turkmenistan, op. cit. note 69, above, para. 29.

72 EuroGas Inc. and Belmont Resources Inc. v. Slovak Republic (ICSID Case No. ARB/14/14) (EuroGas v. Slovak Republic).

73 ibid. (n 71), paras. 58–59.

74 ibid., para. 58.

75 ibid., para. 63.

76 IA Reporter, 'Majority in Unionmatex v. Turkmenistan Agrees to Rescind Security for Costs Order', op. cit. note 70, above.

77 Bay View Group LLC and another v. Republic of Rwanda (ICSID Case No. ARB/18/21) 2020), Procedural Order No. 6 (28 Sep. 2020), paras. 5–18.

78 ibid., para. 21.

79 ibid., para. 64.

80 ibid., para. 49.

81 ibid., para. 47.

82 ibid., para. 59.

83 ibid., para. 61.

84 id.

85 ibid., para. 62.

86 Manuel García Armas and others v. Venezuela (PCA Case No. 2016-08, Procedural Order No. 9 (20 Jun. 2018).

87 ibid., para. 242.

88 ibid., para. 232.

89 ibid., para. 235.

90 Eskosol SpA in liquidazione v. Italian Republic (ICSID Case No. ARB/15/50), Procedural Order No. 3, Decision on Respondent's Request for Provisional Measures (12 Apr. 2017), para. 39.

91 ibid., para. 37.

92 ibid., paras. 35–36.

93 ibid., para. 37.

94 EuroGas v. Slovak Republic, op. cit. note 72, above.

95 ibid., para. 123.

96 ibid., para. 122.

97 ibid., para. 123.

98 RSM v. Saint Lucia (ICSID Case No. ARB/12/10), Decision on Saint Lucia's Request for Security for Costs (13 Aug. 2014), para. 86.

99 ibid., para. 83.

100 id.

101 ibid., para 87.

102 Tenke Fungurume Mining SA v. Katanga Contracting Services SAS [2021] EWHC 3301 (Comm), paras. 29–32.

103 ibid., para 94.

104 Under Section 59 of the Arbitration Act 1996; see Essar Oilfields Services v. Norscot Rig Management [2016] EWHC 2361 (Comm), [2017] Bus LR 227.

105 Dominion Minerals v. Panama, ICSID Case No. ARB/16/13.

106 Investment Arbitration Reporter, 'Analysis: Arbitrators in Dominion Minerals v. Panama unanimously dismiss denial of benefits related to shareholder's dual nationality, but disagree on merits and damages' (16 Nov. 2020), at https://www.iareporter.com/articles/analysis-arbitrators-in-dominion-minerals-v-panama-unanimously-dismiss-denial-of-benefits-objection-but-disagree-on-merits-and-damages/ (last accessed 1 Apr. 2022). Note that the Award is subject to annulment proceedings, which are currently in progress.

107 UNCITRAL Working Group III, Possible reform of investor-State dispute settlement (ISDS), Draft provisions on third-party funding, p. 13, Draft Provision 10.

108 ibid., p. 14, para. 57.

109 ibid., p. 13, Draft Provision 10.

110 ibid., p. 14, para. 57.

The Law Reviews content