Third-Party Funding in Investment Arbitration: A Normative
Attractive Mechanism or a Trend that Should be Abolished?
University of Amsterdam Law School
Master Thesis
LLM International Trade and Investment Law (International and European Law)
Author: Georgios Kortesis Student Number: 12281115
Supervisor: Prof. Dr. Stephan Schill Word Count: 12, 974
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Table of Contents
Introduction ... 3
1. The legal nature of TPF, the advantages and the drawbacks of this mechanism ... 5
1.1. The TPF in different legal systems and its historical background ... 5
1.1.1. The common law legal system ... 5
1.1.2. The continental legal system ... 6
1.2. TPF in comparison with other litigation and arbitration funding mechanisms ... 7
1.3. TPF in commercial arbitration ... 9
1.4. TPF and the right of access to justice ... 11
1.5. The positive impact of TPF in Investment Arbitration ... 13
1.6. The cost of investment arbitration and the calculation of funder’s share ... 14
2. The impact of TPF on jurisdictional and procedural matters ... 16
2.1. The distinction between jurisdiction and admissibility ... 16
2.2. The position of TPF under the BITs and IIAs ... 16
2.3. The replacement of the party by the funder ... 18
2.4. What obligation for disclosure? ... 19
2.4.1 The procedure of disclosure ... 19
2.4.2 Why disclosure is important for TPF ... 22
2.4.3. Types of disclosure: Full disclosure versus partial disclosure ... 23
2.5. The rights and the obligations of the Third-Party ... 25
2.5.1 Involvement of the funder in the arbitration ... 25
2.5.2 The relationship between the counsels and the funder ... 26
3. The impact of TPF on investment arbitration when developing countries are involved as respondents ... 26
3.1. Concerns that derive from the use of TPF ... 26
3.2. Does TPF shift power to powerful investors? ... 27
3.2.1 The economic barriers for developing countries... 27
3.2.2 The economic impact of investment arbitration for developing countries ... 28
3.3 TPF: a new «ally» or «enemy» for developing countries? ... 28
4. The relevant case-law regarding TPF ... 29
4.1 TPF in international commercial arbitration: The Essar v. Norscot case ... 29
4.2. The existing case-law on TPF in Investment Arbitration ... 30
5. Conclusion – Issues for further consideration ... 32
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Abbreviations
BIT Bilateral Investment Treaty
CETA Comprehensive Economic and Trade
Agreement
CFA Conditional Fee Arrangement
CJEU Court of Justice of European Union
DBA Damages-Based Agreement
FTA Free Trade Agreement
GDP Gross Domestic Product
ICC International Chamber of Commerce
ICCA International Council for Commercial
Arbitration
ICSID International Centre for Settlement of
Investment Disputes
IIA International Investment Agreement
LEI Legal Expenses Insurance
MIT Multilateral Investment Treaty
NAFTA North American Free Trade Agreement
QMUL Queen-Mary University of London
TPF Third-Party Funding
UNCITRAL United Nations Commission on International
Trade Law
UNCTAD United Nations Conference on Trade and
Development
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Introduction
For many decades, international investment arbitration has been the most commonly accepted method of resolving disputes between a state and an investor. The application of investment arbitration has become an increasingly popular method of dispute settlement. This has been illustrated following the aftermath of the financial crisis of 2008, when the resolution of investment disputes through arbitration became a more frequent phenomenon.1 Moreover, the funding of this procedure has become a genuinely controversial issue.2 According to a study delivered by the Allen and Overy law firm, the average tribunal costs amount to USD 746,000.3 Equally high are the tribunal costs under ICSID (USD 769,000) and UNCITRAL arbitration (USD 853,000).4 To the above sum, one should add the high payments for the lawyers, which, depending on the claim, can be unaffordable for many investors. Thus, the costs in investment arbitration are beyond any doubt higher than those incurred in commercial arbitration.5 The
increase in investment disputes as well as the need for funding them, has led to the development of the Third-Party Funding (TPF) alternative. Third-party litigation funding is an increasing trend in the international investment scene, which involves investors investing in a legal claim, with the view to recovering from the proceeds of the dispute.6 TPF is not the only mechanism to fund a claim in the context of international investment arbitration, although it remains the most popular. However, attention should be paid to the constant growth of alternatives, which aim to fund claims. The legal framework in international law, which governs the TPF, is not that developed, and the alternative funding mechanisms should be examined on a case-by-case basis to determine their compatibility with the principles of international law.
The jurisdictional issues, which follow TPF, are of great importance, and for this reason, a detailed examination of the position that the various legal systems adopt on TPF should be
1 International Council for Commercial Arbitration, Report of the ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration (2018) The ICCA Reports No. 4 <
https://www.arbitration-icca.org/media/10/40280243154551/icca_reports_4_tpf_final_for_print_5_april.pdf> [ICCA-Queen Mary Task Force Report] 18-19.
2 T Santosuosso and S Randall, ‘Third-Party Funding in Investment Arbitration: Misappropriation of Access to Justice Rhetoric by Global Speculative Finance’ (2018) Law and Justice in the Americas Working Paper Series 8.
3 M Hodgson and A Campbell, ‘Investment Treaty Arbitration: Cost, Duration and Size of Claims All Show Steady Treaty Increase’ (Allen & Overy, 14December 2017) <http://www.allenovery.com/publications/en-gb/Pages/Investment-Treaty-Arbitration-cost-duration-and-size-of-claims-all-show-steady-increase.aspx> accessed 15 February 2019.
4 ibid. 5 ibid.
6 FJ Garcia, HJ Cho, T Santosuosso, R Scarlett, RD Thrasher, ‘The Case Against Third-Party Funding in Investment Arbitration’ (IISD, 30 July 2018) <https://www.iisd.org/itn/2018/07/30/the-case-against-third-party-funding-in-investment-arbitration-frank-garcia/> accessed 16 February 2019.
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performed. Common law and the continental system have remarkable differences regarding the legitimacy of TPF. In common law countries, TPF has been developed significantly, and a significant number of litigation funding companies have been established recently. This phenomenon is also apparent in the American legal system, where the access to justice is expensive, and therefore, the high costs of a trial constitute a decisive factor in avoiding starting proceedings.7 Companies like Burford Capital Ltd and Juridica Investments Ltd have already invested a lot of money in funding claims. Burford Capital is also involved in investment arbitration proceedings.
It is further debated whether the funder of a claim becomes a party in the arbitral proceedings and which rights and obligations he is entitled to owing to his investment.8 The legal position of the funder is a crucial issue, which determines not only procedural but also substantive issues of law. Furthermore, one of the most essential principles that govern investment arbitration is the principle of transparency. The public nature of the proceedings is a fundamental factor that distinguishes investment from commercial arbitration because of the involvement of a State.9
Many NAFTA, as well as ICSID cases, are published on the internet, while the hearings may take a public character and the journalists’ interest is respectively high.10
TPF is a funding mechanism that may be used by anyone who pursues to bring a claim against a State whether this claim is of minor or significant importance. Therefore, powerful and wealthy investors may use TPF to institute proceedings even for small claims against States with a developing economy.11 Consequently, given that the cost of investment arbitration is very high, a large number of these procedures may have a detrimental effect on the already restricted economic possibilities of a developing State. Arguably, TPF could have a potentially harmful impact on the social and political affairs of developing countries because it directs power and resources to private investors.
7 Lawyers for Civil Justice, Civil Justice Reform Group, US Chamber Institute for Legal Reform, ‘Litigation Cost Survey of Major Companies’ Conference on Civil Litigation Duke Law School (May 2010) Appendix 1, 16.
8 C Dos Santos, ‘Third-Party Funding in International Commercial Arbitration: A Wolf in Sheep’s Clothing?’ (2017), 35(4) ASA Bulletin 918-936 <http://www.kluweronline.com> accessed 10 June 2019; See also J Sidklev, C Persson, B Gustafsson, ‘Third Party Funding in Sweden – Uncovering Unchartered Territory’ (Kluwer
Arbitration Blog, 16 September 2018) < http://arbitrationblog.kluwerarbitration.com/2018/09/16/third-party-funding-in-sweden-uncovering-uncharted-territory/> accessed 5 May 2019.
9 AC Smutny, ‘Investment Treaty Arbitration and Commercial Arbitration: Are They Different Ball Games? The Actual Conduct’ in AJ van den Berg (ed), 50 Years of the New York Convention: ICCA International Arbitration
Conference (ICCA Congress Series No. 14, Kluwer Law International 2009) 167-177.
10 ibid.
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Moreover, the relevant case law on TPF in investment arbitration should be examined, so that the current position of international law on this issue becomes clear. ICSID case law constitutes the vast majority of jurisprudence that is going to be referred to in this thesis. The analysis of the cases will be performed from both the parties’ perspective as well as from the third funder perspective.
The standards that will be applied to identify the nature and the contribution of TPF on the facilitation and greater use of investment treaty arbitration would be the existing case law and the position of national and international courts. Moreover, the impact of this mechanism for states and investors would be taken into consideration. The interest of the litigation and arbitration funding companies cannot apply as a separate standard because it is obvious that their main concern is profit. Finally, the opinion of scholars and experts on this issue would apply as a standard in order to reach to a conclusion on whether TPF should be considered as an attractive mechanism or whether it should be abolished.
1. The legal nature of TPF, the advantages and the drawbacks of this mechanism 1.1. The TPF in different legal systems and its historical background
1.1.1. The common law legal system
TPF is not considered to be a new mechanism of funding because similar tools have been employed previously, mainly, in common law jurisdictions. The most known practices that have been developed in the field of litigation funding are the theories of “maintenance”, “champerty” and “barratry”. These doctrines are deemed to have their historical background in medieval England.12 As described by the US Supreme Court, “maintenance is helping another prosecute a suit; champerty is maintaining a suit in return for a financial interest in the outcome, and barratry is a continuing practice of maintenance or champerty.”13 However, the above methods
do not reflect the contemporary legal issues because their roots lie, as mentioned, at legal systems that either do not exist or have been reformed. In the USA, a publication from 2009 revealed that the litigation funding did not exceed the number of 30 trials per year.14 From this point and then, TPF has become a more popular method, which is particularly profitable for the shareholders of this type of companies. This significant development is evident in a recent
12 L Whillans, ‘Litigation Finance: Understanding Champerty, Maintenance, And Barratry’ (Abovethelaw.com, 2014) <https:/ /abovethelaw.com/2014/12/litigation-finance-understanding-champerty-maintenance-and-barratry/> accessed 23 February 2019.
13 RL Cohen and RM Schwartz, ‘Champerty and Claims Trading’ (2003) American Bankruptcy Law Review 197. 14 M Maleske, ‘Hedging Bets: Third-Party Litigation Funding Gains Steam in the U.S.’ (Law.com, 2009) <https://www.law.com/almID/4dcafaeb160ba0ad57001341/> accessed 1 March 2019.
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study, rendered by ALM Media, which showed that 36% of US law firms have made use of TPF in comparison with the particularly low 7% in 2013.15
During the 20th century, the TPF entailing earning profits from the final award has been considered a tort in common law jurisdictions.16 Both maintenance and champerty were deemed illegal, and the intervention by a third party who had no interest in the trial was, therefore, a case of tort. In the United Kingdom, the legitimacy of champerty was judged on a case-by-case basis. The main reason, which rendered “maintenance, champerty and barratry” illegal practices, was the fact that these methods were responsible for the initiation of proceedings that, in the absence of funding, would not have been initiated.17
1.1.2. The continental legal system
It is true that TPF is gaining support in different jurisdictional territories because of its efficiency and flexibility in facilitating the access to justice. The states of the civil law system embraced this method significantly later than those of the common law system. In Germany, which is a prominent representative of civil law, TPF appeared first in 1998 with the registration of FORIS AG, which provided services for funding litigation claims and was listed on the German stock market in the same year.18 Previously and for several years, the most common method to fund a legal claim was through the Legal Expenses Insurance (“Rechtsschutzversicherung”, “LEI”), which has been widely used by claimants in Germany.19
What is of great importance is that there is no decision so far from the German Courts in which the legality of TPF in the German legal order is negated. In fact, there are courts decisions reaffirming that under German Civil Code, TPF is allowed, while the Higher Regional Court of Munich has confirmed the amount that the funder is entitled, recognising this way the legitimacy of TPF under the German legal system.20 The lack of strict obligation of disclosure of the funder and the non-applicability of the common law doctrines of champerty and
15 ibid.
16 V Mansinghksa, ‘Third-Party Funding in International Commercial Arbitration and Its Impacts on
Independence of Arbitrators: An Indian Perspective’ (2017) 13(1) Asian International Arbitration Journal 97-112.
17 I Torterola, ‘Third Party Funding in International Investment Arbitration’ (Investment Policy Hub, 8 April 2013) <https://investmentpolicyhub.unctad.org> accessed 25 February 2019.
18 A Sessler and J Sättler, ‘Part II. Country Reports – Germany’ in N Pitkowitz (ed) Handbook on Third Party
Funding in International Arbitration (Juris Publishing 2018).
19 ibid.
20 A Eversberg, ‘Litigation Funding’ (Getting The Deal Though, December 2018)
<https://gettingthedealthrough.com/area/94/jurisdiction/11/litigation-funding-germany/> accessed 25 February 2019.
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maintenance has made the use of TPF particularly popular and with promising investment perspectives.
Under the French legal system, which is considered to be a system particularly friendly for arbitration, the issue of TPF remains less regulated. However, there is no explicit prohibition of such practice. The Paris Bar Council endorsed the greater use of TPF by issuing a resolution which highlights the beneficial aspects of TPF but also the relevant issues concerning the conflicts of interest and the obligation of disclosure.21 Therefore, the overall French approach towards TPF seems to be rather positive, and in any case, it is unlikely that the legitimacy of TPF would be brought under the challenge of legitimacy shortly.22
A first conclusion that could be extracted after the analysis of the approaches that the two main legal orders have adopted towards TPF is that this mechanism is not perceived in the same manner by both common law and civil law. Common law states like the USA, Australia and the United Kingdom, which are deemed to be the jurisdictions where the TPF has been initially developed, are far more reluctant towards the further endorsement and establishment of TPF. On the other hand, civil law countries like Germany follow a more cautious approach, which could be characterized as rather positive towards TPF.23 However, in other legal systems, such as Greece, a ban on the possibility of obtaining funding from a third party to sponsor your claims still prevails. The Greek Civil Procedural Code does not contain any provisions on this issue and the Courts have thus far not faced such a case. However, in countries like Austria, which is a representative state of a civil law system, TPF has been recognized as a lawful method to fund claims in litigation and arbitration.24 Consequently, there is a first indication that an increasing number of states with different legal systems are starting to consider TPF more as a viable alternative than as a menace.
1.2. TPF in comparison with other litigation and arbitration funding mechanisms
TPF constitutes a unique mechanism compared to the different types of litigation and arbitration funding. The investor is funding a party to the procedure without interfering further
21 B Button-Stephens, ‘Paris Bar Approves Third-Party Funding’ (Global Arbitration Review, 4 May 2017) <https://globalarbitrationreview.com/article/1140876/paris-bar-approves-third-party-funding> accessed 27 February 2019.
22 J El Ahdab and P Pic, ‘Part II. Country Reports – France’ in N Pitkowitz (ed) Handbook on Third-Party
Funding in International Arbitration (Juris Publishing 2018) 213-224.
23 ibid 12.
24 M Wegmüller and M Gnägi, ‘Austria’ in L Perrin (eds), The Third Party Litigation Funding Law Review (1st edn, Law Reviews 2017) 12-19.
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with the provision of legal services or the indication of the legal experts that are going to deal with the dispute.
In the USA, given the high cost of legal proceedings, the practice of “Contingent Fee Agreement” is frequently used. Through this mechanism, the funded party is not obliged to pay any compensation to the lawyer until the end of the procedure.25 It means that the fee for the legal services remains contingent upon the successful completion of the trial and afterwards, in case of a positive outcome, the adequate sum of money for the services provided by the attorney is calculated.26
Another method for funding a claim is the conclusion of a “loan agreement”. According to this kind of funding, the claimant receives a sum of money in the form of a loan from a lender and must return this amount irrespective of the outcome of the case.27 An interest could also be
agreed upon, but in any case, the claimant has the absolute control of its claim during the whole procedure.28
Under the practice of “Conditional-Fee Arrangement” (CFA), the lawyer is not entitled to a compensation if the case has not yielded a positive result for the funded. Therefore, this mechanism, which appears to have many common elements with the “Contingent Fee Arrangement”, is similarly conditioned on the final outcome of the trial. In fact, the type of calculation of the remuneration can be identified as the only substantive difference between those two methods .29 Regarding the CFA, the compensation is calculated on the basis of the number of hours that the lawyer spent working on the case, while in “Contingent Fee Arrangement”, the compensation is calculated based on a percentage of the proceeds.30
Another litigation funding alternative is the “Damages-Based Agreement” (DBA). According to this practice, the lawyer is compensated only where he achieved to recover damages for the claimant.31
25 FB MacKinnon, Contingent Fees for Legal Services: Professional Economics and
Responsibilities (Routledge 2017).
26 ibid.
27 WH Van Boom, ‘Third-Party Financing in International Investment Arbitration’ (2011) at <https://ssrn.com/abstract=2027114> 25.
28 ibid 25-28. 29 ibid. 30 ibid 26.
31 T Richards, ‘Litigation Funding Options’ (Michelmores.com)
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Another litigation funding mechanism is the “Legal Expenses Insurance” (LEI), which can be separated into two categories according to the relevant temporal effect of the insurance. Firstly, the claimant who pursues a specific claim can be covered from the costs needed to bring that claim before the courts.32 Secondly, the Claimant with LEI can be protected from paying the defendant’s legal fees in case of an adverse decision.33
All the above funding alternatives are particularly important because they may give to a claimant the possibility to initiate proceedings where it would have otherwise been unrealistic to do so. Therefore, access to justice, is prima facie protected. However, these alternatives are not recognized in most jurisdictions, and some of them could not be functional in the area of arbitration in general and especially in investment arbitration, where the costs of the proceedings and the involvement of a state render the situation more complicated. On the other hand, although TPF is a mechanism that might have its roots in some of the above-mentioned funding alternatives, more and diverse legal systems have adopted a progressively positive approach towards TPF. This demonstrates the main advantage of the TPF; it tends to be an internationally recognized mechanism rather than a regionally applied service. Indeed, what is clear from the preceding analysis is that, in many jurisdictions, there are several alternatives to assure funding in order to access justice. In this line of thought, however, would it not be preferable to establish on a more consistent basis an internationally applicable mechanism, such as the TPF?
1.3. TPF in commercial arbitration
One could find many common attributes between investment arbitration, and commercial arbitration. The procedural rules, the competent tribunals and many other elements, such as the recognition and enforceability of the arbitral awards and the selection of arbitrators, exist in both arbitration procedures.34 However, there are several elements, like the participants, the applicable law, costs and duration of the procedure that render them distinct.35
One of the main differences is that the jurisdiction of an arbitral tribunal in investment arbitration derives typically from a “Bilateral Investment Treaty” (BIT) or a “Multilateral
32 A Grzadkowska, ‘What is Legal Expense Insurance?’ (Insurance Business, 7 December 2018)
<https://www.insurancebusinessmag.com/ca/guides/what-is-legal-expense-insurance-118226.aspx> accessed 1 March 2019.
33 ibid.
34 KH Böckstiegel, ‘Commercial and Investment Arbitration: How Different are They Today? The Lalive Lecture 2012’ (2012) 28(4) The Journal of the London Court of International Arbitration 577-590.
35 A Roberts, ‘Divergence Between Investment and Commercial Arbitration’ (2012) 106 Proceedings of the
Annual Meeting (American Society of International Law), Confronting Complexity 297-300 at
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Investment Treaty” (MIT), while in commercial arbitration, an arbitral clause is the basis of the tribunal’s jurisdiction. Another significant difference is the issue of the applicable law. While in commercial arbitration the role of the applicable law is more factual than legal and therefore of minor importance, in investment arbitration the applicable law, whether it is public international law or the national law of the host-State, has a decisive role for the drafting of a comprehensive and well-reasoned decision.36 In commercial arbitration, both claimant and defendant may seek funding from a third-party. In investment arbitration, there is no rule that deprives the respondent State from being funded by a third-party, but this is rather unlikely to happen, mainly because the cost of the arbitration is generally affordable and without a severe impact for the economic viability of most States. Moreover, while States are usually respondents, there is no economic interest for the funders to sponsor them.
The most severe issue that could appear with respect to TPF in commercial arbitration is the conflict of interest. Therefore, as it will be explained in the next chapters, the disclosure of the identity of the funder seems necessary to avoid conflicts of interest that could provoke the challenge of the arbitrators or even the award.37 The IBA Guidelines could contribute
significantly to avoid issues of conflict of interest by indicating which kind of information should be disclosed. Three categories are defined by three colours depending on the necessity to disclose particular conduct. The red list means that it is imperative to reveal certain behaviour; the orange list contains those conducts that are not necessary to be disclosed, but it is preferable on a case-by-case examination; and the green list means that there is no reason for disclosure.38 However, the different institutions may have different rules that guarantee the transparency and the independence of the arbitrators. For example, under ICSID, the arbitrators should sign a declaration that states their impartiality and independence,39 while under ICC, the arbitrators sign a “statement of (…) impartiality and independence.”40 Although under the IBA
Guidelines there is no explicit reference to third-party funding, third-party funders could arguably be included in the category of parties’ “affiliates”.41
36 DD Caron, SW Schill, AC Smutny and EE Triantafilou, Practising Virtue: Inside International Arbitration (Oxford 2015) 54-57.
37 B Osmanoglu, ‘Third-Party Funding in International Commercial Arbitration and Arbitrator Conflict of Interest’ (2015) 32(3) Journal of International Arbitration 325–349.
38J Sicard-Mirabal and Y Derains, ‘Chapter 4: Commencing the Arbitration’ in Introduction to Investor State
Arbitration (Kluwer Law International 2018) 75-114.
39 ICSID Rules of Procedure for Arbitration Proceedings (Arbitration Rules) 2006, art 6(2). 40 ICC Rules of Arbitration 2017, art 11(2).
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The four issues, as mentioned by Smutny,42 which concern the conduct of arbitration itself and distinguish the investment-treaty arbitration from commercial arbitration could be summarised as follows:
- The public nature of the proceedings; - The challenges in marshalling evidence;
- The interactions between the international nature of the procedures and domestic laws and proceedings;
- The essential inequality of the parties in an investment-treaty arbitration.
Therefore, considering the above, the involvement of a State itself in the proceedings certainly constitutes the main factor which differentiates commercial and investment arbitration. In commercial arbitration, the use of TPF is not considered a controversial mechanism, because the nature of the dispute is private. On the contrary, in investment arbitration, funding claims against a State could be the reason for serious issues concerning third party interests against a State, because the State is not merely a plaintiff but a population, whose interests can be affected by the outcome of the arbitration.
Consequently, in commercial arbitration the situation is rather straightforward because the privacy rules that govern the process justify the independent choice of the parties to seek for third-party funding. When it comes to investment arbitration, however, some parameters differentiate the situation. The arguments about the public nature of the proceedings and the need of the state’s people to know who is funding the claimant against their home state raise a debate on whether the use of TPF in investment arbitration should be allowed. Nevertheless, if we agree that in the context of commercial arbitration, TPF is a legitimate means; would it not be irrational and with no legal basis to ban TPF for investment disputes?
1.4. TPF and the right of access to justice
Historically, the right of access to justice has been largely discussed and considered as one of the most fundamental human rights at the international level.43 The possibility for an injured
person, whether natural or legal, to have a recourse to the competent courts is of paramount importance for the justice system and constitutes a core component of the system of protection and enforcement of human rights.44 Because of the protection of this right by customary
42 Smutny (n 9).
43 F Francioni, Access to Justice as a Human Right (Oxford University Press 2007) 1-56. 44 ibid.
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international law, its implementation should be a major priority of the international legal order. This specific right could be found in multiple legal documents, such as Article 8 of the Universal Declaration of Human Rights (UDHR) of 1948, as well as Article 6(1) of the European Convention on Human Rights (ECHR) and Article 25 of the American Convention on Human Rights of 1969.45
However, in the last decades, access to justice has arguably been restrained to a certain degree by the increasing cost of initiating proceedings both before domestic and international courts.46 Regarding international arbitration, the complexity of the proceedings and the involvement of expert lawyers that charge exorbitant fees have rendered the procedure popular but also not easily accessible for individuals and legal persons with restrained funding possibilities.47 In this context, it should be examined whether the TPF could constitute an effective alternative to the situation. By observing the economic framework of this issue, TPF could be viewed as a panacea to those cases, where the claimant does not have the financial resources to fund his claims, and has no other relevant funding available to him.48 The opportunity that TPF offers,
namely the access to justice, should be given a thorough consideration, especially in the case of investment arbitration, which is an undoubtedly costly dispute resolution procedure.49 Furthermore, with the reinforcement of the right of access to justice, the feeling of protection for the possible investors could be developed. For an investor, who knows ab initio that in case of a dispute, he could seek funding for his claims from a third party, this would indeed be a motivation for the undertaking of investment initiatives. The reason is that investors could often feel reluctant to invest in a foreign state knowing that the resolution of a potential dispute can be particularly costly and can affect the economic viability of the investor. What is clear from the substantial and economic perspective is that TPF might enhance – at least prima facie – the accessibility of the justice system for those who could not otherwise fund their claims and could contribute to the improvement of the investment conditions in the long term.
As a further confirmation that TPF could indeed contribute to the effective access to justice, one could consider Opinion 1/17 of the CJEU on the compatibility of the EU-Canada
45 ibid.
46 European Parliament Policy Department: Citizens’ Rights and Constitutional Affairs, ‘Effective Access to Justice’ (2017) Study for the Peti Committee, 21.
47 M Langford, D Behn and L Létourneau-Tremblay, ‘Empirical Perspectives on Investment Arbitration What Do We Know? Does It Matter’ (2019) ISDS Academic Forum Working Group 7 Paper, 6-15.
48 J De Mot, MG Faure and LT Visscher, ‘Third Party Funding and its Alternatives: An Economic Appraisal’ (2016) Research Conference on Third Party Funding Litigation 1-27.
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Comprehensive Economic and Trade Agreement (CETA)’s Investment Court System with EU law.50 As will be examined in chapter 2.2, CETA explicitly permits the use of TPF. Specifically, the Court held that, in the absence of any specific rules that facilitate and ensure the access to the CETA Tribunal and Appellate Tribunal, it is particularly likely, if not certain, that smaller companies and individuals would be substantially deprived from being able to afford the cost that the recourse to such a tribunal demands.51 However, despite these terms, the Court did not find the investment court system in question in contradiction with the right of access to justice. The provision that is contained in CETA concerning the recourse to funding by a third-party operates as a safeguard, sufficient to enable the less wealthy claimants to bring their disputes before the CETA Tribunal.52 Therefore, even from a regulatory perspective, it could be argued that TPF could indeed be not only a useful mechanism but, under certain circumstances, a necessity for the effective access to justice.
1.5. The positive impact of TPF in Investment Arbitration
Having referred to the nature of TP, how it could operate in the context of dispute resolution, and the main legal orders’ differing approaches towards this mechanism, it is appropriate to proceed with the arguments of the TPF proponents. The England and Wales Court of Appeal, in the case of Arkin v. Borchard Lines Ltd (2005), endorsed the practice of TPF by stating that this type of funding facilitated the access to justice and strengthened the policy objective.53 However, its practical implications are not limited to litigation.
As reasoned above, TPF’s main advantage is the possibility that it offers to those, who cannot fund their claims, to exercise their right of access to justice. In particular, in investment arbitration, where the costs are significant, investors might be able to bring their claims before a panel of arbitrators by making use of TPF. Additionally, the greater use of TPF could have a positive impact on states. Those states that are involved as defendants in investment arbitration could seek funding from a third-party. This practice is not commonly used but might constitute an issue for further consideration. Importantly, the funding from a third-party means that the State’s budget would not be burdened with the cost of arbitration.
50 M Bungenberg and C Titi, ‘CETA Opinion – Setting Conditions for the Future of ISDS’ (Blog of the European
Journal of International Law, 5 June 2019)
<https://www.ejiltalk.org/ceta-opinion-setting-conditions-for-the-future-of-isds/> accessed 30 June 2019.
51 Opinion 1/17 CETA [2019] ECLI:EU:C:2019:341, Opinion of the Court (Full Court), paras 213-217. 52 G Croisant, ‘Opinion 1/17 – The CJEU Confirms that CETA’s Investment Court System is Compatible with
EU Law’ (Kluwer Arbitration Blog, 30 April 2019)
<http://arbitrationblog.kluwerarbitration.com/2019/04/30/opinion-117-the-cjeu-confirms-that-cetas-investment-court-system-is-compatible-with-eu-law/> accessed 15 May 2019.
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Another essential advantage of using TPF in investment arbitration is that, in comparison to the other funding mechanisms, referred to in the Chapter 1.2, the TPF does not impose to the parties any additional obligation of economic nature. It might, in fact, operate as a filter for claims without substantive legal basis, since the funders would normally not attempt to take over the funding of a claim without chances of a successful outcome. Therefore, claims without a reasonable prospect of success would not be brought before arbitral tribunals.
What is also of great importance is the fact that, with the use of TPF, the number of investment arbitration cases increases.54 The cost is not becoming an obstacle to bring a case before arbitration when it is covered by a third-party. According to the official ICSID caseload statistics of 2019, a constant increase concerning the ICSID registered cases can be observed since 2003, and the same is noted for ad hoc arbitrations.55 Notably, in the last two years (2017-2018) the number of the registered ICSID cases reached its peak (53 and 56 respectively) since the ICSID was founded.56 Further, there is no evidence to support the claim that TPF leads to
frivolous claims.57 Therefore, data confirms that the involvement of TPF facilitates the use of
investment-treaty arbitration.
1.6. The cost of investment arbitration and the calculation of funder’s share
As mentioned in the previous chapters, investment-treaty arbitration is characterized by particularly high costs. This is the main reason which triggers the need for a third funder. Specifically, what drives the cost of investment arbitration up is the parties’ tendency to seek to hire legal counsels from leading law firms to advise them so that they have better chances of a successful outcome. Moreover, the parties commonly appoint experts to testify, who are oftentimes reputable professionals in their sector and charge high fees to provide their services. This fact, in conjunction with the administrative costs of the arbitral tribunals and arbitrators’ compensation, raises the issue of procedural costs.
A survey on this matter indicated that the cost of investment arbitration is an average of 8 million dollars, but there is even a possibility to exceed US$30,000,000.58 According to ICSID statistics, between the financial years 2011 and 2015, the average costs for a claimant in 55 ICSID arbitration cases was US$5,619,261.74, while for the same time-period, the average cost
54 Hodgson and Campbell (n 3).
55 ICSID, ICSID Caseload – Statistics (ICSID 2019) Issue 2019-1 World Bank Group Report, 7-9. 56 ibid 7.
57 Langford, Behn and Létourneau-Tremblay (n 47) 14.
58 JK Sharpe, ‘3 Representing a Respondent State in Investment Arbitration’ in C Giorgetti (ed), Litigating
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for the respondent in 56 ICSID arbitrations was US$4,954,461.27.59 Therefore, these facts create the need for an effective funding mechanism.
The Yukos case provides an example that demonstrates the likelihood that the cost of the process could escalate to very high levels.60 The cost of the claimants’ legal representation was about US$80,000,000, and the corresponding amount for the defendant was US$31,500,000, while the Tribunal’s fees, the costs of administration and all the other costs added up to US$11,000,000 for both disputing parties.61 Respectively high were the amounts spent by the parties in Abaclat, where the parties spent about US$40,000,000 on their legal representation, legal experts and other ICSID expenses.62 Equally high was the cost in Fraport v Philippines,63 where the respondent state spent a considerable amount of US$50,000,000.64
Turning to the methods for calculating the dividend corresponding to each funder, these vary but generally, the initial investment is taken as the basis for the calculation and is multiplied by a factor if the investor earns any financial compensation.65 Alternatively, the funder’s share
may be calculated on the basis of a percentage of the final sum of the award, which accounts for between 15% and 50% of the compensation awarded. In most of the cases, the funders aim to triple their profit from each investment they pursue.66
Moreover, it is possible that both ways of calculation are used in combination. As to the legal counsel’s fees, these are not affected by the funder’s compensation and are calculated independently, based on the agreement concluded between the funded party and the lawyer. In most cases, the party chooses the legal counsel and there is no known case where the funder raised doubts about the selection of the legal counsels.
The analysis above clearly shows that the costs in investment arbitration could reach very high levels. Thus, the recourse to a funding from a third-party could sometimes represent not just an
59 J Commission, ‘How Much Does an ICSID Arbitration Cost? A Snapshot of the Last Five Years’ (Kluwer
Arbitration Blog, 29 February 2016)
<http://arbitrationblog.kluwerarbitration.com/2016/02/29/how-much-does-an-icsid-arbitration-cost-a-snapshot-of-the-last-five-years/> accessed 10 March 2019.
60 M Altenkirch and MT Borges, ‘To the Victor, the Spoils?’ (Global Arbitration News, 10 August 2015) <https://globalarbitrationnews.com/to-the-victor-the-spoils-20150810/> accessed 10 March 2019.
61 D Rosert, ‘The Stakes Are High: A Review of the Financial Costs of Investment Treaty Arbitration’ (2014)
IISD, 8 at <https://www.iisd.org/library/stakes-are-high-review-financial-costs-investment-treaty-arbitration> accessed 10 March 2019.
62 ibid.
63 Fraport AG Frankfurt Airport Services Worldwide v Philippines, ICSID Case No. ARB/03/25, Award (16 August 2007).
64 Rosert (n 61) 8.
65 C Dos Santos, ‘Third-Party Funding in International Commercial Arbitration: A Wolf in Sheep’s Clothing?’ (2017) 35(4) ASA Bulletin 918-936 <http://www.kluweronline.com> accessed 10 June 2019.
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alternative but, in fact, the only solution to pursue a claim by assuring at the same time the investor’s financial viability.
2. The impact of TPF on jurisdictional and procedural matters 2.1. The distinction between jurisdiction and admissibility
A debate that emerges from the use of TPF is whether this mechanism should be examined as a jurisdictional issue or as a matter that affects the admissibility of the claims. The consideration of TPF as an issue of admissibility would be irrational because the legal basis of a claim should not be depended on factors other than its own substantive legality. Therefore, TPF should rather be examined at the stage of jurisdiction. Consequently, if one follows this approach, it is more likely that, with the necessary adjustments, the claim would remain mature for adjudication because jurisdictional barriers can be bypassed depending on the circumstances. Consequently, an analysis of the meanings of jurisdiction and admissibility is indeed useful in order to understand the consequences of considering TPF as an issue of jurisdiction or admissibility. The Abaclat Tribunal contributed with its award to the distinction between these two concepts.67 The lack of jurisdiction means that the claim cannot be brought before the body called upon, while lack of admissibility implies that the claim was not mature and was not fit for judicial treatment.68 Moreover, a decision that dismisses a case because of a lack of jurisdiction could be brought for review by another body, while a decision dismissed for a lack of admissibility cannot be subject to a review. The third element that distinguishes those two terms, according to the Abaclat Tribunal, is the fact that a final refusal based on a lack of jurisdiction will not allow the parties to re-submit the same claim to the same body. On the contrary, if the refusal is based on a lack of admissibility, then the claimant might be able to bring the same claim to the same body again, if the flaw that previously caused the inadmissibility has been cured.69
2.2. The position of TPF under the BITs and IIAs
The consent to investment arbitration is given through a two-stage process. Host States express their consent via treaties, national laws or a direct agreement with the investor. Under the treaty context, the investor expresses and perfects their consent either by bringing a claim or by
67 Abaclat and Others v. Argentine Republic, ICSID Case No. ARB/07/5, Decision on Jurisdiction and Admissibility (4 August 2011).
68 J Sicard-Mirabal and Y Derains, ‘Chapter 3: Jurisdiction of the Arbitral Tribunal’ in Introduction to
Investor-State Arbitration (Kluwer Law International 2018) 41-74.
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providing a notice directly to the host State before the filing of a claim.70 However, TPF is not explicitly mentioned in any known BIT so far. This should not be interpreted to mean that states oppose TPF because the vast majority of BITs have been concluded several years ago, when TPF was not considered as a funding alternative for investment arbitration cases. Therefore, there are no specific provisions that apply to this mechanism. The only mechanism that is included in some BITs and could be considered as a reference to TPF mechanisms is the political risk insurance.71 However, this relates to exceptional cases, including wars and political destabilisation, as insurance for the non-collection of compensation.72
The absence of any regulation regarding the position of TPF under the BITs constitutes the ground for further debate between the proponents and the critics of TPF. It is recommended that states, in proceeding with the revision of BITs, consider the inclusion of TPF as an alternative means to fund the claims. Towards this direction, on 2 August 2018, the ICSID Secretariat proposed rule amendments and thus, the world’s leading institution on settlement of investment disputes send a clear signal that it is willing to take initiatives for the establishment of contemporary rules and regulations referring to TPF exclusively in the context of investment arbitration. The relevant reference to TPF in the existing treaties could operate to push those states that have banned TPF in their domestic legislation to re-evaluate its usefulness.
The first International Investment Agreement (IIA) that opened the path for the inclusion of TPF in international agreements was the EU-Vietnam Free Trade Agreement (EU-Vietnam FTA).73 The draft of the agreement, in Article 11(1) of Section 3, provides for the disclosure of the identity and the address of the third funder. Arguably, due to this provision, TPF is no longer a debatable issue in terms of its legality, but a mechanism that is starting to have a practical application as well.
Moreover, the EU-Canada Comprehensive Economic and Trade Agreement (CETA), in its Article 8.26, contains explicitly provides for the legality of TPF and how it should function in the context of investment arbitration. This Article imposes an obligation for the party, which is benefited from funding, to disclose immediately “to the other disputing party and the Tribunal
70 ibid.
71 R Ginsburg, ‘Political Risk Insurance and Bilateral Investment Treaties: Making the Connection’ (2013) 14(6)
The Journal of World Investment & Trade 943-977.
72 ibid.
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the name and address of the third party funder.”74 The drafters of CETA considered TPF as an effective alternative for less wealthy parties to fund their claims.
2.3. The replacement of the party by the funder
In order to understand the way that TPF may affect the jurisdiction of an arbitral tribunal, the relationship between the funder and the funded party under the funding agreement should be analysed. It is possible that the parties have agreed on the transfer of the rights from the main contract to the funder, therefore, substituting the funded party with the funder. Concerning the assignment of the claim to the funder, there are two cases, which could be distinguished. The first case describes the specific assignment of the rights, and the funder replaces the funded party as a contracting party to the arbitration agreement. Regarding the second case, there is no explicit transfer of the rights to the funder, but because of the high profit that the funder may earn from the procedure, it acquires control of the claim indirectly. In this case, it is not clear whether the funding agreement leads to the assignment of the claim to the funder. According to an opinion expressed by Aren Goldsmith and Lorenzo Melchionda, this is considered to be a
de facto assignment.75 This interpretation has also been endorsed by Sebok who argued that: “Once the funder assumes full control of the claim, he really is an assignee and the contract that brought his control of the claim is properly a contract of assignment.”76 The above applies in general to funding agreements and it could be concluded that when the funding agreement does not explicitly specify that the claim has been transferred to the funder and the funder is only entitled to benefit from the profits of the award, there is no grounds to believe that this agreement would be considered an assignment of the rights derived from the claim. This practice might spur debates. While the BITs and IIAs specify explicitly who is entitled to investment protection, the substitution of the investor by the funder is manifestly against the object and purpose of the investment protection regime. In this regard, it could be suggested that those investment agreements and treaties that allow the TPF must further contain provisions that preclude the assignment of claims to third parties.
An issue of jurisdictional nature concerning the replacement of a party by the funder based on a funding agreement arose in the case of Teinver v. Argentina. In this case, a Spanish investor initiated arbitration against Argentina claiming unlawful expropriation of its investment by
74 CETA, Article 8.26 para 1.
75 A Goldsmith and L Melchionda, ‘Third Party Funding in International Arbitration Everything You Ever Wanted to Know (But Were Afraid to Ask)’ International Business Law Journal 53-76.
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means of nationalisation.77 To support its claim, the investor concluded a funding agreement with Burford Capital Ltd.78 According to this funding agreement, Burford Capital was entitled to a share of the compensation that would be awarded to the claimant. Because of this agreement, Argentina maintained that the claimants did not have any actual interest in the outcome of the case, and in fact, the third funder would be the real sole beneficiary of the award.79 Moreover, because Burford Capital could not qualify as an investor under the BIT in question, it did not fulfil the requirements of the ICSID Convention, and the tribunal, therefore, would not have jurisdiction to hear the case.80 The Tribunal, however, rejected Argentina’s objection that the claimant was no longer the real party with an interest in the dispute and characterized their arguments as a “conspiracy”.81
Teinver v Argentina is particularly useful to extract some conclusions when discussing the possible establishment of TPF in investment arbitration. One of the strongest and more frequent arguments that are brought up by the critics of TPF is that in practice, through the funding contract, the funder takes control over the claim and immediately substitutes the claimant and it thus creates grounds for a dismissal of the claim for a lack of jurisdiction of the tribunal.82
Nevertheless, the Abaclat case demonstrates that this is not tribunals’ point of view and a case of assignment of the claim cannot be established through the mere funding of the claim. Moreover, Teinver Tribunal’s treatment of the objection to TPF as a “conspiracy” does not leave grounds for any doubts that a tribunal could examine such criticism in depth. Therefore, in the debate whether TPF should be banned in the context of investment arbitration, the Abaclat Tribunal gives a very straightforward and well-reasoned negative response.
2.4. What obligation for disclosure? 2.4.1 The procedure of disclosure
One of the main issues points of criticism regarding the use of TPF in investment arbitration is that of the appropriate disclosure of details that pertain to the identity of the funder, the total
77 Teinver S.A. Transportes de Cercanias S.A. and Autobuses Urbanos del Sur S.A. v The Argentine Republic, ICSID Case No. ARB/09/01, Award, paras 100, 103, 224-227.
78 AK Bjorklund, Yearbook on International Investment Law & Policy (Oxford 2013) 115-116.
79 Teinver S.A. Transportes de Cercanias S.A. and Autobuses Urbanos del Sur S.A. v The Argentine Republic (n 57) paras 70-72.
80 ibid para 74. 81 ibid para 233.
82 ICLG, Third-Party Funding and Investor-State Arbitration. Investor-State Arbitration 2019 (2018) at <https://iclg.com/practice-areas/investor-state-arbitration-laws-and-regulations/1-third-party-funding-and-investor-state-arbitration> accessed 1 April 2019.
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sum and the source of the funding.83 The confidentiality, which is one of the hallmarks in commercial arbitration, could not apply in a similar manner in investment arbitration where the final award might affect more than private interests.
Even though there is no extensive legislative framework which provides for the disclosure of the funder, some steps have already been taken towards the establishment of such a framework. The adoption of a “Guidance Note for the Disclosure of Conflicts by Arbitrators” on the 12th of February 2006, could be considered as the first initiative by the International Chamber of Commerce (ICC) to regulate some issues regarding the disclosure of TPF details. This Guidance Note included for the first time an indirect reference to TPF.84 Specifically, the arbitrators should consider at their discretion whether it is necessary to proceed with the disclosure of an entity, which has a direct economic interest in the outcome of the case and is involved in the process.85 Article 28 of the Guidance Note provides that: “Relationships between arbitrators, as well as relationships with any entity having a direct economic interest in the dispute or an obligation to indemnify a party for the award, should also be considered in the circumstances of each case.” This provision could be considered as an indication that the ICC recognizes TPF as an existing mechanism that must be placed in a specific legal framework. The fact that the ICC decided to engage in issues relevant to TPF demonstrates that there is no intention to proceed with its ban because no harmful implications of this mechanism have been detected in the context of arbitrations conducted under the ICC’s administration.
The IBA Guidelines, considered to be highly effective in helping parties avoid situations of conflict of interests, at General Standard 7a, provide that the existence of a third entity, which would be involved as a third-party funder, should be disclosed at the earliest opportunity to the Tribunal and the other party.86 Nonetheless, it should not be disregarded that the IBA Guidelines are a matter of soft law and cannot be enforced to the parties during the proceedings; hence, their role remains ancillary.
It is suggested that more states and international institutions like the ICC should take initiatives towards the establishment of an exact definition of TPF and indicate the most appropriate
83 See eg FJ Garcia, ‘Third-Party Funding as Exploitation of the Investment Treaty System’ (2018) 59 Boston
College Law Review; W Stone, ‘Third Party Funding in International Arbitration: A Case for Mandatory
Disclosure?’ (2015) 17(2) Asian Dispute Review 68.
84 A Goldsmith and L Melchionda, ‘The ICC’s Guidance Note on Disclosure and Third-Party Funding: A Step in the Right Direction’ (Kluwer Arbitration Blog, 14 March 2016)
<http://arbitrationblog.kluwerarbitration.com/2016/03/14/the-iccs-guidance-note-on-disclosure-and-third-party-funding-a-step-in-the-right-direction/> accessed 11 March 2019.
85 ibid. 86 ibid.
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procedure for disclosure of the identity of the third-funder and the sum of the funding, under which circumstances and at which stage of the arbitration.87 The ICSID Secretariat’s proposal from 2 August 2018 for the amendment of existing rules, which included some regulatory recommendations concerning TPF, in conjunction with the ICC’s Guidance Note and the IBA Guidelines constitute a clear intention that international arbitration is moving towards the endorsement of a TPF mechanism.
In the EU-Vietnam FTA, the procedure for disclosure is simple. The notification is made at the time of the claim’s submission. In case that an agreement for funding is made later than the submission of claims, the disclosure should be made immediately after the transaction has been completed.88 If the tribunal decides to order security for costs, it is required to know whether there is TPF. The involvement of TPF is not per se a case of exceptional circumstances, which influence the security for costs, but it might affect the post-award phase of the case when a party is found to be without the required financial resources.89 This position has been reaffirmed in
two instances, Eurogas v Slovakia90 and South American Silver v Bolivia,91 respectively.
Moreover, if a party, who has been funded by a third funder, has not revealed this fact on time, the tribunal may take this into account when it calculates the costs.92
Moreover, CETA refers to the temporal element, which is crucial for the disclosure procedure. The second paragraph of Article 8.26 provides that: “The disclosure shall be made at the time of the submission of a claim, or, if the financing agreement is concluded or the donation or grant is made after the submission of a claim, without delay as soon as the agreement is concluded, or the donation or grant is made.”93 CETA, therefore, contains a very straightforward and clear approach concerning the legality of TPF.94 CETA also included two safeguards that might prevent the abuse of TPF. In Article 8.32 and 8.33, reference is made respectively to those claims that are without substantive legal basis and to those that are
87 See K Brown de Vejar and C Baldwin, ‘The Economics of Access: Systemic Imbalances in ISDS’ in ICCA Congress Proceedings, 33-35 at <https://www.curtis.com/siteFiles/News/KBdV%20-%20ICCA%20Paper%20-%20The%20Economics%20of%20Access_%20Systemic%20Imbalances%20in%20ISDS.pdf>.
88 Aceris Law LLC, ‘Third Party Funding Is Being Regulated’ (International Arbitration Information, 3 March 2016)
<https://www.international-arbitration-attorney.com/third-party-funding-is-being-regulated-iias/> accessed 22 April 2019. 89 ibid.
90 EuroGas Inc. and Belmont Resources Inc. v. Slovak Republic, ICSID Case No. ARB/14/14. 91 South American Silver Limited v. Bolivia, PCA Case No. 2013-15.
92 Aceris Law LLC (n 88). 93 CETA, Article 8.26 para 2.
94 MM Mbengue, ch 9 ‘An Asian View on the CETA Investment’ in S Schacherer (ed) Foreign Investment
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“unfounded as a matter of law”.95 These provisions guarantee that claimants would not use the
TPF mechanism to bring disputes before international arbitration by invoking minor claims or claims without legal merit.
2.4.2 Why disclosure is important for TPF
An issue that should be discussed and is related to the obligation of disclosure is the extent to which a general duty of disclosure is indeed a step forward for the establishment of TPF as a useful tool in service of the parties that participate in arbitration.96 The next chapter will deal with the practical meaning of full and partial disclosure, while this will examine whether a general obligation for disclosure exists. While the ICCA-QMUL Task Force implied a need for immediate further regulation of TPF, when it comes to the issue of disclosure, it should be assessed what extent of disclosure is indeed necessary and for what reasons. The Task Force has put forward two suggestions that deal mainly with the avoidance of conflicts of interest.97 The first proposal referred to the party’s obligation to disclose to the tribunal the fact that it is funded by a third party, the identity of this funder and the following obligation to reveal the total funding provided. The second proposed option, illustrated by the Task Force, concerned the likely authority of the arbitral tribunal to request from the parties to disclose whether they are funded by a third-party, who the funder is, and what is the total sum of that funding.98 However, it remains uncertain whether this rather extensive obligation of disclosure guarantees a kind of transparency of the procedure or whether it contributes to the creation of procedural barriers that render the arbitration more timely and costly than it already is. The main reason for which the tribunals favor an approach of extensive disclosure is because they want to assure the lack of conflicts of interest. There is no indication that this is happening because they want to investigate the source of the funding. Besides that, this is not an arbitral tribunal’s duty. Therefore, the question is whether certain limits could be applied to this duty of disclosure.99 This discussion is crucial, because the economic and practical impact for the procedure could be disproportionate to the actual benefits. Given that the funders are investors that could even
95 ibid.
96 LB Nieuwveld, ‘To Disclose or to Not Disclose – That is the Question. Insight from: IBLJ/RDAI Round Table Regarding TPF Produces Interesting Insights Into the Question of Disclosure and Private Interviews’ (Kluwer
Arbitration Blog, 17 April 2012)
<http://arbitrationblog.kluwerarbitration.com/2012/04/17/to-disclose-or-to-not-disclose-that-is-the-question/> accessed 10 May 2019. 97 ICCA-Queen Mary Task Force Report (n 1). 98 ibid.
99 N Casado Filho, ‘The Duty of Disclosure and Conflicts of Interest of TPF in Arbitration’ (Kluwer Arbitration
Blog, 23 December 2017) <http://arbitrationblog.kluwerarbitration.com/2017/12/23/duty-disclosure-conflicts-interest-tpf-arbitration> accessed 13 May 2019.
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be under the wing of an investment fund, it is expected that the defendants would be continuously engaged in piercing the corporate veil until they discover who has assumed to fund the claimant.100 Such a procedure with successive requests from the defendant’s side would inevitably lead to the further slowdown of the arbitration and might drive up the cost of the procedure to even higher amounts. For this reason, a mere provision in the arbitration rules, stating that only companies registered legitimately for the specific reason of funding proceedings could qualify as funders, should suffice. By introducing such a safeguard, the arbitration system would be protected from exploitation by aspiring investors.
From my point of view, it would be unreasonable to seek a very stringent regulation on the matter of disclosure, as implied by the Task Force, because it is unrealistic that the funded party would follow such a risky strategy by being funded by someone who acts in breach of the conflict of interest rules. It is clear that in such cases the award sought would not be enforceable. Therefore, a mere declaration that the funder is not an entity with direct or indirect interest in the procedure would be an adequate solution. However, if the defendant brings substantive evidence alleging conflicts of interest, the tribunal should examine the issue further. Consequently, it could be argued that more regulation of TPF is indeed desirable, but overregulation could have adverse impacts on the procedure itself and this should be borne in mind when discussing the role of the TPF in investment arbitration.101
2.4.3. Types of disclosure: Full disclosure versus partial disclosure
The type of disclosure that is required in each case of investor-state arbitration is an issue that calls for a debate. As mentioned, the establishment of a duty of full disclosure should not be considered as the most appropriate practice. It lacks practical application and disregards the economic implications of such a duty.102
Indeed, the obligation of full disclosure is not desirable. A duty of full disclosure means that the benefited from the funding should disclose not only information about the identity of the funder but also, details of the funding agreement, such as the interest rate.103 This practice, however, would be contrary to the privacy and contract laws of many legal systems.
100 ibid. 101 ibid. 102 ibid.
103 A Hubai, ‘Coming Out of the Closet: Third-Party Funding in International Arbitration’ (EFILA Blog, 1 February 2018) <https://efilablog.org/2018/02/01/coming-out-of-the-closet-third-party-funding-in-international-arbitration/> accessed 22 April 2019.
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On the other hand, partial disclosure is deemed to be more appropriate. The purpose of the tribunal should, in fact, be to reveal the necessary details of the funder and the funding agreement insofar as they ensure the impartiality of the procedure. In exceptional cases and at the tribunal’s discretion, a funded party could be asked to reveal more specific details. In any case, partial disclosure does not come in contradiction with the principles of private law. In my opinion, a party to the arbitration should not be aware of the total amount with which the opposing party is funded. It would be contrary to the object and purpose of the investor-state dispute settlement (ISDS) system that a party modifies its claims according to the funding that the other party would receive. This is not a practice that serves the settlement of the dispute but is a rather ‘usurious’ approach.
A compelling suggestion towards the establishment of a particular type of disclosure has been made by Jennifer A. Trusz.104 She proposed a four-step guide to address issues of disclosure.
These proposals are as follows:
A. The information that might affect the arbitrator’s impartiality and includes information about the relationship between him/her and the third-party who is funding the claim should be disclosed.
B. The institution shall receive information by the party which is being funded. Moreover, that party should disclose if there is any possibility that conflicts might arise from any other investments, which the funder has undertaken.
C. The institution, which becomes aware of any funding from a third-party, shall immediately perform a conflict check. This preliminary control should be executed under absolute discretion and confidentiality.
D. The tribunal should not, in any case, consider the existence of a third-party funder as a factor that might affect its decision on the issue of security for costs.
The proposals mentioned above, as expressed by Trusz, reflect the need for partial disclosure, and they might constitute a safeguard to the normal conduct of the arbitration. It would be a step in the right direction to consider this four-step guide as grounds for further regulation, as
104 J Trusz, ‘Full Disclosure? Conflicts of Interest Arising from Third-Party Funding in International Commercial Arbitration’ (2013) The Georgetown Law Journal 1672-1674.
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it might render arbitration more flexible by introducing a legitimate means to finance a claim without putting at risk the integrity of the process.
2.5. The rights and the obligations of the Third-Party 2.5.1 Involvement of the funder in the arbitration
Even though the funders in TPF procedure are not involved in the arbitration either directly or indirectly have an interest in the outcome of the case. In any event, they cannot be considered as parties to the dispute like the disputing parties, the legal counsels, the arbitrators, and the witnesses and therefore, they cannot be treated in the same manner.105 The crucial question that derives from their participation in the arbitration is how should the tribunal treat them.
The funders cannot be considered as amici curiae because they do not make any submissions relevant to the dispute, despite the fact that they obviously support the position of the funded party, given that their share is calculated in case of a win of that party.106 They are not allowed
to enforce their opinion or impose any proposals to the arbitrators, because they are not direct parties to the procedure. Therefore, a tribunal would not accept any interference by their side, and they cannot prima facie determine the outcome of the arbitration. In addition, it must be clarified that they are not beneficiaries of any contract. Consequently, they cannot submit a claim independent to the funded party’s claim as a non-party to the original contract.107 The only possibility to enforce the original contract is to purchase the claim and, in this way, become a party to the procedure. Therefore, it could be argued that while they might qualify as investors because of their economic contribution and their interest in the outcome of the dispute, they cannot directly be considered parties to the investment arbitration.
As mentioned above, several jurisdictions do not permit the direct involvement of the funders. However, the question emerges of how they can be protected when the counsels of the funded party act in a way that would clearly lead to the dismissal of the funded claim. In this case, the funders might initiate proceedings against the funded party, claiming its liability for unjustified misconduct. Nevertheless, it is highly unlikely that such a claim will have success, given that there are no known instances where the counsels of a party acted manifestly in such a wrongful way. It should also be noted that some jurisdictions allow for a more active role of the funders
105 V Shannon Sahani, ‘Judging Third-Party Funding’ (2016) 1(1) UCLA Law Review 399. 106 ibid.
