The critical analysis of
third-party funding reform in investment arbitration
LL.M. Thesis in partial fulfilment of the LL.M. program International and European Law: International Trade and Investment Law by Ezhov Kristian [ezhov-kristian@yandex.ru] [12833126] under supervision of Prof. dr. S.W.B. Schill 24 June 2020 Amount of words (including footnotes): 13239
Abstract:
This thesis assesses the present regulation of third-party funding in investment arbitration and those proposed by different institutions, such as ICSID and UNCITRAL. The regulation of third-party funding is necessary, since involvement of a third party with direct interest in a claim raises concerns as to the conflict of interest, confidentiality, costs and others. In Author’s view the reform of third-party should be consistent and address and mitigate all of the concerns that third-third-party funding raises. However, the analysis of current reform and existing regulations of third-party funding shows that there is no unified approach neither as to the definition of third-party funding nor as to the appropriate solutions for mitigation of the concerns it raises. Therefore, the aim of this thesis is to analysis existing regulation of third-party funding and find the most appropriate definition of third-party funding in light of the concerns it raises and to propose Author’s own view on how concerns itself may be mitigated within investment arbitration system.
Table of Content:
i. Abstract………..………..2
ii. Table of Content ………..………3
iii. Introduction. ………..………..4
1. Chapter 1: The concept of third-party funding……….5
1.1 Funding Mechanisms………..………5
1.1.1 Litigation third-party funding……….5
1.1.2 Insurance………..………...7
1.1.3 Law Firm………..………...8
1.1.4 Loans………..……….9
1.1.5 Non-profit third-party funding………10
1.2 Definition……….11
2 Chapter 2: Why and how TPF is regulated………...….13
2.1 Conflict of interest………..………..13
2.2 Costs of the proceeding………..………..…15
2.3 Security for costs………..18
2.4 Confidentiality………..………20
2.5 Conclusion………..………..22
3 Chapter 3: ………..……….22
3.1 Definition………..………...22
3.2 How the existent system may be improved………..25
3.2.1 Disclosure………..……….25
3.2.2 3.2.2 Direct power………...26
4 Conclusion……..………..………...28
Introduction:
The number of ISDS cases rises each year. In 2019 at least 55 cases were initiated reaching the total number of 10231. The costs of investor-state dispute settlement (ISDS) proceedings is also increasing. As some studies show, average claimant costs have increased from $4,437,000 in 2012 to 6,019,000 in 2017 with an average tribunal cost increase from $746,000 to $933,0002. Not every investor may afford so high costs and even if it can, not every will put this amount at stake. This make third-party funding (TPF) very attractive option, since it creates almost ‘no lose’ situation for an investor. This is because under TPF agreement, in most of the cases, funder agrees to provide funds to pay all costs associated with a dispute and to pay any adverse costs order. Therefore, party’s risks are minimised almost to zero. However, the price of TPF is not low and in some cases may reach more than 50% of an awarded damages and in case claim fails funder will receive nothing. Therefore, if a party that concluded TPF agreement wins a case it will receive only portion of an award and if loses all its costs will be borne by a funder. This ‘formula’ has made TPF very attractive option for investor-state disputes, since claimed damages are usually were high and chances of success are about 50%3 . The problem with TPF is that even though it became common practice for investor-state dispute settlement (ISDS) system, it remains largely unregulated area4. Most of the international treaties are silent as to the TPF and only few regulate this phenomenon5. There is also one treaty which adopts very radical approach namely the total ban of TPF6. The regulation of TPF is necessary in order to address concerns that involvement of third party with direct interest in a claim raises, such as: conflict of interest, confidentiality and costs.7. This was also understood by the international community, particularly by UNCITRAL, whose Working Group III now working on the reform TPF and ICSID which is now considers amendments to its arbitration rules in order to address TPF.
The analyzes of different regulations that address TPF shows that different institutions and states adopt different approaches in respect of definition of TPF and this leads to inclusion/exclusion of different financing mechanism from regulation of TPF. In Author’s view, some definitions (especially
1 https://investmentpolicy.unctad.org/investment-dispute-settlement/advanced-search accessed 19 June 2019
2 Matthew Hodgson and Alastair Campbell, Investment Treaty Arbitration: cost, duration and size of claims all show
steady increase (14 December 2017) Allen & Overy
<https://www.allenovery.com/en-gb/global/news-and-insights/publications/investment-treaty-arbitration-cost-duration-and-size-of-claims-all-show-steady-increase> accessed 19 June 2019.
3 THE ICSID CASELOAD — STATISTICS ISSUE 2020-1, p. 14 available at
https://icsid.worldbank.org/en/Documents/resources/The%20ICSID%20Caseload%20Statistics%202020-1%20Edition-ENG.pdf accessed 19 June 2020.
4 A/CN.9/WG.III/WP.172, para.3, available at: https://undocs.org/A/CN.9/WG.III/WP.172 accessed 19 June 2020. 5 Investment Protection Agreement between the European Union and its Member States, of the one part, and the
Socialist Republic of Viet Nam, signed 30 June 2016 (EU-Viet Nam BIT), Art. 3.37.
6 Agreement for the Reciprocal Promotion and Protection of Investments between Argentina Republic and United Arab
Emirates, adopted 16 April 2018, Art. 24.
very strict) pose great risks to ISDS system because they exclude financing mechanism that pose almost the same concerns as those included. The aim of this thesis is to critically assess existing regulations of TPF and find whether or not they are enough to mitigate all concerns that TPF raises. Therefore, the first chapter of the thesis will describe different financing mechanism that potentially may be covered as TPF and analyze existing definitions so as to assess which definition include which financing models. The paper will not state in this chapter what particular mechanism should be included in the definition of TPF, because in Author’s view, it is impossible without analyzing concerns that TPF raises first. These concerns will be assessed in the second chapter of the thesis. The aim of the second chapter is to assess how existing regulation of TPF mitigates concerns associated with involvement of TPF. This chapter will show that even though some concerns are in fact mitigated other are not dealt at all. Therefore, it will show that more extensive regulation is needed to minimize every problem that TPF raises. In Author’s view, this could be done through making funders subject to tribunal’s jurisdiction. The reasons for such proposal as well as its assessment in relation to the concerns will be provided in the third chapter as well as Author’s view on what should be the definition of TPF.
Chapter 1: The concept of third-party funding: 1.1 Funding mechanisms:
«Third-party funding is difficult to define because various forms of financing claims and paying for
legal expenses have long existed and many such forms are like or definitionally overlap with modern forms of third-party funding»8. Therefore, it seems very important to discuss, at least briefly, all these means of financing to understand different approaches to the definition and regulation of the TPF in investment arbitration.
1.1.1 Litigation third-party funding:
For this paper, the most interesting type of funding mechanism is litigation TPF. This type is unique since the main function of such companies is to fund cases, while for others it is only subsidiary. Litigation funding is relatively new phenomena and first companies which provide this service were formed only in the late 1990s. Since the financial crisis in 2008 professional litigation funding became more widespread and some research shows that since 2012 this market has grown by more than 500%9. By now, the most important players in this field are Bentham IMF Limited, Burford Capital Limited and others. In principle, such agreement in some way is similar to contingency fee or ATE insurance (discussed below), since funder provides means for bringing a claim, including arbitrator’s and institute fees, attorney fees etc. and in return funder receives part of an award and if the claim
8 Stavros Brekoulakis and Catherine Rogers, ‘Third-Party Financing in ISDS: A Framework for Understanding Practice
and Policy’, Academic Forum on ISDS Concept Paper 2019/11, 31 July 2019, p.6.
fails it receives nothing. However, because financing of arbitration is the main business for funders, such agreements have its features in contrast to ATE insurance or contingency fee agreement. Therefore, it seems necessary to look deeply in the contractual terms of funding agreement and context of conclusion to differentiate it from other terms. Concerning the demand for TPF, one funder disclosed that he was contacted by investors in respect of two-thirds cases that were registered before ICSID but has declined funding for all 10. The fact that most of the cases declined funding is also shown by ICC France study which provides that only 5-10% of cases are accepted11. One of the reasons could be not high amount of prospective damages. Usually costs of ISDS arbitration is about $5-7 mln and this means that damages should be no less than $30-40 mln to make this «enterprise» profitable for both funder and investor, since funder’s share in an award is about 30-50%12. Furthermore, each potential case is very carefully assessed concerning its merits, claim value, enforcement and other issues and if the funder is satisfied with these criteria it will more deeply assess claim’s legal merits usually by hiring outsider law firms13. Moreover, depending on whether funder has other funded cases it will consider whether it fits in their portfolio or not14.
As to the terms of the agreement, it usually includes terms regulating how funding is provided to a claimant, including the scope of funding commitment and return structure and party’s rights and obligation15. One of the most interesting and important provisions relate to funder’s rights to control of a case. The case monitoring is not surprising, as all investors including funders want to protect and promote their investments. Therefore, it is at top of importance, especially in investment arbitration, that the best lawyers are hired and «right» arbitrator is chosen and since investor maybe not very experienced in these matters, funders as more experienced may have better judgement in these matters. As one funder explained: «[o]ur active monitoring seeks to ensure that lawyers attached to a particular case are diligently moving the case forward in an appropriate manner, the proper legal strategy is employed, the right experts are hired, and case expenses are minimised»16. However, not all funders exercise such extensive monitoring or at least claim that they do not do so. For example,
10 Report of the ICCA – Queen Mary Task Force on Third-Party Funding in International Arbitration, International
Council for Commercial Arbitration, The ICCA Reports No. 4, April 2018, p.254.
11 J. VON GOELER, Third-Party Funding in International Arbitration and its Impact on Procedure (Kluwer 2016), p.
25.
12 Report of the ICCA – Queen Mary Task Force on Third-Party Funding in International Arbitration, International
Council for Commercial Arbitration, The ICCA Reports No. 4, April 2018, p.244.
13 Ibid, p.31.
14 J. VON GOELER, Third-Party Funding in International Arbitration and its Impact on Procedure (Kluwer 2016) p. 22. 15 Report of the ICCA – Queen Mary Task Force on Third-Party Funding in International Arbitration, International
Council for Commercial Arbitration, The ICCA Reports No. 4, April 2018, p. 32
16 J. VON GOELER, Third-Party Funding in International Arbitration and its Impact on Procedure (Kluwer 2016), p.
Burford Capital states that it «has no control over litigation or settlement decisions and it does not interfere with the attorney-client relationship»17.
Such monitoring rights usually are established by funding agreement itself and may include the right to choose legal councils, to decide whether to agree to a settlement or not and other18. Also, TPF agreement may likely be subject to veto right against funded party decisions, however, it is not clear whether such right exists and will be enforceable due to the confidentiality and closed nature of such market19. However, such control may be also exercised through case budget or termination right 20. The funding agreements are drafted in a way to ensure that no cent is spent unreasonably or without funder’s approval, this is achieved through obligation on behalf of a funded party to inform funder of any circumstances that lead to new expenses in advance or obligation to seek approval for measures requiring additional finance. Also, the funding may be structured in a way of tranches with funder’s sole discretion as to whether new tranche should be transferred, and this can be used to freeze lawyers work 21.
Another possibility is to use or at least threaten to use right to terminate funding agreement. For example, the UK Code of Conduct for litigation funders provides in Art. 11.2 three ground for termination: funder reasonably ceases to be satisfied about the merits of the dispute (11.2.1); funder reasonably believes that the dispute is no longer litigation viable (11.2.2), and funder reasonably believes that there has been a material breach of the [Agreement] by the Funded Party (11.2.3). It cannot be done at the sole discretion of a funder22 and judgement of an independent body will be needed to establish whether termination is reasonable or not23. Nevertheless, it obviously may be used to coerce funded party to refrain from acting in a way not approved by a funder.
As can be seen from this section, funders in litigation funding agreement play a significant role in the arbitration process, since they not only may decide on a strategy of a case and the amicable settlement of a dispute, but may also put a future of a case at stake by denying financing. Furthermore, because litigation TPF receives a large share of a possible award (sometimes even more than 50%) it makes this agreement at the core of the discussion of this paper.
1.1.2 Insurance:
The insurance in certain cases may be also regarded as TPF. There are two types of insurance available for a party in international arbitration proceeding - liability insurance and legal expenses
17 Theory and Practice in Litigation Risk, Burford, p. 7, available at:
http://rippmedia.com/Molot-TheoryandPractice.pdf, accessed 19 June 2020.
18 J. VON GOELER, Third-Party Funding in International Arbitration and its Impact on Procedure (Kluwer 2016) p. 35. 19 Ibid.
20 Ibid, p. 41. 21 Ibid, p. 43.
22 Code of Conduct, Association of Litigation Funders, Art. 12, available at
<http://associationoflitigationfunders.com/code-of-conduct/> accessed 19 June 2020.
insurance24. Concerning the first type, it ensures liability against any potential award against insured party. However, since, this thesis is aimed at TPF, i.e. way of financing an arbitration, this type is irrelevant for this paper. The second type, depending on its terms, covers all expenses associated with pursuing/defending a claim including lawyer’s, arbitrator’s and expert’s fees, institutional fees and, in some circumstances, liability for adverse costs award25. Liability insurance may be taken either before or after commencement of a dispute26. In both instances, the insurer, as litigation funder has some interest in the proceeding, especially minimising legal costs and ensuring that no adverse costs are awarded27.
The method of payment and its amount usually will depend on whether this is before the event (BTE) insurance or after the event (ATE) insurances. As to the before the event insurance, the price of the insurance (premium) is usually paid in advance and does not relate to any possible award 28, while premiums for after the event insurance, since concluded after the dispute has arisen and there is a visible award with more or less defined possible compensation, can be structured on “contingent premium” model. It means that the premium would be payable only in case insured party succeeds and an amount of premium is defined to and paid out of the amount of damages awarded to an insured party29. For this type of insurance, it is also common to include terms that provide for a premium in case of settlement of a dispute30. It makes ATE insurance in some ways very similar to litigation TPF, however, one of the main differences is that insurer usually pays its costs by itself and only if a case fails it will be identified for the costs inquired 31.
Therefore, even though insurer, especially in ATE insurance, has some interests in an outcome of a case this type of arbitration financing in many ways differs from litigation TPF, since usually, the insurer does not have any investment committee and, consequently, the power to direct arbitration process and close ties with investment arbitration community. However, in ATE insurance, prior case monitoring is conducted, and it means that some outsider lawyers are hired to assess a case. This means that it is ATE and not BTE insurance which is more likely to raise concerns related to TPF. 1.1.3 Law Firm:
TPF may be also provided by a law firm representing a party. This is usually done through contingency fee agreement, which is based on the formula «no win, no fee». Law firm may provide
24 J. VON GOELER, Third-Party Funding in International Arbitration and its Impact on Procedure (Kluwer 2016), p. 33 25 Report of the ICCA – Queen Mary Task Force on Third-Party Funding in International Arbitration, International
Council for Commercial Arbitration, The ICCA Reports No. 4, April 2018, p. 34.
26 J. VON GOELER, Third-Party Funding in International Arbitration and its Impact on Procedure (Kluwer 2016), p. 33 27 Report of the ICCA – Queen Mary Task Force on Third-Party Funding in International Arbitration, International
Council for Commercial Arbitration, The ICCA Reports No. 4, April 2018, p. 34.
28 Ibid. 29 Ibid, p.35.
30 J. VON GOELER, Third-Party Funding in International Arbitration and its Impact on Procedure (Kluwer 2016), p. 53 31 Report of the ICCA – Queen Mary Task Force on Third-Party Funding in International Arbitration, International
resources to cover all proceeding fees, including arbitrator’s fees and institute fees and cost of its service. In this case, a law firm will do it usually in exchange for a share of an award32. There are also other ways of how law firm may fund or provide equivalent support for pursuing a claim, for example, through reduced hourly rate, capped fee etc. and in case its client wins law firm will receive «success» fee as a bonus33. It makes this agreement similar to ATE insurance and litigation TPF with some great exception: a law firm is already involved in the proceeding and its name and address are known to the tribunal and opposite party and existing rules (such as IBA Guidelines on Conflict of Interest and IBA Guidelines on Party Representation) mitigate some of the concerns that relate to TPF, especially conflict of interest and confidentiality issue. However, other concerns such as the cost of the proceeding and security for costs are good reasons for considering law firm financing as TPF. 1.1.4 Loans:
A party seeking to initiate investment arbitration proceeding may also attempt to get funds from the general loan, usually provided by banks. This may also amount to a broad description of TPF, however, the debt is usually paid regardless of an outcome of a dispute and, thus, banks would not have any great interest in a case, since usually they try to protect recoverability of the debt by different means34.
Another way would be to use corporate finance instruments. For example, investment banks may invest in a listed company, who is the claimant in a proceeding, to provide means for pursuing a claim with a view that these stocks will increase in value and bank would be profited35. It is also possible to issue shares that are directly linked to the litigation outcome. In Crystallex v Argentine case, the claimant after initiating ICSID proceeding announced issuing of securities which contained a «contractual right to receive a portion of any proceeds recovered to an award or settlement in the arbitration»36. However, this enterprise was not successful since Crystallex did not find enough buyers37. Furthermore, financing may be made within one group of companies, so that the parent company or beneficiary of a group may provide resources to pursue a claim38. In this scenario, the group company would have an indirect interest in the proceeding even before provision of funds.
32 Report of the ICCA – Queen Mary Task Force on Third-Party Funding in International Arbitration, International
Council for Commercial Arbitration, The ICCA Reports No. 4, April 2018, p. 36.
33 ibid.
34 J. VON GOELER, Third-Party Funding in International Arbitration and its Impact on Procedure (Kluwer 2016), p. 56 35 J. VON GOELER, Third-Party Funding in International Arbitration and its Impact on Procedure (Kluwer 2016), p.
56-57.
36 Ibid, p.112. 37 Ibid.
38 Report of the ICCA – Queen Mary Task Force on Third-Party Funding in International Arbitration, International
Therefore, it seems to the Author that debt/investment mechanism do not pose any significant risks to the arbitral proceedings, since if one finance in a company it becomes its shareholder and not a third party.
1.1.5 Non-profit third-party funding:
All above-mentioned funding mechanism pursue an aim of gaining profit. However, in investment arbitration also exists non-profit funding. Until now, there are only a few cases where such type of funding tool place, however, they are worth mentioning because this type can also be covered by the definition of TPF. One of the most prominent examples is Phillip Morris International v Uruguay where the Tobacco-Free Kids Foundation provided financial aid to Uruguay to defence its anti-tobacco legislation. It was also suggested that not only fonds or international organisation may provide such help but also other states39. This may take place for political considerations or to make a precedent if they may face an investment claim based on similar legal issue40. Concerning nonprofit funding with aim to make a precedent, Quasar de Valores v the Russian Federation case worth mentioning. In that case funder (Group Menatep Ltd - a former major shareholder in Yukos) provided financial aid to a claimant of $14.5 mln to pursue expropriation claim related to Yukos, interestingly that amount claimed ($2.6 mln) was in more than five times less than provided financial claim. However, this amount was paid off since another tribunal constituted also under Energy Treaty Charter in its judgement referred to Quasar case and awarded claimants $50 bln41.
Even though this funding is provided voluntarily, at least concerns that are related to conflict of interest may arise, thus, it worth to be regulated as well.
Conclusion:
As can be seen, TPF may be used to define either the process when any party which is not involved in a dispute provides some financial aid to one of the parties or activities of companies which sole business is to fund other’s cases to share profit if a case is won (litigation TPF).
This analysis of funding models shows that there are different ways of how the arbitration process may be financed with the involvement of the party, who is not a party to the proceeding. Due to the model the main terms of a financing agreement may differ in, inter alia, the extent of risk assumption, method of financing and recovering of «investments» and maybe most importantly, the extent of the control over a case. Because of such differences in terms, these funding models create different concerns to different extent. Consequently, it seems to the Author that such differences should be considered by any regulator especially to the definition of TPF.
39 Ibid, p. 110. 40 Ibid, p. 24.
41 J. VON GOELER, Third-Party Funding in International Arbitration and its Impact on Procedure (Kluwer 2016), p.
1.2. Existing definitions of third-party funding:
There is no unified approach for defining TPF nor who could be considered as a third-party funder, this is due to «the wide range of funding models that exist and are rapidly evolving which may include corporate debt or equity, risk-avoidance instruments or «portfolio funding»42. This was also mentioned by UNCITRAL Working Group III in a Note by the Secretariat where it noted that counsel’s funding, insurance policies and equity investments should be considered in developing a definition of TPF.
Therefore, some authors and institutes adopt a very broad definition of TPF, like in Report of the ICCA – Queen Mary Task Force on Third-Party Funding in International Arbitration (QMR) that defined it as: «an agreement by an entity that is not a party to the dispute to provide a party, an
affiliate of that party or a law firm representing that party, a) funds or other material support to finance part or all of the cost of the proceedings, either individually or as part of a specific range of cases, and b) such support or financing is either provided in exchange for remuneration or reimbursement that is wholly or partially dependent on the outcome of the dispute, or provided through a grant or in return for a premium payment»43. This definition includes not only litigation TPF but also contingency fee agreements and non-profit TPF44. Furthermore, inclusion of the word «premium» signifies that insurance policies are also considered to be within the definition of TPF. However, not everyone favours such broad definitions, for example, existing investment protection instruments, such as EU - Viet Nam Investment Protection Agreement (which is signed but not yet enforce) defines it as: «any funding provided by a natural or juridical person who is not a party to
the dispute but who enters into an agreement with a disputing party to finance part or all of the cost of the proceedings in return for a remuneration dependent on the outcome of the dispute, or any funding provided by a natural or juridical person who is not a party to the dispute in the form of a donation or grant»45. The similar definition of TPF is also included in the Comprehensive Economic
and Trade Agreement (CETA) between Canada and the EU46. Unlike QM’s definition, this covers only «agreement with disputing party» while the agreement with a law firm representing a party or party’s affiliates are not expressly included in the definition. This may be used by investors and funders to evade obligations, because the TPF agreement may be concluded between funder and party’s representatives and pose the same concerns if was concluded directly between investor and
42 Report of the ICCA – Queen Mary Task Force on Third-Party Funding in International Arbitration, International
Council for Commercial Arbitration, The ICCA Reports No. 4, April 2018, p.47.
43 Report of the ICCA – Queen Mary Task Force on Third-Party Funding in International Arbitration, International
Council for Commercial Arbitration, The ICCA Reports No. 4, April 2018, p. 50.
44 Ibid, p. 53.
45 EU-Viet Nam BIT, Art. 3.28 (I).
46 Comprehensive Economic and Trade Agreement between Canada, of the one part, and the European Union and its
funder47. It is unclear whether tribunals will be able to construe this section to give effect for agreements concluded not exactly with the disputing party. Therefore, it seems to be not very appropriate definition, to prevent problems that TPF may raise.
The ICSID also has an intention to address TPF and even drafted amendments to ICSID Rules and since the huge number of ISDS cases are governed by ICSID Convention and ICSID Rules, their approach is of the most interest. It defines third-party funder as: «non-party from which the party,
directly or indirectly, has received funds for the pursuit or defence of the proceeding through a donation or grant, or in return for remuneration dependent on the outcome of the proceeding» (Rule
14(1))48. This definition differs from both QM and CETA approaches. Comparing to CETA’s definition, ICSID’s include also indirect provision of funds, so that support to party’s affiliate or its representatives seems to be covered by this definition. It also differs from QM’s approach in certain features. The last proposal for amendments does not include equivalent support as a way of financing and limits it only to funds, while the previous version has defined TPF concerning equivalent
support49. Moreover, art. 14(2) states that: «a non-party referred to in paragraph (1) does not include
a representative of a party»50 this means that it excludes any agreements with party’s law firm from
the definition of TPF. While some states were silent as to this clause, other, such as Korea and Israel proposed that this sentence should be deleted and TPF should also cover funding from party’s representatives51 and in fact, it seems to the Author to be a rational proposal. Concerning insurance policies, it is not clear whether they would amount to TPF under ICSID Rules or CETA definition, but, some commentators on ICSID proposed rules noted that it would and that it is, in fact, necessary to prevent a possible conflict of interest 52.
Conclusion:
Within investment arbitration system exists numerous different mechanisms by which party may raise funds to pursue its claim. The analysis of TPF definitions shows that states and international institutions hold different views in respect to financing mechanism that should amount to TPF. Some of them adopt very wide definition which may include almost all existing and even potential funding models, while other try to limit application of TPF rules to particular models or expressly exclude some of them. Author believes that one uniform approach in relation to definition of TPF should be adopted, however at this point it is impossible to say which definition is more appropriate. This is
47 Draft Text Providing for Transparency and Prohibiting Certain Forms of Third-Party Funding in Investor-State
Dispute Settlement p.6, footnote 10,
48 Proposal for amendments of the ICSID Rules, Working Paper 4, Volume 1, February 2020, Rule 14(1) p. 37.
49 Proposal for amendments of the ICSID Rules, Working Paper 2, Volume 1, March 2019, Rule 13(2) p. 118. 50Proposal for amendments of the ICSID Rules, Working Paper 4, Volume 1, February 2020, Rule 14(2) p. 37.
51 Compendium of State and Public Comments on WP #2 - June 28, 2019, p. 69, and Compendium of State and Public
Comments on WP #3 - February 27, 2020, p.18 available at: https://icsid.worldbank.org/en/amendments, accessed 19 June 2020.
because in Author’s view, before answering to this question concerns that are associated with TPF should be analyzed and only them it will be possible to say which mechanism are worth to be defined and regulated as TPF.
Chapter 2: Regulation of third-party funding:
As can be seen, TPF involves third party in the proceeding with its own interest which is sometimes may even contradict interests of a funded party. However, for ISDS proceeding there are other, more fundamental concerns. They include TPF’s impact on conflict of interest, a decision on the allocation of costs and security for costs, protection of confidential information and amicable settlement of a dispute 53.
As it was noted in the introduction, TPF remains largely unregulated area54. The UNCITRAL Working Group III proposed two ways of dealing with TPF: either prohibition or regulation. Both proposals were implemented. For example, UAE and Argentine concluded BIT (which is not in force yet) which prohibits TPF55. Interestingly, that that BIT does not define TPF, therefore it would be an open question what types of financing agreements are prohibited.
Other countries have adopted a relaxed approach towards TPF. For example, the EU has concluded some treaties, including CETA and EU - Viet Nam BIT. Both of these treaties oblige party benefiting from TPF to disclose it to the other party and tribunal the name and address of a funder56. This disclosure should be made at the time of submission of a claim or if concluded after submission as soon as possible57. The same obligation is also contained in the Canada-Chile Free Trade Agreement (CCFTA) in Art. G-23 bis58 and in proposed amendments to ICSID Rules59. However, arbitral tribunals even without such express regulation had a power to order disclosure of TPF’s name and address and in some cases even terms of a funding agreement60.
The disclosure in fact may be relevant for mitigating risks associated with TPF. As one tribunal stated, disclosure is necessary to avoid a potential conflict of interest; to provide greater transparency and identification of the true party to a case; for the decision on allocation of costs and security for costs, and to protect the confidentiality of a process61.
2.1 Conflict of interest:
53 A/CN.9/WG.III/WP.172, p.4, available at: https://undocs.org/A/CN.9/WG.III/WP.172 accessed 19 June 2020. 54 A/CN.9/WG.III/WP.172, para.3, available at: https://undocs.org/A/CN.9/WG.III/WP.172 accessed 19 June 2020. 55 Agreement for the Reciprocal Promotion and Protection of Investments between Argentina Republic and United Arab
Emirates, adopted 16 April 2018, Art. 24.
56 EU-Viet Nam BIT, Art. 3.37(1); CETA, Art. 8.26. 57 EU-Viet Nam BIT, Art. 3.37(2); Art. 8.26 CETA;
58Canada-Chile Free Trade Agreement (CCFTA) entered into force on February 5, 2019, Art. G-23 bis
59 Proposal for amendments of the ICSID Rules, Working Paper 4, Volume 1, February 2020, Rule 14 p. 37.
60 Muhammet Çap & Sehil Inşaat Endustri ve Ticaret Ltd Sti v. Turkmenistan (ICSID Case No. ARB/12/6), Procedural
Order No. 3 (12 June 2015).
61 Muhammet Cap & Sehil Insaat Endustri ve Ticaret Ltd. Sti. v. Turkmenistan (ICSID Case
No. ARB/12/6), Decision on Jurisdiction (13 February 2015) para. 50 (quoting Procedural Order No. 2).
The disclosure is most effective about conflict of interest. Investment arbitration community is very closed and interrelated one. The same person may be acting as both, arbitrator and counsel for different disputes and have connection with other arbitrators and councils, for example, work at the same law firm. However, due to the involvement of third-party, the possibility of a conflict of interest only arises because litigation funders are active in the investment arbitration field and very often employ or contact other experts inter alia for a case evaluation62. This is also recognised by leading arbitration institutes, for example, CAM-CCBC recommended parties to disclose any TPF, since its existence may «raise a reasonable doubt as to the impartiality or independence of the arbitrators, due to possible past or current relationship between the arbitrator and the third-party funder»63. Furthermore, initially, the amendments to ICSID AR have if disclosure of TPF is made to complete arbitrator declaration of its independence and impartiality64, however, after the criticism of such narrow approach65, the decision to redraft this wording was taken. The prevention of conflict of interest issue is essential because if an award would be rendered by the dependent or partial tribunal, it may be subject to annulment proceeding 66. Moreover, as QMR rightly points out the disclosure is necessary «to preserve the overall integrity of international arbitration»67.
Concerning the extent of disclosure, the existing rules provide for initial disclosure only of the name and address of a funder68. This may be sufficient for preventing a conflict of interest in case funder’s beneficiaries and any connected persons are easily identifiable and a funder is not “special purpose vehicles” which are legal entities created to finance particular case to conceal real beneficiary or other circumstances, such as connecting to or repeated appointment of an arbitrator69. This concern was also mentioned by some countries during deliberations on ICSID AR reform70. Proposed ICSID AR provides for a tribunal’s express power to order disclosure of any relevant information concerning TPF agreement and funder itself71. However, the inclusion of such express right is a rare example which is not present in most of the other treaties. Moreover, this right is regulated by general rules on
62 Report of the ICCA – Queen Mary Task Force on Third-Party Funding in International Arbitration, International
Council for Commercial Arbitration, The ICCA Reports No. 4, April 2018, p. 82.
63 CAM-CCBC Administrative Resolution 18/2016, available at <http://www.ccbc.org.br/
Materia/2890/resolucao-administrativa-182016/en-US>, accessed 19 June 2020.
64 Proposal for amendments of the ICSID Rules, Working Paper 2, Volume 1, March 2019, Rule 13(1). 65 Compendium of State and Public Comments on WP #2 - June 28, 2019, p.70, available at:
https://icsid.worldbank.org/en/amendments, accessed 19 June 2020
66 UNCITRAL Model Law, Art. 34; ICSID Convention, Art. 51.
67 Report of the ICCA – Queen Mary Task Force on Third-Party Funding in International Arbitration, International
Council for Commercial Arbitration, The ICCA Reports No. 4, April 2018, p.82.
68 Investment Protection Agreement between the European Union and its Member States, of the one part, and the
Socialist Republic of Viet Nam, Art. 3.37(1); Art. 8.26 CETA;
69 Stavros Brekoulakis and Catherine Rogers, ‘Third-Party Financing in ISDS: A Framework for Understanding
Practice and Policy’, Academic Forum on ISDS Concept Paper 2019/11, 31 July 2019, p.6.
70 Compendium of State and Public Comments on WP #3 - February 27, 2020, p.18, available at:
https://icsid.worldbank.org/en/amendments, accessed 19 June 2020.
the provision of documents72 and may be subject to the party’s right to objection73. All these make tribunal’s order for the provision of other information related to funder very complex and time-consuming. Furthermore, if such order is made not at the very beginning of the proceeding, but after it has reached a certain threshold, and conflict of interest became apparent, it will jeopardise entire proceeding and significantly increase time and cost of it.
Therefore, the author is of the view that present and proposed regulations of TPF that oblige funded party to disclose only name and address of a funder are not enough to conduct extensive conflict of interest check by arbitrators and, consequently, does not tautly mitigate this concern. In Author’s view, tribunals should have a power to directly oblige funders to provide all relevant information, including business structure, any affiliated person and ultimate beneficial owners. This order should be addressed to funders itself, because funded party may not have access to this information.
2.2 Costs of the proceeding:
Some treaties include provisions that might be considered as sanctions for non-disclosure. For example, Art. 3.37(3) EU-Viet Nam BIT provides that tribunal may consider the party’s failure to disclose TPF when deciding on costs. The amount of recoverable costs usually constitutes «reasonable legal and other costs incurred by the parties for the arbitration»74 and the tribunals usually have very wide discretion as to the award on costs and its allocation75. Moreover, as Gary Barn notes: «as a practical matter, arbitrators in international cases routinely award the costs of legal representation, usually without discussing questions of applicable law or detailed substantive analysis»76. When TPF is involved it raises several issues about costs, including whether an amount paid by the funder for legal service and/or institutional fees is in fact costs incurred by a party; whether the amount payable out of an award to funder can be considered as costs associated with the arbitration, as well as any payment associated with obtaining of funding. As can be seen, these issues in no way may be solved by the simple requirement of disclosure and probably much more extensive regulation is needed to address them. However, the non-existence of express regulations of such measures did not prevent arbitral tribunals to deal with these matters.
Concerning the first issue, even if TPF exists, contract for legal services is concluded between the party and the law firm and since invoices are issued in funded party’s name it is the party who is responsible for discharging the bills. Therefore, most of the arbitral tribunals were in the opinion that, even though, bills were paid by the funder it does constitute costs incurred by a party and consequently are capable of recovery. Moreover, in one case tribunal clearly stated that it is not aware
72 Proposal for amendments of the ICSID Rules, Working Paper 4, Volume 1, February 2020, Rule 36(3) p. 47. 73 Proposal for amendments of the ICSID Rules, Working Paper 4, Volume 1, February 2020, Rule 37 p. 47. 74 ICC Arbitration Rules 2017, Art. 38(1).
75 ICSID Convention, Art. 61(2); UNCITRAL Arbitration Rules Art. 42.
76 Report of the ICCA – Queen Mary Task Force on Third-Party Funding in International Arbitration, International
of any rule that would require the tribunal to consider the existence of TPF about its decision for costs 77. However, in Quasar de Valores v. the Russian Federation, the tribunal considered the fact that claimant was financed by TPF and that it had no obligation to reimburse funder and concluded that claimant had not incurred any costs. Therefore, it refrained from awarding claimant legal costs that were paid by a funder78. As can be seen, due to the unregulated nature of TPF relation to costs, arbitral tribunals may come to contradictory decisions, however, the practice of the ICSID tribunals shows that TPF does not affect the recoverability of costs79.
As to the recoverability of costs associated with obtaining TPF and funding costs, it will depend not only on arbitration rules but also on circumstances of a case. Concerning investment disputes, among academics, there is no clear view as to this issue. Some argue that awarding funding costs would unfairly increase the amount of damages and should not be recoverable80. Others support a view that specific conduct of the respondent state, even not “egregious” may justify an award of such costs81. The second view was also supported in ICC arbitration, in its commission report they noted that such costs are recoverable if the «cost was incurred specifically to pursue the arbitration, has been paid or is payable, and was reasonable»82. Consequently, the recoverability of funding costs will be subject to the requirement of reasonableness. The QMR provides for three most important considerations that should be taken into account: a) whether recourse to TPF was because of claimant’s impecuniosity which was caused by host state’s conduct and b) whether the claimant had no other option but to apply for TPF to pursue the case; and c) whether respondent had knowledge that claimant was funded83. Finally, the amount of funding cost should itself be reasonable and it is hard to provide general rule, since the price of funding depends on different aspects that vary from case to case. For example, in one commercial case, Essar v. Norscotthe English High Court approved tribunal’s decision on recovery of funding cost with a return rate of 300%84. However, there is no reported investment arbitration case where funded party was able to recover such costs. In Author’s view, such
77 Kardassopoulos and Fuchs v. The Republic of Georgia (ICSID Case Nos. ARB/05/18 and ARB/07/15), Award (3
March 2010);
78 Quasarde Valores SICAV S.A. et.al.v.The Russian Federation, SCC Arbitration No.
24/2007, Award of 20 July 2012 , para. 224.
79 Kardassopoulos and Fuchs v. The Republic of Georgia (ICSID Case Nos. ARB/05/18 and ARB/07/15), Award (3
March 2010);
80 Report of the ICCA – Queen Mary Task Force on Third-Party Funding in International Arbitration, International
Council for Commercial Arbitration, The ICCA Reports No. 4, April 2018, p.157; A_CN.9_1004_E, p. 17-18 available at: https://undocs.org/en/A/CN.9/1004, accessed 19 June 2020p. 17.
81 Report of the ICCA – Queen Mary Task Force on Third-Party Funding in International Arbitration, International
Council for Commercial Arbitration, The ICCA Reports No. 4, April 2018, p.157.
82 ICC COMMISSION REPORT Decisions on costs in international Arbitration, ICC Dispute Resolution Bulletin 2015,
Issue 2, para. 92-93, available at https://www.iccwbo.be/wp-content/uploads/2012/03/20151201-Decisions-on-Costs-in-International-Arbitration.pdf accessed 19 June 2020.
83 Report of the ICCA – Queen Mary Task Force on Third-Party Funding in International Arbitration, International
Council for Commercial Arbitration, The ICCA Reports No. 4, April 2018, p. 158.
84 Report of the ICCA – Queen Mary Task Force on Third-Party Funding in International Arbitration, International
a possibility has some rationales besides, but a very strict test for recoverability of these costs is necessary and QMR’s approach seems to be appropriate.
It seems that tribunal’s right to take into account the fact whether TPF was voluntary and timely disclosed when deciding on costs, the same as in art. 3.37(3) EU-Viet Nam BIT, may be used to reject claimant’s claim for compensation of costs associated with obtaining of TPF. This seems to be reasonable, because if it is not disclosed then respondent would not have a knowledge that claimant was funded and QMR’s conditions would not be satisfied85.
Furthermore, the important question exists whether funder itself may be liable for adverse costs if the funded party’s claim fails. The whole concept of arbitration is based on the notion of consent, which is expressed in the state’s offer to arbitration and investor’s consent to it. Furthermore, the State’s offer (consent) is very limited in nature and covers usually only disputes between it and foreign investor to investments within its territory. Therefore, such consent may not cover funders, to make it party to investment proceeding and make subject to tribunal’s power. This was confirmed by QMR which stated that: «under the current state of the law arbitral tribunals generally lack the jurisdiction
to order costs directly against a funder»86. This will be a case even if the funding agreement provides for funder’s obligation to pay adverse costs. Moreover, since initial and obligatory disclosure relates only to funder’s name and the address, neither tribunal nor opposite party will be aware of such contractual obligation. However, some arbitration rules, try to mitigate these concerns by giving power to the tribunal to order disclosure of «whether or not the third-party funder has committed to undertake adverse costs liability»87. But this is a power of the tribunal and will depend on the tribunal’s wish.
As can be seen from this section, TPF raises several concerns as to the costs of a proceeding, but the main seems to be the one related to an adverse costs order. The Author agrees with ICSID members who proposed that funded party should be obliged to initially disclose any funder’s obligation in respect to adverse cost order88. However, in Author’s view this would be meaningless if tribunals would not have a power to order such costs against funder itself. Therefore, the existent system that does not include any obligation to provide information about funders obligations and that makes it impossible for states to claim money from funders who are contractually bind to pay them seems to be the one that does not mitigate concerns that TPF raises in relation to costs.
85 Report of the ICCA – Queen Mary Task Force on Third-Party Funding in International Arbitration, International
Council for Commercial Arbitration, The ICCA Reports No. 4, April 2018, p. 158
86 Report of the ICCA – Queen Mary Task Force on Third-Party Funding in International Arbitration, International
Council for Commercial Arbitration, The ICCA Reports No. 4, April 2018, p.226.
87 Investment Arbitration Rules of the Singapore International Arbitration Centre SIAC Investment Rules (1st Edition, 1
January 2017), Art. 24.
88 Compendium of State and Public Comments on WP #2 - June 28, 2019, p. 67, and Compendium of State and Public
Comments on WP #3 - February 27, 2020, p.22 available at: https://icsid.worldbank.org/en/amendments, accessed 19 June 2020;
2.3 Security for costs:
Another concern associated with TPF is its relation to security for costs orders. The involvement of the TPF in arbitral proceeding obviously may raise questions as to claimant’s impecuniosity and respondent states will try to ensure that in case, they win they would be able to recover its costs. Moreover, as ICSID statistic shows, from 34 cases where award was in favour of states in 12 cases claimants failed to comply with award and states were not able to recover damages89.
The availability for security for costs order was disputable in ISDS system, while some rules such as LCIA90 provides for tribunal’s authority to order such measure, other, such as ICSID Rules and UNCITRAL Arbitration Rule is silent as to the tribunal’s power to order security for costs. However, some arbitrators91 and academics92 proposed a view that Art. 47 ICSID Convention93 should be interpreted to provide tribunals with such power. Furthermore, the present reform of ICSID Arbitration Rules suggest the inclusion of an express provision for security for costs orders94. This provision states that tribunal should consider all relevant pieces of evidence when deciding on the security for costs95 and that «[t]he existence of third-party funding may form part of such evidence but is not by itself sufficient to justify an order for security for costs»96 Therefore, contrary to some views that TPF should trigger security for costs order per se and shift the burden of proof to the funded party to show its ability to cover adverse costs97, at least proposed reform of ICSID Rules sticks to a more conservative approach. The majority of the UNCITRAL Working Group III also have agreed that the existence of the TPF per se does not justify security for costs order and agreed with the approach taken by ICSID proposed amendments. However, there were some who disagreed with this view and argued that TPF could be sufficient in itself to order security for costs98. Furthermore, it should be noted that the general rule is that security for costs order «remains a very
89 SURVEY FOR ICSID MEMBER STATES ON COMPLIANCE WITH ICSID AWARDS, p. 4, available at:
https://icsid.worldbank.org/en/Documents/about/Report%20on%20ICSID%20Survey.pdf#search=SURVEY%20FOR% 20ICSID%20MEMBER%20STATES%20ON%20COMPLIANCE%20WITH%20ICSID%20AWARDS accessed 19 June 2020.
90 LCIA Arbitration Rules (2014), Art. 25.2.
91 Schreuer, The ICSID Convention: A Commentary (2001), p. 782; EuroGas Inc. and Belmont Resources Inc. v.
Slovak Republic (ICSID Case No. ARB/14/14), Procedural Order No. 3 (23 June 2015).
92 Schreuer, The ICSID Convention: A Commentary (2001), p. 782.
93 «Except as the parties otherwise agree, the Tribunal may, if it considers that the circumstances so require,
recommend any provisional measures which should be taken to preserve the respective rights of either party.»
94 Proposal for amendments of the ICSID Rules, Working Paper 4, Volume 1, February 2020, Rule 53, available at:
https://icsid.worldbank.org/en/amendments accessed 19 June 2020.
95 ibid, Rule 53(3). 96 Ibid, Rule 53(4).
97 RSM Production Corporation v. Saint Lucia, (ICSID Case No. ARB/12/10), Assenting Reasons of Gavan Griffith (12
August 2014)
rare and exceptional measure» and that respondent will have to prove that mere existence of TPF shows that a claimant would not be able to pay award costs rendered against it 99.
The first ICSID case in which tribunal has ordered security for costs was RSM Production
Corporation v. St Lucia. Interestingly, that this case involved TPF on behalf of a claimant, however,
the decisive factor for such decision was claimants proven history of non-compliance with costs awards issued against it in previous ICSID proceedings100. As to TPF itself, the tribunal stated that its existence confirms concern as to claimant’s possible failure to comply with adverse costs award and concluded that: «[t]ribunal regards it as unjustified to burden Respondent with the risk emanating from the uncertainty as to whether or not the unknown third party will be willing to comply with a potential costs award in Respondent‘s favour»101. However, in certain circumstances, the existence of TPF may also be advantages for claimant in security for costs issue. As was discussed in the 1st chapter, TPF, depending on its definition, may also include ATE insurance (as well other means of arbitration financing mechanisms) which typical terms include insurer’s obligation to pay adverse costs orders. The existence of such insurance policy was a reason why tribunal in Eskosol v Italy case decided not to grant security for costs order despite claimant’s apparent insolvency102.
In another case, García Armas v. Venezuela administered under ICSID Additional Facility, the TPF was also assessed about security for costs order. This case is relevant to this work for two following reasons. Firstly, before deciding on the respondent’s request for security the tribunal ordered the claimant to disclose terms of the funding agreement. After the tribunal has found that agreement did not contain any responsibility for funder in respect of adverse costs award it ordered the claimant to prove its solvency and to identify any assets it holds and jurisdictions where these assets are located103. By this ruling, it seems that the tribunal has shifted the burden of proof from the respondent to the claimant and attached great importance to the existence of TPF, which is contrary to previous case law, where tribunals stated that: «financial difficulties and third-party funding … do not necessarily constitute per se exceptional circumstances justifying … an order of security for costs»104. Secondly, in this case, the tribunal rejected claimant’s proposal to amend the funding agreement to
99 Guaracachi America Inc. and Rurelec plc v. Plurinational State of Bolivia PCA Case No. 2011-17, Procedural Order
No. 14 (11 March 2013).
100 RSM Production Corporation v. Saint Lucia, ICSID Case No. ARB/12/10, Decision on Saint Lucia’s Request for
Security for Costs (13 August 2014) para. 86.
101 Ibid, para. 83.
102 ESKOSOL S.P.A. IN LIQUIDAZIONE and ITALIAN REPUBLIC, ICSID Case No. ARB/15/50, PROCEDURAL
ORDER NO. 3, para. 37.
103 Report of the ICCA – Queen Mary Task Force on Third-Party Funding in International Arbitration, International
Council for Commercial Arbitration, The ICCA Reports No. 4, April 2018, p.179.
104 EuroGas Inc. and Belmont Resources Inc. v. Slovak Republic, (ICSID Case No. ARB/14/14), Procedural Order No.
include in its funder’s obligation to pay adverse costs in case tribunal so decides105. The second ruling of the tribunal has some sense because usually respondent state has no recourse against funder to enforce its contractual obligation vis-a-vis funded party. However, shifting the burden of proof and ordering security for costs only due to the involvement of TPF seems to be at least surprising. The above analyzes shows that security for costs is one of the central problems arising out of involvement of TPF. This is mostly due to the unregulated nature of security for costs order itself and its relation to TPF. This uncertainty leaded to several contradictory decisions which is obviously harmful for the ISDS system. It seems that after adoption of new ICSID Arbitration Rules this concern will be resolved, but only for arbitration under ICSID auspice. However, if arbitration would be conducted under other rules, it will be an open question for tribunals. This is why Author believes that uniform approach should be adopted in respect to security for costs and it might be one adopted by ICSID AR, since it represents a good balance between interests of both investor and state. 2.4 Confidentiality:
Another concern that TPF raises relates to confidentiality. Arbitration, as a dispute settlement mechanism, is very attractive because, as a rule, it is held privately, so that no third party can get any information about the dispute and even its existence. However, in investment arbitration, great steps were taken to make the ISDS system more transparent. For example, every ICSID case and its most important facts are now published by ICSID Secretary-General106 as well as excerpts of the legal reasoning of the Tribunal107. While some attempts to transparency were made, the Centre still is not allowed to publish awards108 and make hearings open to the public without the consent of the parties109. Furthermore, the arbitrators shall keep all information which came to their knowledge during the proceeding confidential110. However, all these obligations are addressed to the centre and arbitrators, while no rule in ICSID Convention or Arbitration Rules impose a duty of confidentiality on behalf of parties involved in a proceeding111. Moreover, as one tribunal observed: «the official annotations accompanying the original version of the ICSID Arbitration Rules (which are not binding, and do not form part of the Rules) state that the parties are not prohibited from publishing their pleadings»112. This position was also adopted in another case, where tribunal concluded: «that the
105 Manuel García Armas et al. v. Bolivarian Republic of Venezuela, PCA Case No. 2016-08, Procedural Order No. 11
(Oct. 5, 2018), reported in Lisa Bohmer & Luke E. Peterson, In New Ruling, BIT Tribunal Does Not Consider
Amendment of Third Party Funding Contract to Be Sufficient Guarantee That a State Could Collect on Possible Future Costs Order, IA REP. (Oct. 24, 2018).
106 ICSID Administrative and Financial and Regulations, Regulations 22(1),p. 23. 107 ICSID Convention Arbitration Rules, Rule 48(4).
108ICSID Convention Arbitration Rules, Rule 48(4); ICSID Convention art. 48(5). 109 ICSID Convention Arbitration Rules, Rule 32(2).
110Ibid, Rule 6(2).
111 Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania, ICSID Case No. ARB/05/22, Procedural Order No.
3, para. 121.
Convention and the Rules do not prevent the parties from reviling their case» and rejected respondent request for a provisional measure to prohibit a claimant from communicating information about an arbitration case to the newspapers113.
The UNCITRAL Rules on Transparency adopted even more open approach as to the publication of documents related to the proceeding and under Art. 3(1) the notice of arbitration, the response to the notice of arbitration, the statement of claim, the statement of defence and any further written statements or written submissions by any disputing party shall be disclosed to the public114. However, as the ICSID system, it does not provide for any express obligation towards parties not to disclose any information to the public.
Notwithstanding flexible approaches adopted by ICSID and UNCITRAL, the obligation as to confidentiality may arise either due to the applicable law115 or express agreement between parties. If such duties exist, the TPF may violate these obligations and the breach may acquire even before TPF agreement is concluded, since, as discussed in the first chapter, before agreeing to fund arbitration funder will very carefully examine the case which may include documents that are protected by confidential obligation. Furthermore, the TPF agreements usually provide for funded party obligation to provide the funder with information about the progress of claim «regardless of the information’s source, confidentiality»116.
The problem is that funder may use information about a case and respondent state for its own benefit. For example, by financing other disputes against the same respondent state for the same cause and disclosing this information to claimants, since funder will already know possible arguments and defences that respondent may raise and tribunal’s reaction to it. However, some funding agreements address this concern and include a provision that prohibits any party receiving confidential information from disclosing, using or making it available to anyone, except as to perform the finding agreement117. But the problem is that this obligation is towards funded party only and respondent states, who are not party to funding agreement have no mean to enforce it. Furthermore, even if disclosure of the existence of the TPF would apply to a dispute, neither respondent nor tribunal would be aware of such obligation, since the disclosure, as it now regulated does not cover all TPF agreement terms.
As can be seen from this analyzes, existing regulations do not address concern related to confidentiality at all. The Author believes that the best way to solve this problem would be to make
113 Amco Asia Corporation and others v. Republic of Indonesia, ICSID Case No. ARB/81/1, Decision on Request for
Provisional Measures, 9 December 1983, 1 ICSID Rep.410 (1993), para. 4.
114 United Nations Convention on Transparency in Treaty-based Investor-State Arbitration (New York, 2014) (the
"Mauritius Convention on Transparency»), Art. 3(1).
115 Central America-Dominican Republic Free Trade Agreement (CAFTA-DR)), Art. 10.21.
116 Steinitz, Maya & Field, Abigail. (2014). A Model Litigation Finance Contract. Iowa Law Review. 99, p.761. 117 Ibid, p.763.
funders party to a confidentiality agreement vis-à-vis states. However, under present system it would be almost impossible to do, because funders are unlikely to enter into this agreement voluntary. Therefore, the only way to make it work would be to make funders subjects to the tribunal’s jurisdiction.
2.5 Conclusion to chapter 2:
The above analysis proves that that TPF in investment arbitration remains largely unregulated area118. Even though, some attempts to regulate it were taken, for example obligation of funded party to disclose existence and name of a funder to prevent conflict of interest or provisions that regulate TPF effect on decision on security for costs, these reforms are rather exceptions than general practice. Most of the treaties and arbitration rules are absolutely silent as to the TPF and those that contain some reference to TPF do not deal with all concerns that it raises. Therefore, the Author believes that greater reform that could minimize all problems that TPF raises is needed. In Author’s view this could be done by giving tribunals direct power over funders. The reason for such proposals will be discussed in the next chapter. However, before moving to this part it is important to understand what mechanisms should be regarded as TPF and this will be assessed in the first part of third chapter.
Chapter 3: Author’s proposals for the reform of third-party funding:
This chapter aims to propose Author’s approach to the regulation of the TPF. As it was shown in the previous chapter, the current and proposed regulations are not perfect, since they do not mitigate all concerns associated with the TPF. Therefore, this chapter will first assess existing definitions of the TPF and conclude which one is most appropriate. Secondly, it will show Author’s view on how regulation of TPF may be improved.
3.1 Definition:
It is impossible to regulate something if there is no clear definition of what is regulated. Therefore, the first step is to decide what types of funding mechanism, in light of the concerns mentioned in the second chapter, should be considered as TPF and consequently be under regulation.
The analysis of existing definitions suggests that TPF includes several characteristics, which are common for most of the approaches: funder always is a non-party to a proceeding; funding may be provided to both claimant and respondent; funding may cover all cost associated with a proceeding or part of it; funding is provided in return for a remuneration dependent on the outcome of the dispute or as donation or grant. However, drafters of different treaties and rules sometimes disagree on the relevance of further characteristics, namely: whether TPF include only agreements with a party to a dispute or also agreements with party’s affiliate and its legal representatives; whether the subject matter of an agreement is limited to funds only or covers also other material/equivalent support;
whether funding agreement which includes remuneration not depended on the outcome of a dispute, but is fixed (like in BTE insurance) will be identified as TPF; whether agreements between the party and its legal representatives should be included in the definition of TPF. The Author agrees with all ‘common’ characteristics and believes that they are should form part of TPF definition. Therefore, the very issue is whether other characteristics which are not uniformly accepted should nevertheless be included in the definition of TPF and if so, why? Hence, all this possible element of the definition will be assessed in turn.
The first is whether agreements concluded not directly with a party to a dispute, but with its affiliates or legal representatives should form part of the definition of the TPF. TPF regulation aims to minimise any risk to the investment proceeding that arises out of its existence. The author believes that even if a funding agreement is concluded not directly with a party to a dispute it raises almost the same concerns. For instance, the agreement may be concluded between funder and claimant’s parent company, which provides for a payment calculated concerning awarded damages and includes funder’s obligation to pay adverse costs or one state may decide to provide funds to respondent state’s legal representative, to help it to establish a good precedent. These agreements raise the same concerns as the direct agreement between funder and party, because they may create a conflict of interest since both funders will have some interest in the outcome of a dispute and may endanger the confidentiality of a proceeding. In the first scenario, it may also raise concerns related to security for costs and adverse costs issues. If such agreements are not included in the definition of TPF, it will make possible for funding party to evade obligations that related to the TPF by concluding not direct TPF agreement. Consequently, it might endanger the integrity of a proceeding. Therefore, the author believes that such agreements should be covered by the definition of TPF, either by the inclusion of express words like in QMR definition119 or by stating that the funding may be received by a party either directly or indirectly120.
As to the second disputable characteristic, existing and proposed definition have defined TPF concerning either funds or other material support121 or any funding122 or just funds123. The Oxford
dictionary defines funds as «[t]he money at the disposal of a person, organization, etc.»124 and funding
119 «an agreement by an entity that is not a party to the dispute to provide a party, an affiliate of that party or a law firm
representing that party»; Report of the ICCA – Queen Mary Task Force on Third-Party Funding in International
Arbitration, International Council for Commercial Arbitration, The ICCA Reports No. 4, April 2018, p. 50..
120 «non-party from which the party, directly or indirectly, has received funds»; Proposal for amendments of the ICSID
Rules, Working Paper 4, Volume 1, February 2020, Rule 14(1) p. 37.
121 Report of the ICCA – Queen Mary Task Force on Third-Party Funding in International Arbitration, International
Council for Commercial Arbitration, The ICCA Reports No. 4, April 2018, p. 50.
122 EU-Viet Nam BIT, Art. 3.28 (I).
123 Proposal for amendments of the ICSID Rules, Working Paper 4, Volume 1, February 2020, Rule 14(1).
124 Oxford English Dictionary, available at:
