The Influence of Third-Party Funding in Investor – State Arbitration in the
Light of Issues Concerning Impartiality of Arbitrators and Transparency in
the Current Investment Arbitration System
LL.M Thesis University of Amsterdam International and European Law: International Trade and Investment Law
Sina Widing
27 July 2018
Abstract
International investment arbitration contains tremendous costs for both the investor and the State that are involved in the Investor – State proceedings. A Third-Party Funding involves an entity, that has whatsoever no interest in the legal dispute, but is providing financing to one of the parties. Instead of having an interest in the case itself, the Third-Party Funder as such, is investing in the proceedings in order to gain profit upon the settlement of the dispute. The Third-Party Funding and its popularity has grown at the same pace with the growth of Investor – State Arbitration claims. The explanation that many scholars have given to this rising phenomenon is the fact that Third-Party Funding seems attractive option because of its lack of regulation. Investor – State Arbitration entails delicate matters and therefore it may lead to problems with issues such as public interest including the risk of conflict of interests, transparency issues and problems with the impartiality of the arbitrator; and because of these problems, on the other hand, the whole legitimacy of Investor – State Arbitration system itself might be questioned as a whole. The use of the Third-Party Funding has been under examination and opinions of its’ legitimacy, advantages and disadvantages have been laid out and commented frequently by academics of the field. Concerns for investment arbitration cases that have made their way in front of the Tribunal because of this Third-Party Funding made available have been expressed and usually they concern cases that put sovereign States in a delicate position. Especially, questions have been raised when it comes to the identity and the nature of the involvement of the Third-Party Funders. This thesis will investigate the influence of the Third-Party Funder in Investor – State Arbitration system itself and examine whether the current Investor – State arbitration system itself suffices with regard to the influence of Third-Party Funder in the light of issues concerning impartiality of the arbitrator and transparency. In regards of the issues the impartiality of the arbitrator, the author will introduce tools for addressing Third-Party Funding issues in the mentioned context and also include relevant case law. In this respect as well, the thesis will examine what could be possibly improved in order to ensure the execution of these principles in the current Investor – State Arbitration system.
Table of Content
List of Abbreviations……….2 1. Introduction...3 1.1 Reseach focus……….. ……...3 1.2 Structure………..………...5 1.3 Methodology………..………62. The concept of third-party funding in international investment arbitration………..7
2.1 Third-party funding the investor………...10
2.2 Third-party funding the State……… 11 2.3 Third-party funding: Advantages and Disadvantages………. ……….14
2.3.1. Advantages of the Third-Party Funding……….15
2.3.2. Disadvantages of the Third-Party Funding……… 16 2.4 Interim Conclusions……….17
3. Tools for addressing Third-Party Funding issues in Investor - State Arbitration………19
3.1 Conflict of Interests and the Impartiality of the Arbitrators………20
3.1.1. IBA Guidelines on Conflict of Interests……….21
3.1.2. Report of the ICCA - Queen Mary Task Force on Third-Party Funding in International Arbitration……….24
3.2 The Principle of Transparency and the Mauritius Convention…...………26
3.3 Interim Conclusions………28
4. Public Policy Implications and Possible Improvements………..30
4.1 Possible improvements to the Current Investor - State Arbitration System..……….31
4.2 Interim Conclusions………33
Conclusions…………...………...…34
List of Abbreviations
ICSID International Centre for Settlement of Investment Disputes
BIT Bilateral Investment Treaty IBA International Bas Association
IBA Guidelines IBA Guidelines on Conflict of Interests
ICCA – Queen Mary Report ICCA – Queen Mary Task Force on Third-Party Funding In International Arbitration
Mauritius Convention The United Nations Convention on Transparency in Treaty-Based Investor – State Arbitration
UNCITRAL United Nations Commission on International Trade Law SIAC Singapore International Arbitration Centre
1. Introduction
1.1 Research focus
“The Third-Party Funding is a recent trend in arbitration that becomes popular with astronomic progression and the statistical data shows the rise of interest among investors for more than 500% and this triggers the developing of new field of arbitration that is, however, lacks some primary regulation and universal approach”.1 For the purpose of this work, the Third-Party
Funding will be referred to within the context of international investment arbitration or Investor –State Arbitration and who is defined as an investor to the dispute, is not explicitly a party to the arbitration Treaty, but agrees to pay the arbitration costs of one of the parties in return; meaning that the Third-Party Funder receives an agreed share of the case if the funded party wins the dispute. One must refer at this point to the fact that the funded party and the Third-Party Funder itself will usually form an agreement with specific terms that is also called as the funding agreement.2 The fact that the Third-Party Funding actually makes a financial investment
expecting to realize a return out of this investment leads to a situation where the Third-Party Funding becomes highly involved in the arbitration proceedings.
The mentioned situation, develops the claim that when the Third-Party Funder becomes involved in the arbitration proceedings, there arises a risk of conflict of interests between the Third-Party Funder and an arbitrator that are both involved in the same case. The objectivity of the both arbitrator and the Third-Party Funder may become an issue, for instance, if the arbitrator is a partner of a law firm or a partner of a hedge fund investing in lawsuits with whom the Third-Party Funder has a professional relationship or either way close relationship. This of course gives rise to other forms of conflict of interests as well, one to mention, the principle of transparency. “The international arbitration third-party funding market has to date operated adequately without mandatory regulation”.3 Therefore, one may claim that this is one of the reasons why the topic
1 A Hubai, ‘Coming out of the Closet: Third-Party Funding in International Arbitration’ (EFILA Blog, EU Investment Law and Arbitration, 1 February 2018) https://efilablog.org/2018/02/01/coming-out-of-the-closet-third-party-funding-in-international-arbitration/ accessed 10 April 2018.
2 W H van Boom, ‘Litigation, Costs, Funding and Behavior: Implications for the Law’( Routledge Taylor and Francis Group 2017) 109.
3 M Baker and P Bienvenu, ‘International Arbitration Report’, Norton Rose Fullbright, Issue 7 – September 2016, p. 12.
has created so much discussion. It might even be relevant to claim that because it seems to work so well, behind the scenes of it must be something, such as issues of transparency and impartiality of the arbitrator, much more than one might expect. There are several benefits and potential risks when it comes to third-party funding, but this particular work mainly focuses on the involvement of the funder itself when possibly, for instance, having a previous or even current relationship with the arbitrator and therefore creating a complicated dimension both to the arbitration proceeding and to the case itself. Hence, the objectivity of the arbitrator usually becomes a big question mark as well.
There has been discussion around the frequency of the cases where there is a conflict of interest between the arbitrators and funders. The claim has been made that such conflicts may only arise in very limited amount of cases, but several authors have argued that conflicts of interest between arbitrators and funders are arising with greater frequency due to the both, already mentioned, growth of the third-party funding industry and due to the highly concentrated nature of the industry, which of course leads to more third-party funding cases in general.4 The
transparency of the arbitration proceedings and the impartiality of the arbitrator are fundamental and form the basis to guarantee a fair proceeding for both of the parties, therefore the protection of them become highly important, especially, in the context of a third-party funder where the risks are higher to damage these corner stone principles.
The main aim of this thesis is to examine through a research question whether the current investor – state arbitration system itself suffices with regard to the influence of third-party funder in the light of issues concerning transparency and impartiality of the arbitrator. The central research question will be addressed and examined though sub questions, such as, what is the concept of third-party funding and what are its advantages and disadvantages, how are the issues of transparency and impartiality of an arbitrator currently regulated in a case of third-party funding and whether the provided instruments give a sufficient protection. In order to answer the research question itself through the sub questions, the author will also provide case law to support and explain both the previous and the current situation of the issues. The structure of the thesis is following.
4 N Darwazeh and A Leleu, ‘Disclosure and Security for Costs or How to Address Imbalances Created by Third-Party Funding’ (2016) 33(1) J Intl Arbitration Kluwer Law International 32.
1.2 Structure
This thesis comprises of an introduction, three main chapters and of a conclusion chapter. The first part of this thesis will engage in discussing and analysing the concept of third-party funding in international investment arbitration and explaining in depth its advantages and disadvantages. Subsequently, after a brief explaining of the concept, the thesis will try to achieve a better understanding of the issues evolving around it and hence try to lead the reader to the ethical issues regarding the third-party funding, in particular, the issues around the principle of transparency and the impartiality of the arbitrator. Therefore the second part of the thesis will be devoted to tools addressing Third-Party Funding issues in Investor – State Arbitration, such as, the Mauritius Convention on Transparency, the IBA Guidelines on Conflict of Interests together with the ICCA - Queen Mary report on Third-Party Funding. The author will also include some relevant case law, meaning the author will try to highlight some interesting cases in which the issue of the third-party funding issue has been raised, meaning that in addition to arbitration rules and laws that directly govern arbitrations and are binding as such, the above mentioned guidelines, conventions as well as case-law can also play significant role. As indicated before, because of the lack of regulation of Third-Party Funding, as an opposite to the vast majority of the arbitration rules and laws, the IBA Guidelines on Conflict of Interests, the ICCA- Queen Mary Task Force on Third-Party Funding Report and the United Nations Convention on Transparency in Treaty-based Investor-State Arbitration 2014 (Hereinafter the Mauritius Convention on Transparency) do explicitly address Third-Party Funding and its impact on the conflict of interests, namely the impartiality of the arbitrator as well as its impact on the Transparency issues and therefore, these guidelines, reports and conventions will be analysed more comprehensively and in depth.
Furthermore, the third part of the thesis will focus on the developments that have occurred in the jurisprudence and academic writing related to the issue of third-party funding in investor – state arbitration in the light of the transparency- and impartiality of the arbitrator issue. The aim of the third chapter is basically to talk about public policy implications raised regarding the specific issues in question and to point out some possible improvements to the existing debate. Finally, an overall conclusion with regard to the research question will be drawn.
1.3 Methodology
The research methodology used in writing this thesis has been based on comparative analysis and qualitative, primarily exploratory, analysis. Meaning that the main research question and the purpose of this thesis result from research on prominent literature, academic articles, case law, guidelines, such as the IBA Guidelines on the Conflict of Interests and the Mauritius Convention on Transparency. The sources are initially being assessed through a descriptive comparative law approach. The overall aim of the thesis is to make a contribution to the existing state of the current system of the investor – State arbitration when Third-Party Funder is involved and more specifically in the light of the issues concerning transparency and the impartiality of an arbitrator. The conclusions following this research led to evaluation of the tools, such as, the IBA Guidelines, the ICCA Report and the Mauritius Convention addressing the Third-Party Funder involvement in the light of the two specific issues mentioned in the research question.
2. The Concept of Third-Party Funding in International Investment
Arbitration
Nowadays, when it comes to Third-Party Funding in international investment arbitration, it is rather easy to concur at least partly, that “the whole theory is to take legal system and turn it into a stock market”.5 In other words, the foregoing discussion implies that “as the number of
international investment disputes has grown, arbitration has become a money-making machine in its own right”.6 The main aim of seeking help from the Third-Party Funder, since international
investment arbitration contains tremendous costs for both the investor and the State that are involved in the Investor – State arbitration proceedings, is to get someone else to bear the costs. Having said that, it is clear that in exchange, the Third-Party Funder seeks to gain profit upon the settlement of the dispute. In most of the cases, the Third-Party Funder is a separate entity specialized in litigation funding that has no interest in the legal dispute itself, but has a monetary interest in the outcome of the dispute settlement. The potentially high awards in both commercial and mainly in investment arbitration have attracted funding providers.7 “Jonathan T. Molot,
Buford’s chief investment officer and a Georgetown law professor has stated that “increasingly, companies involved in business disputes are beginning to look to financing as a prudent way to manage costs of those disputes and therefore this is very much like a venture capital or private equity process, with the subject matter being different”.8
Historically speaking, the concept of the Third-Party Funding dates to the time when there was a historical prohibition against the use of outside capital to finance claims in the United States and this in turn has its roots in the four-hundred-year-old English law principle of chamberty, which was developed to prohibit tenants from financing claims against their landlords.9 In the case of
RSM Production Corp v. Saint Lucia, Gavan Griffith gave his assenting opinion of in the State’s
5 W Alden, ‘Looking to Make a Profit on Lawsuits, Firms Invest in Them’ The New York Times (New York, 30 April 2012) https://dealbook.nytimes.com/2012/04/30/looking-to-make-a-profit-on-lawsuits-firms-invest-in-them/ accessed 10 April 2018.
6 “Chapter 2: ‘Investment treaty disputes: Big business for the arbitration industry’ (Corporate Europe Observatory 27 November 2012) https://corporateeurope.org/2012/11/chapter-2-investment-treaty-disputes-big-business-arbitration-industry accessed 10 April 2018.
7 J E Kalicki, ‘Third-party Funding in Arbitration: Innovation and Limits in Self-Regulation (Part 1 of 2)’ (Kluwer Arbitration Blog, 13 March 2012) http://arbitrationblog.kluwerarbitration.com/2012/03/13/third-party-funding-in-arbitration-innovation-and-limits-in-self-regulation-part-1-of-2/ accessed 14 April 2018.
8 Ibid 2, accessed 18 April 2018.
9 Juridica Investment Ltd, ‘Pioneering corporate claim finance for commercial litigation’ http://www.juridicainvestments.com/about-juridica/our-public-policy-statement.aspx accessed 18 April 2018.
application for security for costs and spoke of “the emergence of a new industry of mercantile adventurers”.10 With this comment, Griffith refers to the fact that Third-Party Funding has been
very common, for instance, in Maritime arbitration already for more than hundred years, which has taken a place in a form of special kind of “clubs” where Maritime lawyers represent parties (i.e. ship owners that are part of these clubs) whose legal fees are paid by third parties in claims arising from the deployment of their ships worldwide, including damage and injury caused by for instance pirates.11 In this context, it may also be noted that Third-Party Funding is not initially
something that has been connected to arbitration, it actually originates from State Court litigation and it must be also noted that there is not a single generally accepted definition of the Third-Party Funding, because it remains debatable what exactly should fall under the scope of the term itself.12
When talking about Third-Party Funding as a concept, it is inevitable to discuss about the differences that it has in Common law and Civil law jurisdictions. In general, all Common law jurisdictions have somewhat different approached towards Third-Party Funding. To mention, in the United States alone, there are 50 states with 50 different approaches to describing Third-Party Funding and how it should be regulated.13 In Ireland on the other hand, Third-Party
Funding is absolutely forbidden, following the Supreme Court ruling in the case of Persona
Digital.14 Furthermore, in some Common law jurisdictions, there are different approaches
whether the legal process is a litigation or arbitration, for instance, in Hong Kong until recently only insolvency office holders were permitted to use Third-Party Funding since claims farming remains such a severe problem in personal injury litigation.15 In Singapore, the reason for the
failure of the take off of Third-Party Funding was the mere fact that the torts of chamberty and maintenance still applied to both litigation and arbitration.16 In the case of England and Wales,
English law has traditionally restricted the funding of litigation or arbitration by Third-Parties
10 J Clanchy, ‘Navigating the Waters of Third Party Funding in Arbitration’ (2016) Vol. 82 No.3 The International Journal of Arbitration, Mediation and Dispute Management p. 223; See also RSM Production Corporation v. Saint Lucia, ICSID Case No. ARB/12/10, Assenting Reasons of Gavan Griffith, 13 August 2014, para. 14.
11 Ibid, 223.
12 F Blavi, ‘Towards a Uniform Regulation of Third Party Funding in International Arbitration’ (2015) 18 6 International Arbitration Law Review pp. 143-144.
13 L Perrin, ‘Preface’ (2017) 1st Edition the Third-Party Litigation Funding Review v.
14 Persona Digital v Ireland, The Supreme Court 25 July 2016, [35] 15 Ibid 13.
16C Miles, ‘Case notes on third-party funding’ Global Arbitration Review http://www.lalive.ch/data/publications/Third_Party_Funding.pdf accessed 25 May 2018.
whether that funding is provided by specialist Third-Party financiers or by lawyers through a
“no win, no fee arrangement”.17
“The Civil law, on the other hand, has never held any significant reservations about the Third-Party Funding”.18 In many Civil law jurisdictions, an outright assignment of a claim to a third
party has always to an extent been legally possible.19 For instance, in Switzerland the Third-Party
Funding in arbitrations is a relatively novel concept and there are no legal obstacles preventing the access to Third-Party Funding.20 In France the Third-Party Funding of an international
arbitration has received rather limited attention and is expressly addressed neither by French legislation nor the bar rules; however there is a case where the validity of funding agreements has been indirectly confirmed by a French court.21
However unlike in Europe, in the United States mass claims for instance, have been traditionally funded by means of a contingency fee model offered by lawyers handling the case that is not applicable in Civil law jurisdictions where these types of arrangements are prohibited.22 It has
been claimed that for this reason that numerous entities have devised sophisticated mechanisms to ensure that mass actions are pursued and enforced in the civil law context.23 Furthermore, this
above mentioned it deemed to solve for potential conflicts which may arise in the context of passive funding; such as issues arising from control over the litigation itself and the independence of the lawyer and hence the so-called active funding offers a solution that is based on the fact that the assignment and the underlying share of the proceeds agreement between the Funder and the Claimant typically align the interests that are at stake.24 For the reasons
mentioned above, it cannot be denied that the Civil law jurisdictions offers a better platform for the access to Third-Party Funding than the Common law system and is in its nature more flexible for accepting faster modifications and additions in regulating Third-Party Funding.
17 Ibid 16. 18 Ibid 12.
19 S Purewal, “The evolution of third party funding” (New Law Journal 20 October 2017) https://www.newlawjournal.co.uk/content/evolution-third-party-funding accessed 25 May 2018.
20 Ibid 14. 21 Ibid 14.
22 W Wielinga, H Van Roessel, K Visser and G Marco Solas ‘Third Party Litigation Funding: A Civil Law perspective (Part 4 of 4: Active funding – Collective Redress’ (Litigation Finance Journal 22 March 2018) https://litigationfinancejournal.com/third-party-litigation-funding-civil-law-perspective-part-4-4-active-funding-collective-redress/ accessed 25 May 2018.
23 Ibid 22. 24 Ibid.
International investment arbitration in itself is an extremely expensive form of litigation. Deriving from this, one of the issues for parties, especially for the claimant, is to become unable to pay for the continuation of an arbitration which it had commenced.25 The consensus view
seems to be that, in cases where the costs may rise to the clouds, the Third-Party Funding provides access to justice for those who could otherwise not afford to fight their claims.26
Therefore, without any doubt, third-party funding can promote equality of arms and enhance the overarching principles of procedural fairness and justice.27 However, the Third-Party Funding
thus serves both those who are unable to pay and also those who are unwilling to fund their resolution of their disputes, therefore demand grows as acceptance of the Third-Party Funding spreads.28
In the following sub-chapters, the discussion will point first to situations where a third-party funds the investor and secondly to situations where the third-party funder is funding the State Party. Many discussions about third-party funding address international commercial arbitration and investment arbitration together. However, third-party funding may affect the investment arbitration differently than commercial arbitration due to structural differences in the investment arbitration system.29 In addition, the aim of the author is to address the most commonly presented
disadvantages and advantages of third-party funding in general and specifically in Investor – State Arbitration.
2.1Third-party funding the investor
As discussed, a situation may arise from the investor’s side where it is evident that the dispute has occurred between an investor and a sovereign State, however, the investor cannot afford to 25 J Clanchy, ‘Third Party Funding in Arbitration: the first 125 years’ (LexisNexis Dispute Resolution, 17 May 2016) http://blogs.lexisnexis.co.uk/dr/third-party-funding-in-arbitration-the-first-125-years/ accessed 11 April
2018. 26 Ibid 12.
27 Y Dautaj and B Gustafsson, ‘Third-Party Funding: Enforcement as a Cornerstone in the Funding Calculus’ (Kluwer Arbitration Blog 9 December 2017) http://arbitrationblog.kluwerarbitration.com/2017/12/09/states- taking-two-bites-apple-chewing-non-complying-states-enforcement-stage-can-create-issues-third-party-funding-calculus-thus-hinder-investor-accessing-j/ accessed 7 May 2018.
28 Ibid v.
29 V Shannon, ‘The Structural Challenge of Investment Arbitration Viewed Through the Lens of Third-Party Funding’ (Oxford Public International Law, Investment Claims 2018) http://oxia.ouplaw.com/page/491/the-structural-challenge-of-investment-arbitration-viewed-through-the-lens-of-thirdparty-funding- accessed 4
bring the claim in front of an arbitral tribunal because of the immense amount of money that should be invested both in the proceedings and the lawyers to carry out the task. To put it bluntly, the investor needs a third-party that is able to fund the proceedings on behalf of him. Specifically, in investment arbitration, the Investor itself is in a great position because only the Investor may bring a claim since the aim of the Bilateral Investment Treaties (hereinafter BITs) is to protect the Investor from the Host State.
Usually, when choosing a third-party funder, the Investor tries to enter into a funding agreement with the funder that effectively removes the financial risk of an expensive claim. In this type of situation, the aim of the investor is that it can file the claim then pass the cash drain and the risk to the funder while waiting for a payment, making arbitration against States even more attractive for businesses.30 In other words, if for some reason the money does not come, the Claimant itself
has nothing to lose, but instead, the Defendant (being usually a sovereign State) must pay top-tier firms for their services in the proceedings.31
It is clear that nowadays, there are firms that are specialized in third-party funding, even hedge funds and banks are offering third-party funding as well. As discussed, in common understanding, funders usually prefer to fund the Claimants since there is a better chance for profits. As for a justification, the firms that offer third-party funding are making business out of it. When talking about “the better chance for profits”, it is easy to turn into a more complex setting, meaning the Third-Party Funding the State” since what really makes the Investor a better object to invest in is firstly the fact that by funding the Investor and in case of winning the dispute, the funder wins both the costs and the compensation of the case.
2.2 Third-party funding the State
There seems to be a compelling reason to argue that when it comes to a situation where a sovereign State Respondent is seeking third-party funder, to bear the costs of the investment arbitration, the rationale and justification of it tend to turn into the question of public policy. The proposition of that the State as a Respondent will reward a third-party for funding its costs of 30 Chapter 5: ‘Speculating on injustice: Third party funding in investment disputes’ (Corporate Europe Observatory 27 November 2012) https://corporateeurope.org/trade/2012/11/chapter-5-speculating-injustice-third-party-funding-investment-disputes accessed 7 May 2018.
investment arbitration is usually seen as unattractive to the States itself since they may face difficulties politically justifying State payments to foreign financing companies, particularly in so-called frivolous cases.32 It is not only the investors that may lack sufficient expertise and
resources to litigate their case and might therefore actually need the help of an experienced third-party funder, even though the third-third-party funding is something that is usually seen as favouring investors over States.33
As mentioned before, most funding indeed happens on the Claimant side in any dispute system because claim-side funding is more financially attractive to most funders than Respondent side funding.34 Recently the hot topic in this context has been the question of counterclaims, because
the Respondent side funding is only financially attractive if the funding arrangement is structured in a certain way since the major part of the of any Third-Party Funder’s eventual pay check will come from the Respondent of the case.35 Unlike in commercial cases where Respondents have
the ability to bring counterclaims under the contract that Funders may choose to fund, in investment arbitration “the rigidity of the Parties’ roles may create lopsided funding incentives”.36 In other words, this is because in a regular setting the Third-Party Funder does not
see it attractive to fund the State since they can only win costs, in case of the Respondent wins, instead of winning compensation and costs as they would if funding the Claimant (Investor) who won the case. When the Investor and the Host State sign for instance a separate contract, such as concession agreement, they each have an equal opportunity to bring claims against each other according to their contractual dispute resolution method; furthermore when there is no pre-dispute arbitration clause or contract between the parties, the consent to arbitration itself must be found from the BIT between the Host State and the Investor’s home State.37 Since the Investor is
not part of the treaty, the investor’s “written” consent is demonstrated by the investor filing a claim, for instance, under Articles 25 and 28 of the ICSID Convention or under provisions of the BIT.38 Hence, the State is always the Respondent and the problem is that it is extremely rare for
investment treaties to provide express consent for Host States to bring counterclaims.39 When
32 J E Kalicki, ‘Third-Party Funding in Arbitration: Innovation and Limits in Self-Regulation (Part 1 of 2)’ (Kluwer Arbitration Blog, 12 March 2012) http://arbitrationblog.kluwerarbitration.com/2012/03/13/third-party-funding-in-arbitration-innovation-and-limits-in-self-regulation-part-1-of-2/ accessed 6 May 2018.
33 Ibid, accessed 7 May 2018. 34 Ibid 29, accessed 24 May 2018. 35 Ibid.
36 Ibid. 37 Ibid 29. 38 Ibid. 39 Ibid 22.
nearly all the BITs expressly protect only investor rights and not the Host State’s rights, it is rather unclear whether the claims under involving the Host State’s rights “are within the scope of the consent of the parties” or whether counterclaims brought by the State are “within the jurisdiction of the Centre” and therefore it has been claimed that the Respondent side funding in investment arbitrations is nearly non-existent.40 When the funder is always paid from the fund of
the Respondent, it leads to a situation where the funder is always paid with funds from the Respondent State, which means that the States are the sole payers in the system of Third-Party Funding in investment treaty arbitration that in turn leads to the fact that they are unable to benefit equivalent to Investors’ benefits.
Since the essence of the third-party funding is the fact that the funder bares the costs but also expects to gain financially from the case and the decision of whether to fund is primarily based on the merits of the case, favouring issues may arise, especially in the cases with less developed countries involved.41 Hence the third-party funder may see the less developed country as less
attractive to “invest in” and this may of course jeopardize the State’s possibilities to access justice. Since the investment arbitration has attracted funders because of the massive potential of recoveries, it has been claimed by the critics that are concerned about the fact that this new funding in investment arbitration cases will aggravate an already existing exploding caseload that creates disproportionate burden on States.42 Even though in theory, the funders may also
fund the Respondent party as well, usually the case is that the Claimant is the funded party, which means that in most of the cases the funders really do prefer to favour investors over States. Furthermore, this itself also creates the situation where third-party funder, an experienced arbitrator or practitioner to weigh in a less developed country’s lack of “potential” and litigate the case based on this and favour the investor.43 The policy debate over whether there are reasons
to allow the States finally to bring counterclaims have been defended by Professor Michael Reisman in his dissenting opinion in the case of Spyridon Roussalis v. Romania where he actually emphasized how this would lead to efficiency, to the centralization of inquiry and lastly to the avoidance of duplication that creates inconsistent results and therefore create threats to the legitimacy of the system.44
40 Ibid 34.
41 Ibid 19, accessed 7 May 2018.
42 C A Rogers, ‘Gamblers, Loans Sharks & Third-Party Funders’, Ethics in International Arbitration, Oxford University Press 2014, 65.
43 Ibid 27, accessed 7 May 2018.
44 Spyridon Roussalis v. Romania, ICSID Case No. ARB/06/1, Separate Opinion of W. Michael Reisman, December 2011.
All in all the case of third-party funding a sovereign State is quite more delicate than the one where the investor has an outside funder to bear the costs of the litigation. It is undebatable when claiming that it is quite rare a State to use a third-party to fund its case but apparently it is a rising trend for the States as well. It has been suggested that if Host States could become Claimants against Investor-Respondents, or if arbitral tribunals determine that they have jurisdiction over Host State counterclaims then it would be helpful since then if the “funded State-Claimant” or “State-counterclaimant” win a dispute, the funder would be paid from the private Investor’s funds; to put it bluntly, if treaties would allow Host State claims and counterclaims, the Third-Party Funding of investment arbitration would look a lot more like Third-Party Funding in commercial arbitration.45
2.3 Third-Party Funding: Advantages and Disadvantages
“Third-party funding has attracted a great deal of attention from the legal community, as it offers significant advantages and poses serious risks for international arbitration”46
Arbitrators, law firms and funders often have repeat dealings with each other and it is imperative for the integrity of the arbitral process that conflicts are avoided.47 Catrine A. Rogers states in her
book Ethics in International Arbitration that “Third-Party Funders are not as yet systematically present in arbitration cases to the same extent as attorneys, arbitrators, experts or arbitral institutions, however, their increasing presence raises a host of legal and ethical questions that can affect all these actors, as well as the larger framework of international arbitral regime”.48 She
also notes that: “the interaction of third-party funders with the ethical obligations of these various actors also highlights that third-party funders appear to be the group most distinctively untethered from any formal professional regulation, while most funders apparently agree that the
45 Ibid 22.
46 F Blavi, ‘It’s About Time to Regulate Third-Party Funding’ (Kluwer Arbitration Blog, 17 December 2015) http://arbitrationblog.kluwerarbitration.com/2015/12/17/its-about-time-to-regulate-third-party-funding/
accessed 23 April 2018.
47 F Bannon, ‘The rise of third-party funding in international arbitration’ The Financier Worldwide Magazine Special report: international dispute resolution October 2016 https://www.financierworldwide.com/the-rise-of-third-party-funding-in-international-arbitration/#.Wux0oLS72b8 accessed 4 May 2018.
48 C A Rogers, ‘Gamblers, Loans Sharks & Third-Party Funders’, Ethics in International Arbitration, Oxford University Press 2014, 7.
industry cannot remain completely unregulated, to date there is no clear sense of what could or should be done”.49
“One of the primary reasons for seeking third-party funding is the lack of “access to justice”.50 In
common understanding of the context of the Third-Party Funding, the “access to justice” refers to all tools and resources that implicate a party’s opportunity to defend or enforce a legal right.51
To put it bluntly, lack of access to justice can be roughly equated to a lack of resources to therefore litigate properly.52 Hence, in cases like these the third-party funder comes in handy.
Therefore, it has also been noted that the Third-Party Funding is more often being used by claimants to allocate risks and costs when continuing its business with steady cash flow while the dispute is on.53
2.3.1 Advantages of the Third-Party Funding
According to the ICSID Tribunal in the case of EuroGas Inc and Belmont Resources Inc. v.
Slovak Republic, the third-party funding has become “a common practice” in investor – state
arbitration.54 In the words of Myriam Seers, senior associate at Torys, third-party funding is
“absolutely essential to allowing international investment treaty claims” to proceed to investor – State arbitration.55 However, it is not all about the access to justice anymore. It has also been
noted that the third-party funding is also about sound financial management for companies who have cash available to fund their claims, but who want to de-risk their litigation and take the costs off their balance sheet.56 Moreover, the third-party funding offers a possibility to allow
more meritorious claims to be heard.
49 Ibid.
50 J von Goeler, ‘Third-Party Funding in International Arbitration and its Impact on Procedure’, International Law Library, volume 35 (Kluwer Law International 2016), pp.75-76.
51 Ibid 27, accessed 19 April 2018. 52 Ibid 24.
53 Ibid 23.
54 J Commission, ‘UK: Third-Party Funding In Investor-State Arbitrations: ‘A Common Practice’ That Is ‘Relatively Widespread’ (Mondaq Connecting knowledge & people 1 November 2017) http://www.mondaq.com/uk/x/641810/Arbitration+Dispute+Resolution/ThirdParty+Funding+In+InvestorSta te+Arbitrations+A+Common+Practice+That+Is+Relatively+Widespread accessed 3 May 2018; see also
EuroGas Inc, ICSID Case No. ARB14/14, 18 August 2017, para. 108 55 Ibid.
Another advantage of the third-party funding is to be said the benefit of being able to carry out the case more proficiently, meaning that with the help of a third-party funder it becomes possible to bring the particular issue in front of an arbitral tribunal without having to take the case to a domestic court where the handling of the case will more likely be slower. In other words, the third-party funder gives an opportunity for the investor to pursue the claim with more efficiency. In addition, usually firms that provide third-party funding have a tremendous experience of investment treaty arbitration and can therefore calculate the risks quite accurately, which of course benefits the funded party as well. Furthermore, having access to an independent and objective assessment of the possibilities of success for the case contributes to a more realistic expectation of the results which are likely to be achieved.57
As a counter argument for the claim that litigation financing could encourage frivolous lawsuits, those in the industry state that their incentives are aligned with the interests of the companies they finance and insist that they only invest in cases that they believe have merit.58 Many times
the firm might only act as a passive investor, providing capital without seeking to influence the court proceedings, which makes the funding already an advantage itself.
2.3.2 Disadvantages of the Third-Party Funding
The benefits of third-party funding are quite well known and therefore the author steers now the focus on the disadvantages. Firstly, the advantages of third-party funding concerning the access to justice have been said to be overstated in some cases.59 As a disadvantage, for instance,
third-party funders will probably only support claims where the anticipated return is enough to offset litigation costs and the risk of an unsuccessful claim, meaning that defendants cannot take advantage of litigation funding, in the same scale as the claimants, except through insurance.60
Hence, the evidence actually suggests that third-party funders are very unlikely to invest in defence claims and therefore defendants that are faced against a plaintiff who is receiving back from a third-party funder may therefore have to prematurely settle due to a lack of resources.61
57 D Jiménez, ‘Third Party Funding: advantages and drawbacks’ (IR Global 8 August 2016) https://www.irglobal.com/article/third-party-funding-advantages-and-drawbacks-cbc6 accessed 5 May 2018.
58 Ibid 4, accessed 4 May 2018.
59 E Boolieris, ‘Third-party funding: the effect of the growing third-party funding industry in international arbitration on New Zealand’, Victoria University of Wellington, Faculty of Law 2015, 10.
60 Ibid 31. 61 Ibid 31.
Second disadvantage in third-party funding concerns class actions62 where the funders will often
want a commission from all of the class action members in a class action settlement, in other words, the funders will therefore also want a commission from those group members who have not signed a funding contract themselves.63 For this reason, the apparent consequence is that the
court will enforce funding on group members as a condition, as opposed to funding being contractual agreement that parties have voluntarily signed up for.64
In addition, as a third disadvantage, the notion of the concern of third-party funder control over the litigation has been seen as a disadvantage as well. In this context, the foregoing discussion implies that the attempt to control the litigation by the third-party funder for his or her own benefit can result to problems for the lawyer whose client is supported by the third-party funder, meaning that this may compromise the lawyer’s independence due to the feeling that they have a responsibility to act not only for their client but also for the third-party funder.65 Furthermore,
third-party funding arrangements may result in undisclosed conflicts of interest.
As a final disadvantage, on the basis of the evidence currently available, it seems fair to claim that some business leaders have questioned the value of litigation financing industry, meaning that a third-party funder can affect a company’s legal strategy, potentially to its detriment.66
Further evidence suggests that one of the outlined risks of litigation financing is that it could encourage frivolous lawsuits in the sense of funding a lawsuit just for the sake of gaining the profit out of it and as mentioned above, “the whole theory is to take a legal system and turn it into a stock market”.67 Hence, it has been noted that, for instance, the investment firms providing
third-party funding bent on making profit, can also inappropriately influence cases.
2.4 Interim Conclusions
In conclusive observations the third-party funding has attracted a great deal of attention from the legal community, as it offers as a concept, significant advantages as well as poses serious risks 62 A type of lawsuit where one of the parties is a group of people who are represented collectively by a member of that group.
63 B Bigby and A Bilbow, ‘Storm Clouds Rising’, (Commercial Dispute Resolution News 11 December 2014) https://www.cdr-news.com accessed 3 May 2018.
64 Ibid 62. 65 Ibid 31.
66 Ibid 4, accessed 4 May 2018. 67 Ibid 4, accessed 4 May 2018.
for international investment arbitration system itself.68 Regardless of the risks mentioned above,
the third-party funding has become relevant and nearly necessary for Parties that desperately need the funding in order to bring a claim in front of an arbitral tribunal. As discussed, it follows from the mere fact that without the third-party funding, many of the Parties would not otherwise reach the access to justice, which on the other hand is the fundamental and core principle of law. One needs to bear in mind that the proven benefits of financing legal expenses, by using a third-party funder, for claims made through the courts or through arbitration specifically, are undeniable.69 As it presently stands, the third-party funding gives an opportunity to reach justice
to those who cannot bear the costs themselves.
In regards to the advantages and disadvantages, as can be noted from the most common pros and cons laid out, even though the third-party funding lacks specific regulation, in general it seems to benefit both the funder and the funded party. Admittedly, the lack of regulation poses serious risks, which some of them will be dealt more in depth in the following chapters of this thesis, the general conclusion of the above mentioned is that once the “trend” of seeking third-party funding has already initiated, it is difficult to prohibit now, it may only be regulated more carefully in the future for the sake of the investor – State arbitration system itself. The fact that the third-party funding indeed still lacks specific regulation, puts forward the claim of the concern about the ethical issues when dealing with third-party funding in investor – State arbitration, however, does not exclude the already proven advantages of the already current situation and therefore makes the topic rather multidimensional.
68 Ibid 46, accessed 7 May 2018. 69 Ibid.
3. Tools for addressing Third-party Funding issues in Investor – State
Arbitration
“One cannot deny that arbitration is, in general, a luxury that few can afford”.70 Hence, few can
afford Third-Party Funding since it always contains the transfer of litigation risk that makes it a problem in most of the times. Apart from financial point of view, the topic that has been highlighted for a long time is which issues – particularly ethical and conflict issues – does the Third-Party Funding give rise to, and how can these issues be addressed? As introduced above, this chapter is concerned with the problems of Third-Party Funding and what are the tools, for that matter, to address these issues.
The reason for the matter to be so debatable, is the fact that Third-Party Funding is an area that is not uniformly regulated. On this grounds, we can argue that this also creates a platform for the misuse of the concept that has been originally formed to ease the access to justice for those that cannot afford it instead of abusing the fact that one cannot bring a claim in front of a tribunal without a help of a Party. An exhaustive discussion of all types of possible issues of Third-Party Funding, such as, the confidentiality of the funding agreement and the interference of the Third-Party Funder with the proceedings goes beyond the scope and purpose of this thesis and therefore will not be addressed, even though they are rather important issues to note when talking about the problems related to Third-Party Funding. The aim is to describe how the arbitrator’s impartiality and the principle of Transparency in case of Third-Party Funding is currently regulated by comparing chosen rules and conventions in the field of international investment arbitration.
In the third chapter of this thesis, the discussion will point to the tools for addressing Third-Party Funding issues in Investor – State Arbitration. The starting point, as discussed, is that international investment arbitration does not entail one singular and uniform legal framework. The law and rules applicable to a given arbitration depend on the seat of the arbitration and the 70 N Kadhim, ‘Whose line of credit is it anyway? Third-party funding issues in arbitration’ (Kluwer Arbitration Blog 17 July 2017) http://arbitrationblog.kluwerarbitration.com/2017/07/17/whose-line-credit-anyway-third-party-funding-issues-arbitration/ accessed 1 June 2018.
choice of applicable law or rules agreed upon by the parties. In this present chapter, the issues under scrutiny are the problems in Third-Party Funding in general, meaning the conflict of interests that may arise, specifically, under the issue of the impartiality of the arbitrator, which is closely related to an issue of conflict of interest, and under the principle of Transparency. The first sub-chapter will engage, after a brief priming on the subject, the relevant tools namely the IBA Guidelines on Conflict of Interests and the ICCA – Queen Mary Task Force on Third-Party Funding report, for addressing the issues concerning conflict of interests and the impartiality of the arbitrators. The second sub-chapter is devoted for the principle of Transparency and the Mauritius Convention on Transparency.
3.1. Conflict of Interests and the Impartiality of the Arbitrators
The consensus view seems to be that the potential for conflict of interests as one of the most prominent issues that can arise given the increase in arbitrators holding permanent positions or consulting roles with Third-Party Funders and the resulting they may have in the funded Party succeeding in their claim.71 The classical example is of course the situation where there is a
relationship or other connection between the arbitrator and the Funder that are both involved in the arbitration., thus this type of situation concerns more the independence of the arbitrator. It is not always stressed enough that not every relationship between an arbitrator and a Funder gives rise to conflict of interest issues; whether the arbitrator is actually conflicted depends rather quite a lot on the specific facts and circumstances of the given case. For this reason, there should always be a further investigation and a clear analysis of the relationship before making assumptions. The so-called early identification of a conflict of interest is to avoid potential challenges in the future regarding the case, such as, challenges to the arbitral award without causing delay, unnecessary challenges to arbitrators or applications for disclosure of further information.72 To avoid conflict of interest issues for arising, especially in the context of the
impartiality of the arbitrator, it cannot be stressed enough that safeguarding guaranteed fundamentals of arbitration (such as, the freedom of choosing the Tribunal). For these reasons, the discussion around the topic has led to the creation of the following tools that may be used 71 V Jackson-Grant, ‘ICCA – Queen Mary Task Force publishes its Report on Third-Party Funding in International Arbitration’ (The Judge Global 8 May 2018) https://www.thejudgeglobal.com/icca-queen-mary-task-force-publishes-its-report-on-third-party-funding-in-international-arbitration/ accessed 2 June 2018.
when examining the issues arising from Third-Party Funding in Investor – State arbitration. In the purpose of this thesis, the author has chosen the most relevant regarding the topic.
3.1.1. IBA Guidelines on Conflict of Interests
The International Bar Association (hereinafter IBA) introduced the first version of the Guidelines on Conflict of Interest in International Commercial Arbitration in 2004. Since their issuance, the Guidelines have gained wide acceptance within the international arbitration community.73 When talking about the IBA Guidelines, it is rather important to stress the fact that
is also mentioned in the introduction section, which implies that the Guidelines are not legal provisions and do not override national law or arbitral rules chosen by the parties, therefore can be considered as soft-law and not binding.74 The Guidelines are considered successful in the
sense that they have been frequently used by arbitration practitioners as well as they have been relied upon by arbitral institutions and even State Courts and has been given a practical and concrete character, which derives from the fact that the Guidelines are easy to use when applying laws and rules that are often of a more general and abstract nature.75 The Third-Party Funding as
an issue was only explicitly given attention in the revised version of the Guidelines, which was delivered in 2014.
The IBA Guidelines consist of seven general standards. When talking about the impartiality of an arbitrator, one must use the word independency as well since it is included in the definition of the (1) General Principle that requires every arbitrator to be “impartial and independent of the
Parties at the time of accepting an appointment to serve and shall remain so until the final award has been rendered or the proceedings have otherwise finally terminated”.76 Furthermore,
the Guidelines advice in its section (2)(a) Conflict of interests that “An arbitrator shall decline
to accept an appointment or, if the arbitration has already been commenced, refuse to continue to act as an arbitrator, if he or she has any doubts as to his or her ability to be impartial or independent”.77 In addition, in the section (b) it has been noted that this same principle applies
73 IBA Guidelines, p. i.
74 IBA Guidelines Introduction para.6.
75 N Blackaby and others, Redfern and Hunter on International Arbitration, Student Version (6th edn, Oxford
University Press, New York 2015) 257. 76 IBA Guidelines, 5.
on behalf of a third person having knowledge of the relevant facts and circumstances that would give rise suspect that there is a conflict of interest regarding the arbitrators independence or impartiality towards the case.78 What comes to the timeframe, the basic general principle obliges
the arbitrator to be independent and impartial at the time he or she accepts the appointment and must remain so during the entire course of the arbitration proceeding, including the time period for the correction as well as interpretation of the final award; however there was a question whether this obligation should extend also to the period during which the award may be challenged before the relevant courts, but according to the Guidelines no unless the final award may be referred back to the original Arbitral Tribunal.79 The section (3) the disclosure by the
Arbitrator is strongly included in the context as well as in the Guidelines itself. The arbitrator’s duty to disclose to the parties, the arbitration institution or other appointing institution the existing facts or circumstances that may give rise to doubts as to the arbitrator’s independence or impartiality is a principle that rests on the principle that the parties have an interest in being fully informed of any facts or circumstances that may be relevant in their view.80 Hence, this kind of
scenario can be explained by using the case Muhammet Çap & Sehil Inşaat Endustri ve Tickaret
Ltd.Sti. v Turkmenistan where the Respondent actually relied on the 2014 IBA Guidelines on
Conflict of Interest. To put it bluntly, the Claimant refused to disclose details of Third-Party Funding even though requested by the Respondent that claimed that the disclosure was necessary for various reasons including to ensure that there are no conflicts with those involved in the arbitration, in addition, the Respondent stated that it was considering making an application for security for costs because of its concern that a Third-Party Funder “may elect to withdraw at any
time and […] may be able to evade a costs award in the event of an adverse decision”.81 The
Tribunal ordered the disclosure of the identity of the Funder as well as the nature of the arrangements with the funder in order to ensure the integrity of the proceedings and to determine whether any of the arbitrators are affected by the existence of a Third-Party Funder.82
Moreover, similar circumstances can be notified from the case of South American Silver v.
Bolivia where the Respondent requested a disclosure of the name of the Funder on the basis that
it was necessary to ensure the integrity of the arbitration and ensure the Tribunal’s independence 78 Ibid.
79 Ibid 75. 80 Ibid 75, pp. 6-7.
81 Muhammet Çap & Sehil Inşaat Endustri ve Tickaret Ltd.Sti. v Turkmenistan, ICSID Case No. ARB 12/6, Procedural Order No. 3, 12 June 2015, para. 2.
and impartiality.83According to the Guidelines, a disclosure does not imply the existence of a
conflict of interest, it merely refers to the fact that when an arbitrator making a disclosure thus feels capable of performing his or her duties in the sense that he or she considers himself/herself to be impartial and independent of the parties.84 One could claim that in a situation as in the case
of South American Silver v. Bolivia where the Claimant is resistant to give out the name(s) of the Funder, it implies that it has something to hide. Especially when the claims of the particular case arose out of the Government’s issuance of a decree that revoked mining concessions that had been previously granted to claimant’s subsidiary concerning a certain project.85
Largely in consequence of the nature of Third-party Funding in investor – State arbitration, one must stress, as revised in the IBA Guidelines 2014, that a Third-Party funder is indeed “an equivalent of a party”, which has significant implications under the Guidelines.86 For instance, in
a scenario where an arbitrator serves as an adviser for a Third-Party Funder would fall under the list of Non-Waivable conflicts of interests in the IBA Guidelines and has also important implications in terms of disclosure requirements under the IBA Guidelines, hence the Non-Waivable Red List that is included in the Guidelines describes circumstances that necessarily raise justifiable doubts as to the arbitrator’s impartiality or independence.87 In the case of
Guaracachi America Inc and Rurelec PLC v. The Plurinational State of Bolivia, the Respondent
requested for a funding agreement in order to confirm that there were no conflicts of interests, where the Claimants objected this arguing that the Respondent never demonstrated what the conflict of interest would be.88 The Tribunal agreed with the Claimant and did not order the
production of the agreement or any further documentation and therefore, after the identity of the Third-party Funder became known, the arbitrators confirmed that they had no link with the funder and that they were not “aware of any circumstance that could give rise to justifiable doubts as to their impartiality and independence on account of the financing of the Claimant’s claims by the Third-Party Funder.89 Even though the request was dismissed, the Tribunal did not
83 South American Silver Limited v. Bolivia, UNCITRAL, PCA Case No.2013-15, Procedural Order No 10, 11 January 2016, paras. 69-70.
84 Ibid 75, 8.
85 ‘BITs and Tribal’ (Green Features Blog 27 February 2017) https://greenfeatures.blogspot.com/2017/02/bits-and-tribal.html accessed 7 June 2018.
86 Ibid 75, 14. 87 Ibid 75, 6.
88 Guaracachi America Inc and Rurelec PLC v. The Plurinational State of Bolivia, UNCITRAL, PCA Case No. 2011-17 (Guaracachi v. Bolivia), Procedural order No.13, 21 February 2013, para. 6-7.
hide the fact that they found it important to anyways give a careful consideration to the integrity of the arbitration proceedings.
3.1.2. Report of the ICCA – Queen Mary Task Force on Third-Party Funding in International Arbitration
The long-waited Report of the ICCA – Queen Mary Task Force on Third-Party Funding in International Arbitration was published on 17th of April 2018. It is a joint Task Force established
between the International Council for Commercial Arbitration (hereinafter ICCA) and the Queen Mary, University of London in 2013.90 The Task Force was comprised of a diverse group of
leading experts from a wide range of professional background, and included arbitrators, attorneys from both in-house and law firms, representatives from arbitral institutions, states, academics, and a range of third-party funders and brokers; the aim and the objective of the work was to identify issues that arise in relation to Third-Party Funding in international arbitration, and the determination of what outputs, if any, would be appropriate to address those issues.91
However, the purpose was never to produce either a code of conduct or other form of regulation for international arbitration, the aim was rather to clarify and identify how and on what terms such above mentioned consistency should be achieved.92
Firstly, when tackling the issue of conflict of interests, it appears that the focus should be always drawn to disclosing the recommended Third-Party Funding arrangement and its presentation to the appropriate authorities in the name respecting the concept of access to justice. To begin with, this has now been suggested in the Report under the principles of disclosure and conflict of interests where it is stated that “A Party and/or its representative should, on their own initiative,
disclose the existence of a Third-Party Funding arrangement and the identity of the funder to the arbitrators the and the arbitral institution or appointing authority (if any), either as part of the
90 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. ix.
91 Ibid, pp. 2-3. 92 Ibid.
first appearance or submission, or as soon as practicable after funding is provided or an arrangement to provide funding for the arbitration is entered into”.93 The Report also stresses
the fact that for the purposes of disclosure, the term “third-party funder” refers to any natural or
legal person who is not party to the dispute and is not party’s legal council, but enters into an agreement either with a party, an affiliate of that party, or law firm representing that party:
i. In order to provide material support for or to finance part or all of the costs of the proceedings, either individually or as part of a specific range of cases and,
ii. Such support or financing is provided through a donation, or grant, or in exchange of remuneration or reimbursement wholly or partially dependent on the outcome of the dispute94
In addition, in the disclosures made regarding the participation of any Third-Party Funder the potential of existence of conflict of interest must be assessed by the arbitrators and arbitral tribunals.95
Furthermore, in the above mentioned ICSID case of Muhammet Çap & Sehil Inşaat Endustri ve
Tickaret Ltd.Sti. v Turkmenistan the Respondent requested disclosure of the identity and nature
of the involvement of Third-Party Funder(s) for the Claimants in the arbitration proceedings, arguing that this was necessary to ensure there were no conflict of interests.96 The Tribunal gave
several reasons that could justify an order for disclosure of a Third-Party Funder, including in particular to avoid a conflict of interests for the arbitrator, for transparency and to identify the true Party to the case.97 The same type of situation occurred in the ICSID case of RSM
Production Corporation v. Saint Lucia where in contrary the Claimant alleged that the
Respondent was funded by a Third-Party and therefore requested the Respondent to inform the Tribunal the identity of the funder because of the sake of the continuance of the arbitration proceedings.98 However, the Tribunal with regard to the present case weighted up and assessed
the Respondent’s interest with the Claimant’s access to justice and came to the conclusion that it 93 Ibid 89, 14.
94 Ibid 88, 14. 95 Ibid.
96 Muhammet Çap & Sehil Inşaat Endustri ve Tickaret Ltd.Sti. v Turkmenistan, ICSID Case No. ARB 12/6, Procedural Order No. 3, 12 June 2015, para. 13.
97 Ibid, paras. 8-9.
98 RSM Production Corporation v. Saint Lucia, ICSID Case No. ARB/12/10, Decision on Saint Lucia’s Request for Suspension or Discontinuation of Proceedings, 8 April 2015, para.30.
would be “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 cost award in the Respondent’s favor”.99 Even though it is postulated that since the funder exercises a great
control over the Claimant’s behavior in the arbitration proceedings, the adverse cost award should have an effect on the funder.100 Even though this being so, currently there is not relevant
court or arbitral practice to support this position.101
Moreover, an important emphasis is given in the Report to the encouragement to enter in the funding agreement, furthermore, to the ground work for parties to work for before entering into one.102 What makes the Report rather unique, is the fact that it raises concerns around whether
the existence of the Third-Party Funder involvement is increasing the number of claims brought against States103, which on the other hand turns the questions back to the relationship between the
Third-Party Funders and, for instance, the arbitrators and the issues concerning Transparency in this particular context.
3.2. The Principle of Transparency and the Mauritius Convention
The principle of Transparency is one of the key principles of law and its definition can be conveniently summarized as follows:
“A Concept, used in national and international legal systems to ensure the public’s right to the availability and accessibility of a certain level of information about (institutional)norms, rules, procedures and regimes, and the actions of participants; where the information provided should be presented in an understandable and clear manner and should always be sufficient to facilitate monitoring, verification and assessment”.104
99 Ibid, para. 54.
100 D Horodyski and M Kierska, ‘Third-Party Funding in International Arbitration – Legal Problems and Global Trends with a focus on Disclosure Requirement’, Jagielloian University in Krakow Faculty of Law and
Administration Law Review 2017, p. 77.
101 RSM Production Corporation v. Saint Lucia, ICSID Case No. ARB/12/10, Assenting reasons of Gavan Griffith to decision on Saint Lucia’s Request for Security for Costs, 13 August 2014, paras. 12-14.
102 Ibid 75, accessed 11 May 2018. 103 Ibid.
104 I Georgieva, Using Transparency Against Corruption in Public Procurement (1st Ed, Springer International
For its general nature, transparency as a flexible notion emerges in a wide range of different contexts and subject areas.105 It has been noted that there are an increasing number of cases in
which the violation of transparency is invoked, however, in the end this rarely leads to a ruling that this principle has been violated.106 Especially in the context of international investment law
regime, the author sees that the matter of Transparency is extremely important to discuss because of the involvement of public policy in the investment treaty arbitration field.
The United Nations Convention on Transparency in Treaty-based Investor – State Arbitration is an extension to the application of the UNCITRAL Rules on transparency.107More importantly, this makes the UNCITRAL Transparency Rules applicable to all treaty-based investor – State arbitrations under “old” treaties, independently of the applicable arbitration rules whether the arbitration in question is governed by the UNCITRAL Arbitration Rules, the ICSID Convention, or else; requiring that both the Respondent State and the investor’s home State are contracting parties or if the investor accepts the unilateral offer to apply the UNCITRAL Transparency Rules made by the respondent in signing the Convention.108 The huge advantage of this particular Convention is that it provides for transparency of submissions to arbitral tribunals, arbitration hearings, and decisions by arbitral tribunals, in addition what is extremely relevant to this study, it gives more room for Third-Party participation under a uniform set of rules.109 It must be stressed that the Mauritius Convention only has a retroactive scope of application ,however, it leaves an opportunity for States to modify or make a complete reform to the their future treaties.110
Arbitral tribunals have also cited potential conflicts of interest as a factor warranting disclosure of third-party funding.111 In Muhammet Çap & Sehil Inşaat Endustri ve Tickaret Ltd.Sti. v
Turkmenistan, the Tribunal ordered disclosure of third-party funding, underscoring the need “to avoid a conflict of interest for the arbitrator” and the importance of “transparency”.112 The international investment regime has already a fragmented structure so to mirror the situation that
105 Berniz et al. General Principles of EC Law in a Process of Development (2008 Kluwer Law International) 202.
106 Ibid.
107 S Schill, ‘The Mauritius Convention on Transparency: A Model for Investment Law Reform?’ (EJIL: Talk! 8 April 2015) https://www.ejiltalk.org/the-mauritius-convention-on-transparency-a-model-for-investment-law-reform/ accessed 7 May 2018.
108 Ibid. 109 Ibid. 110 Ibid. 111 Ibid 12, 46.
