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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
1 LESSONS FROM CASE LAW
1.a Abaclat v. Argentina
In Abaclat v. Argentina,1 the most important jurisdictional issues were the following: (i) whether the investors' consent to ICSID arbitration had been validly expressed, notwithstanding the fact that the arbitration had been notified by a third-party funder to which the investors had conferred the mandate to institute and handle the ICSID proceedings; and (ii) whether the "group" proceedings amounted to a class action for which arbitration, in particular ICSID arbitration, might not be considered a viable or suitable mechanism for settling disputes.
In a majority decision on jurisdiction of 4 August 2011, the tribunal's reply was "yes" to the first question - consent had been validly expressed by the claimants and also by Argentina - and "no" to the second - ICSID arbitration is also a permitted and suitable mechanism for resolving disputes with multiple claimants. On this basis, the Tribunal assumed jurisdiction over the case.
The third-party funder was TFA (Task Force Argentina, composed of banks), which was a "third" party in respect of the treaty arbitration, not the (domestic) disputes that the bondholders had raised against the banks before the Italian courts. Those domestic disputes were suspended as soon as TFA agreed to accept from all claimants (more than 60,000) and discharge on their behalf a "mandate package", including a commitment to institute an ICSID arbitration in their name, appoint and instruct counsel and experts, develop the claim strategy and bear all costs, in exchange for which the claimants would waive their right to sue the banks as long as the ICSID proceedings were on-going.
The tribunal admitted that the claimants were to some extent "passive" participants, unable to instruct counsel or determine the conduct of the proceedings by themselves, but acknowledged (by a majority) that they were fully aware of and willing to accept these restrictions on their defensive freedom. The tribunal found that this was justified by a state of necessity: when claimants number several thousand, no better alternatives exist. According to the majority, these uncommon features did not affect "consent" as a requirement for ICSID jurisdiction: all the claimants had empowered TFA to bring their claims against Argentina before an ICSID tribunal "knowing what they were doing". Their consent was "free and informed" - no evidence of fraud, coercion or mistake was found by the majority of the tribunal.
As to the claimants' temporary waiver of their right to sue the banks before State courts, the tribunal accepted that this amounted to a benefit for the banks and created a conflict of interest between the funder and the claimants. However, a majority of the members of the tribunal emphasized that the anomaly did not arise from an invalid agreement. Indeed, it resulted from a bargain that had been freely struck between the parties, and no principle of law made this agreement illicit, invalid or otherwise ineffective.
The tribunal further held that this apparent anomaly was counterbalanced by the fact that the claimants were now able to conduct a unified ICSID arbitration at the expense of the banks, something that none of them would have been able to afford individually. They had all accepted TFA as a sort of "risk insurance", in which TFA had taken on the risk relating to the outcome of the case and the claimants undertook to remunerate TFA for taking this risk by paying them a premium.
The majority of the tribunal concluded that the above-mentioned uncommon features (conflict of interest and restrictions on defensive freedom) might at most give rise to a question of admissibility rather than jurisdiction, given that the Italian investors' consent to ICSID arbitration had been validly expressed.
The majority of the tribunal found in favour of the admissibility of "mass actions" before ICSID tribunals on the grounds that this category of actions is not excluded by or incompatible with the ICSID Convention. Argentina had objected that the "mass" dispute was impossible to manage by a single tribunal in a single procedure, to which the tribunal replied that procedurally they were not unmanageable.
On this crucial point, the tribunal referred to Article 44 of the ICSID Convention, which provides that, if a question of procedure arises which is not covered by the Convention or the ICSID Arbitration Rules, it shall be decided by the tribunal. Based on Article 44, the tribunal held that it was empowered to introduce and organize, by means of procedural orders, the devices and modalities suitable to allow the merits of the claims to be investigated and decided through efficient procedural measures, notwithstanding the extraordinary number of co-claimants and of individual claims made by each claimant or homogeneous groups of claimants.
Reacting to a specific objection raised by Argentina, the majority of the tribunal clarified that, in its view, the silence of the Convention was merely a "gap" and not an intention to exclude mass claims from ICSID proceedings. As a matter of fact, it noted that multi-party arbitrations were not an absolute novelty in ICSID practice and that the number of co-claimants may not make the difference.
The tribunal stressed that what matters is whether the multiple claims arise from the same fact pattern and the same State measure and whether they are based on the same alleged breaches of the same treaty provisions. In the tribunal's view, all these conditions were entirely satisfied in Abaclat case.
In its reasoning, the tribunal clarified its position by noting that if each investor had separately filed its individual claim, the tribunal's jurisdiction over each separate claim would have been unquestionable. There was no good reason, therefore, to deny jurisdiction only because the investors were many and their claims were aggregated in a unified procedure.
The tribunal further noted that disputes resulting from sovereign debt restructuring may inevitably amount to mass claims and that the two contracting States might have provided that such a category of disputes was not arbitrable under the BIT. However, they did not introduce such an exception.
In particular, although Argentina is used to obtaining financing resources by issuing bonds that are offered to foreign subscribers, it did not exclude disputes connected to such bonds from its consent to ICSID arbitration. On the contrary, in the BIT in force with Italy, Argentina gave express consent to arbitrate before ICSID tribunals the disputes arising from certain categories of protected investments, which specifically included those consisting of "private or public bonds".
Finally, the majority of the tribunal underlined that the alternative would have been either a denial of justice or 60,000 separate arbitrations against Argentina.
The decision on jurisdiction was severely criticized in a separate opinion produced by the dissenting arbitrator. The dissent was articulated as a sort of "counter-judgment" in which all relevant issues were re-examined one by one. The reasoning of the dissenting arbitrator led him to reach opposite conclusions to those of the majority.
In summary, the reasons for his dissent were as follows:
(a) Mass claims are not arbitrable under ICSID Convention. Each claim must be examined individually, and this also applies to treaty claims. The tribunal cannot decide the merits without knowing the time at which each asset was acquired, what price was paid or the currency of denomination, these being the basic elements needed to establish compensation for damages.
(b) The US Supreme Court has held that, absent explicit consent, a common (bilateral) arbitration clause cannot be presumed to make class actions arbitrable: "arbitration is poorly suited" to class actions, because they increase the risks to defendants and the likelihood of errors, especially when damages allegedly owed to thousands of claimants are aggregated and must be decided at once.2
(c) Whether a regular arbitration clause covers class actions is doubtful in domestic law and "excluded in international law". Treaty-based tribunals ignore this type of practice, the precedents being cases in which certain special commissions or tribunals (e.g., the UN Compensation Commission, the US-Iran Claims Tribunal, the administrative compensation commissions and the old mixed arbitral tribunals) were empowered to deal with multiple claims on the basis of special agreements, not on the basis of a standard arbitration agreement. Moreover, these commissions and tribunals used to individually examine the claims of the various claimants.
(d) None of the above-mentioned bodies were authorized to devise ad hoc procedural rules in addition to or in lieu of those established in the legal instruments upon which their authority was founded.
(e) The Convention's silence means exclusion or impediment. It is based on a balance of interests between investors and States. States may not accept substantive diminutions of their defence rights - a diminution that is, instead, the inevitable product of mass actions.
(f) The practice of collective proceedings in investment disputes was introduced well after Argentina ratified the Convention and the BIT in question. At the time, mass arbitration was not even foreseeable and Argentina's consent must be deemed to be restricted to what was known at the time.
(g) The Tribunal was not empowered to rewrite proprio motu an entire chapter of procedural rules, replacing those in force, without the parties' agreement. The change would require "legislative" jurisdiction, i.e., an amendment to ICSID Convention or Arbitration Rules, whereas the tribunal arrogated to itself the power to act as a legislator.
(h) The mandate to TFA included exorbitant powers, giving rise to public policy concerns, which affect or at least call into question the validity of the claimants' consent to ICSID arbitration.
In brief, the dissenting arbitrator did not spare any of the majority's conclusions. In ICSID case law, it is rare to see a dissenting opinion that is so absolute and complete. However, it must be noted that it was founded on deeply reasoned and erudite arguments.
Comparing the opinion of the majority to that of the dissenter, it is evident that the most complicated issue was the arbitrability of mass claims in the ICSID system. The predominant role of the third-party funder - or its "exorbitant powers" - also had an influence on the conclusions of the dissenting arbitrator. However, it seems evident that the most important and insurmountable obstacle that prevented him from going along with the majority was the "class action" nature of the claims.
Had the number of co-claimants been relatively small (for instance, five or ten), it is likely that the difficulty encountered by the dissenting arbitrator could have been overcome. In such a case, the presence of a third-party funder to which the small group of claimants would delegate the conduct of the proceedings would most likely not affect the validity of consent to ICSID arbitration, nor call into question the procedural manageability of the claims. In practice, however, the massive number of claimants represented an insurmountable obstacle to the dissenting arbitrator.
In a dossier devoted to third-party funding in international arbitration, Abaclat is a pertinent case, because it is one in which third-party funding was put to use without causing major concerns. Instead, what caused concern were the extraordinarily large number of co-claimants and the ability of the tribunal to create and control procedural devices that enabled the merits of the case to be investigated in an appropriate and useful way, while protecting the rights of both parties, including Argentina, to a full and meaningful defence and a proper process.
The progress of Abaclat will reveal whether the majority's optimism concerning the tribunal's ability to manage the administration of the merits phase was founded. According to the information available on the ICSID website, the tribunal is currently issuing procedural orders aimed at organizing the merits phase that take into account the vast number of claimants and claims. It seems that the tribunal is inclined to make ample use of experts to perform the factual or quantum investigations concerning the claims of each individual claimant or homogeneous sub-group of claimants and then aggregate the resulting outcome.
The next phases of the proceedings will show whether the case is actually manageable, as claimed by the majority but denied by the minority.
In particular, it will be interesting to see how the respondent, Argentina, will be able to file its defences on the merits and the quantum in a case where the investigation will be conducted by one or more tribunal-appointed experts, who will aggregate and examine several hundred "homogeneous" groups of claims.
1.b RosInvest v. Russia
In RosInvest v. Russia,3 the claimant was a member of the Elliot Group, a vulture fund whose modus operandi, according to Russia, consists of buying lawsuits and securities not because they offer the prospect of a reasonable return but because they furnish a "pretext to threaten legal action": the more desperate the situation of the issuer becomes, the better the profit for Elliot, as it leverages the alleged resulting losses into huge damage claims.
The amount claimed was US$ 276 million, which is 78 times the amount of the purchase price of the claimant's shares in Yukos, which amounted to US$ 3.5 million. The sum eventually awarded by the tribunal was precisely US$ 3.5 million, i.e., the original purchase price and nothing more.
One might wonder whether the claimant was merely a nominee and not the real investor. Indeed, the costs were financed by the Elliot Group as the "economic owner" of the Yukos shares. This circumstance was assumed to be true in both parties' pleadings. However, it was not pleaded as an obstacle to consent to arbitration, as in Abaclat, or as an obstacle to the claimants' standing.
Furthermore, the asset in question did not clearly belong to a UK investor but, arguably, to an American one. Hence, it was questionable whether the UK-Russia BIT was the proper treaty to apply.
However, based on the broad definition of "investor" and "investment" under the UK-Russia BIT, the tribunal ascribed little relevance to the point and was satisfied that the definitions covered both nominal and actual investors and all the kinds of assets in which they had invested, including shares in a company. The broad language of the definitions induced the tribunal to exclude any "stricter interpretation". In conclusion, RosInvest was considered an investor that properly met the requirements defined in the BIT.
In particular, the tribunal rejected Russia's objection that the claimant's only asset was the purchase of a treaty claim through the purchase of shares reflecting the value of the claim. Given that the asset was the "status of shareholder enjoyed by the claimant", the objection was dismissed.
In substance, in RosInvest, the determinative intervention of a third-party funder might have caused concerns regarding the validity of the consent to arbitration or the legal ability of the claimant to assert the claim, but this was not the case. The tribunal found no misuse of the procedural devices offered in the BIT and treated RosInvest as the real investor.
Once again, the existence of a sui generis third-party funder and its active role in the proceedings gave rise to no procedural or substantive obstacle.
1.c Quasar de Valores and Others v. Russia
Quasar de Valores and Others v. Russia4 is another interesting example of a case where third-party funding was successfully used in an investor-to- State arbitration. The peculiarity in this case was that the third-party funding was not provided by a professional or institutional funder or financial institution. It was instead provided for free by a third party that had a noteworthy interest in the outcome of the proceedings. This party - Menatep - was itself a claimant in a parallel ICSID arbitration against Russia, based on the same State measures and treaty breaches invoked by Quasar de Valores.
The claimants were a small group of passive shareholders in Yukos, holding a very marginal portion of shares and alleging that Russia's illicit manoeuvres (tax levies) against Yukos destroyed their investment.
Public disclosure was made that claimants' costs were entirely financed by Menatep, which is a claimant in a parallel huge case based on the same illegalities allegedly committed by Russia against Yukos. Menatep undertook to bear the costs without imposing on the claimants the obligation to share with Menatep the proceeds expected from the award. In other words, the third-party funding was a free donation.
One might legitimately wonder which of the two was the real party in interest: Quasar or Menatep? Was Quasar vindicating Menatep's or its own rights? Was the evident disproportion between the amount claimed (US$ 2.6 million) and the costs incurred for the arbitration as stated in the award (US$ 14.5 million spent by Menatep plus US$ 9.4 million claimed by Russia) an indication that the party having a genuine interest was Menatep rather than Quasar? Was the case to be heard under the Spain-Russia BIT or under the UK-Russia BIT (Menatep being a Gibraltar entity)?
The discrepancy between the arbitration costs and the modest amount claimed was due to the fact that the case involved a long and complex evidentiary phase, a long and detailed analysis of Yukos's story and a long and detailed evaluation of the illegitimacy of Russia's actions against Yukos. This understandably increased the arbitration costs by a considerable amount.
Evidently, Menatep was pursuing a private interest through Quasar, namely a favourable decision that could later be invoked in support of its own case. Although it is not a binding precedent, the Quasar award will inevitably be considered in other pending cases in the Yukos saga, including Menatep's case. This may well explain the costly "donation" made by Menatep to the small Yukos shareholders, in order to allow them to assert their modest claim without incurring any expenses.
Based on these circumstances, Russia objected that the case was an "abuse of process", not least because Quasar's counsel was a member of Menatep's advisory board. It further objected that the claimants themselves, absent Menatep's aid, would have been entirely unable to pursue the case. In addition, the claimants were not the domini litis, the entire defensive strategy having been determined by Menatep through the appointed counsel.
However, the tribunal found the objection "unpersuasive". The claimants were shareholders in Yukos and that was enough to establish the admissibility of the claim and the jurisdiction of the tribunal.
The tribunal went on to underline that the external finance was provided by Menatep with no speculative intent, since the right to reimbursement was waived. In the tribunal's words, Menatep was acting like the Good Samaritan. This excluded any element of abuse, and the underlying motives of the Good Samaritan were "irrelevant as between the disputants in this case".
This conclusion was strengthened by the following strong comment of the tribunal: "If liability is established, Russia's complaint cannot be raised against the Good Samaritan but rather against its own officials who acted in such a way as to give rise to that liability." In other words, the relevance of the facts and the substance of the dispute must prevail over the consideration to be given to the role of a third-party funder and its private motives for funding the proceedings.
When allocating the arbitration costs, the tribunal acknowledged that, in principle, the prevailing party should recover its own costs. However, the tribunal accepted that this was not an ordinary case where the winning party advances its own legal costs. Indeed, for the claimants the arbitration was free and they were not even committed to repaying Menatep. At the same time, Menatep had no standing before the tribunal and could not be awarded any compensation for the costs it had sustained on behalf of Quasar, nor were any such costs ever claimed during the course of the proceedings.
The relevance of Quasar in the context of the present dossier is clear. Third-party funding was provided in assistance of impecunious claimants that would otherwise have been incapable of bringing their (modest) claim in such a costly forum. The apparent monetary discrepancies raised no concerns, although the attorney fees and arbitration costs were nine times the sum claimed and awarded. In fact, an even more delicate issue, namely Menatep's undeniable interest in the favourable outcome of the case that it had decided to sponsor for free, also raised no concerns.
In my view, this is a strong indication that international tribunals are generally well disposed towards third-party funding in arbitration, and evidently more so than what the common worries of many commentators would suggest.
1.d The Lago Agrio saga (Chevron v. Ecuador)
An important example of third-party funding was also employed in the Lago Agrio saga,5 in aid of several lawsuits filed in Ecuador and outside (in the United States and Canada) by a large community of local plaintiffs in order to seek enforcement of a US$ 18.2 billion Ecuadorian judgment against Chevron and to oppose Chevron's enforcement outside Ecuador of an arbitral award made by a UNCITRAL tribunal constituted under the applicable BIT, which had awarded Chevron substantial compensation against Ecuador.6
This was an instance of third-party funding, but it was not put into place in aid of an international arbitration. Rather, it was put into place by a large number of citizens of the host State who were willing to fight against the BIT arbitration system, which they considered intrinsically unfair and detrimental to developing States, whose sovereign powers are greatly diminished by treaty tribunals that protect the interests of powerful foreign companies.
Accordingly, this example of third-party funding was organized to finance a political campaign rather than the resolution of a legal dispute.
1.e S&T Oil v. Romania
The case of S&T Oil v. Romania7 became known because the relevant facts were disclosed in a claim filed by S&T Oil in a RICO complaint before a Texas court in 2011.
In 2007, S&T Oil filed a claim for expropriation against Romania. Given its limited resources, S&T Oil was able to afford the arbitration costs as a result of third-party funding. An ICSID tribunal was constituted, but the claimant's counsel resigned in 2008 declaring that the third-party funding had been discontinued and that the claimant was unable to locate the outstanding sources needed to pursue the claim. Soon afterwards, S&T Oil and the funder agreed on financing to continue the arbitration in exchange for assigning to the funder a substantial percentage of any proceeds deriving from the case, S&T Oil's rights in a Romanian company and the right of access to all confidential information between claimant and attorney.
In 2009, just before the scheduled hearing, the claimant was unable to satisfy ICSID's request for payment of the advance on costs. The hearing was postponed several times, and in 2010 the proceedings were discontinued by the ICSID Secretariat.
As a result, the funder filed an arbitration claim under LCIA Rules against ST&T Oil for damages and attorney's fees, while S&T Oil filed a RICO complaint against the funder, alleging that the funder had defrauded it by imposing an illegal agreement on the company. The RICO complaint was dismissed and the parties were ordered to pursue their London arbitration.
The existence of third-party funding was not disclosed during the ICSID arbitration and only became known because of the subsequent litigations between the claimant and the funder.
In particular, Romania was unaware of the existence and identity of the third-party funder and faced the risk of not recovering its own arbitration costs in the event that the case ended in its favour. No security for costs had been provided at the outset of the proceedings, and the insolvency of the claimant was unknown to all other parties involved.
The lesson to be drawn from the present case is that the existence of third-party funding, its conditions and the identity and solvency of the third-party funder should be disclosed when arbitration proceedings commence. This should, in my view, be the rule in all international arbitrations, but it should be made mandatory at least in investment arbitrations, where a State is inevitably involved. States should not be exposed to the risk of handling a costly arbitration up to a point where the claimant suddenly turns out to be impecunious and lacking any external financial aid.
Apart from this aspect, S&T Oil has no lesson to impart on the admissibility of third-party funding in investment arbitrations. In fact, the case was discontinued before the tribunal had an opportunity to make any decision whatsoever.
2 LESS PROBLEMATIC CASES
2.a Kardassopoulos v. Georgia
In Kardassopoulos v. Georgia,8 the existence of third-party funding had been disclosed and became relevant exclusively with regard to the allocation of the arbitration costs. Georgia objected that the legal costs claimed by the claimant were excessive because they included the repayment of the funder.
However, when determining the amount of cost recovery pertaining to the claimant, the tribunal did not give special consideration to the third-party funding and equated it to an insurance policy, thus applying the specific BIT dispute clause providing that any indemnity possibly paid to the claimant by an insurer in respect of the damages incurred should be disregarded by the tribunal.
The tribunal applied this provision and ignored the funder's contribution to costs.
2.b Funnekotter and Others v. Zimbabwe
This case involved a relatively small "collective" claim,9 and the use of third-party funding was therefore not an issue.
2.c Siag v. Egypt
The case of Siag v. Egypt10 became known in the arbitration community because the third-party funder was the law firm of the claimant's counsel. Lawyer and client had agreed on remuneration based on a success fee amounting to a considerable proportion of the proceeds expected from the award, in exchange for the law firm's commitment to single-handedly advance the entirety of the arbitration costs and legal expenses.
It is unclear whether the lawyer-client arrangement was made public during the arbitration proceedings. What is certain is that it was not discussed in the pleadings as reported in the award. It is therefore likely that Egypt and the tribunal remained unaware of this situation.
The claim was highly successful for the claimant, which nevertheless failed to compensate the funder. The funder therefore launched a litigation in London for recovery of counsel costs and fees as agreed before the start of the arbitration.
This case has little relevance in the context of the present discussion, due to the simple fact that the external financing and its particular modalities were not debated in the proceedings nor addressed by the tribunal.
2.d Oxus Gold v. Uzbekistan
Pursuant to an announcement by Oxus Gold in February 2012, this arbitration11 is being financed by Calunius Litigation Risk Fund on a "non-recourse basis". It appears that Oxus Gold maintains unlimited control over the claims and the proceedings and that the funder will receive a portion of the recovery only after and upon satisfactory closure of the case.
2.e Philip Morris v. Uruguay
This is a rare case were third-party funding is being used by the defendant State to finance its own defence,12 rather than the more usual case of an investor using third-party funding to finance its claim. According to a public announcement, the funder is a US-based organization.
3 GENERAL REMARK S
3.a On third-party funding
Third-party funding is not viewed as a problematic issue, much less an insurmountable one, in investment arbitrations. As the case law shows, it is widely accepted without causing particular difficulties to tribunals. It is generally also accepted in cases where it is undeniable that the third-party funder has a private interest in the outcome of the case, which sometimes transforms it into the real party in interest or at the very least places it in a conflicting position with the nominal party in interest, which is usually the claimant investor.
Almost all the above-mentioned cases were characterized by some degree of conflict of interest, or doubts concerning the identity of the true party to the proceedings.
(i) In Abaclat, the financing banks wagered on the success of the ICSID arbitration and are still betting on its favourable outcome. This is more in their own interest than in the interests of the thousands of bondholders, in order to avoid being ordered by Italian courts to compensate those bondholders for negligent advice to clients. In contrast, the thousands of bondholders had an interest in availing themselves of a forum whose costs none of them could afford individually
(ii) In RosInvest, a legitimate doubt concerned the identity of the real party in interest: the minority shareholders in Yukos, who would never have commenced arbitration if it depended on their own choice and financing capability, or the Elliott Group, the vulture fund that had purchased their claims? Based on the broad definition of the term "investor" in the BIT, the tribunal had no hesitation in identifying the claimant as the real litigant holding locus standi.
(iii) In Quasar, the situation was quite similar: the third-party funder had a clear private interest in ensuring that the case was brought before an investment tribunal and that it would be resolved in favour of the small investors in order to create a precedent. The funder was not repaid any of the costs that it had invested in the case through monetary reimbursement. Rather, it was "repaid in kind" through an award that supported its parallel and much larger case against the same State, which was based on the same factual and legal pattern.
(iv) In Siag, the third-party funder and the claimant had agreed on a success fee remuneration, which transformed it from mere counsel into a de facto partner of its client in the sharing of a substantive portion of the revenues possibly generated from the award.
In other words, the common feature in these cases was that no funder was a genuine third-party financier lending money to another party in aid of a dispute resolution in exchange for reasonable remuneration of the loan and the related risk. In reality, all the above-mentioned funders were remunerated, or are being remunerated, as the real beneficiary of the award or a de facto partner pro quota of the formal litigant that is entitled to share directly in the expected financial benefits of the award.13
Reading the awards, it seems clear that most of the tribunals were made fully aware of the circumstances. Some of them, for instance in Abaclat, even accepted that these circumstances amounted to "anomalies" or novelties in international arbitration practice. However, they consistently distinguished the formal claimant from the funder in defining the investor, the nature of its investment and its right to sue the State and benefit from treaty protection. In the context of these determinations, the preponderant role and evident interest of the third-party funders was not considered sufficient to divest the nominal claimant of these rights.
This conclusion is based not only on the tribunals' interpretation of the treaty provisions, as in the case of RosInvest, but also on the outcome of a specific analysis made by the tribunals as to whether the agreement between the claimant and the funder was valid or invalid under the relevant principles of law (see Abaclat and Quasar).
In this respect, Abaclat is perhaps the most complete and satisfactory decision. Either of its own motion or as a reaction to Argentina's strong objections, the tribunal in Abaclat made a comprehensive analysis of the contractual conditions agreed in the "package mandate" conferred by the thousands of bondholders on Task Force Argentina (TFA) in its role as third-party funder. The tribunal concluded that the agreement was made between parties fully conscious of what they were doing, in the absence of any fraud, duress or undue influence possibly affecting their free intent to conclude the agreement.
Moreover, the tribunal recognized that the agreement was perfectly balanced, each party having been granted adequate protection of its own interests, representing the reasonable consideration for the concessions made to the other party.
One may therefore conclude that, whenever the nominal claimant is vested with the right to arbitrate before a treaty forum, the arbitration may proceed in the usual manner, irrespective of whether the claimant is acting solely its own interests or in the interests of a third party that contributed the necessary financial resources, or even whether it is acting as a front man for the real party concerned with the outcome in order to allow the latter to benefit indirectly from an arbitration in which it would not be entitled to participate. In fact, this was precisely the nature of relationship between the claimant and the third-party funder in RosInvest.
The above-mentioned considerations make disclosure of third-party funding a crucial matter. If the tribunals in Abaclat, RosInvest and Quasar had remained unaware of the existence and nature of the third-party funding, they would have lost the opportunity to examine the relationship between the claimant and the funder and its impact on the admissibility of the claim and regularity of the proceedings - matters which must inevitably be addressed at the preliminary stage in order to accept or decline jurisdiction.
In my understanding, disclosure of third-party funding should be made mandatory in investment arbitration. A respondent State needs to be protected from the risk of defending itself against a puppet claimant. It also needs to be protected against impecunious claimants, which means that not only the existence of third-party funding should be disclosed to the tribunal at the outset of the proceedings but also its conditions and the identity of the funder. This is the only possible way to enable the tribunal and the respondent State to determine whether the case is financed up to its conclusion or whether it might suddenly be transformed into a risky adventure with a bitter end when the claimant or the funder become insolvent.
In the absence of transparency, the continuation of the proceedings is in the hands of the third-party funder, which has the power to discontinue the proceedings or withdraw from the case at will, for instance as soon as it realizes that the prospects of case are less promising than originally estimated.
Transparency of third-party funding before the tribunal and all parties involved is also a guarantee of due process. Non-disclosure would allow the arbitration process to work in the service of an invisible master. Ignoring the existence and role of the funder prevents the tribunal from understanding why counsel may be not acting according to correct and professional standards but in accordance with some unclear strategy, which happens to be the strategy imposed by by the funder. If the underlying relationship between litigant and funder remains opaque, it may undermine the integrity of the arbitration process.
Disclosure is all the more necessary when third-party funding is used to assist mass claims. The defendant State must have the right to determine whether it consented to arbitrate such a dispute, especially when the collective nature of the proceedings (as in Abaclat) requires a substantial adaptation of the procedural rules usually designed for purely bilateral arbitrations.
In my view, there is a procedural good faith obligation that requires the party concerned to disclose third-party funding in the kind of cases discussed here, be they purely bilateral proceedings or mass claims. Among other things, transparency allows tribunals to determine whether third-party funding is being used as a questionable form of "claims marketing".
Finally, I see an additional reason for requiring disclosure of third-party funding. If the involvement and identity of the funder remain unknown, the appointed arbitrator cannot check whether he or she can accept the case or whether there is a conflict of interest. For example, an arbitrator could remain unaware that one of his or her partners in the same law firm is involved in an unrelated case in which the same third-party funder is financing the costs of the proceedings.
In my view, third-party funding should not only be disclosed but should also be regulated through soft-law instruments providing guidance on these matters that parties or tribunals might voluntarily adopt as binding in individual cases. The International Bar Association and other important arbitration institutions would be perfectly suited to promoting the necessary regulation.
3.b Mass claims
Keeping in mind the concerns raised in Abaclat, I wonder whether BIT arbitrations between a large number of co-claimants and the State are the only viable mechanism for settling such disputes. In particular, I wonder whether a State-to-State arbitration might be a suitable alternative.
Article 9 of the BIT in force between Italy and Argentina provides for such a form of arbitration in relation to "disputes arising between the contracting States on the interpretation and application of the present Treaty" by setting forth rules for ad hoc arbitrations. This might have enabled Italy to sue Argentina either as a form of diplomatic protection or in representation of its nationals, claiming that Argentina had misapplied the BIT to their detriment.
The answer to the question whether this alternative should be preferred is no more straightforward than the answers to the questions raised in Abaclat. In classic international law doctrine, if the State exercises diplomatic protection, it may either invoke its own damage or the damage incurred by its nationals, or both. If it intervenes in representation, it may only claim reparation for the damage incurred by its nationals. The rule requiring previous exhaustion of local remedies does not apply to cases in which the State intervenes to claim for its own damage, which normally concerns symbolic or non-material damage. In all other cases, exhaustion of local remedies is mandatory, on the grounds that the object of the dispute involves the international responsibility of the host State for the wrongful treatment of foreign investors and State responsibility cannot be established before exhaustion of all available local remedies.
However, State intervention is also not straightforward. This is demonstrated by the only known case of an inter-State arbitration conducted under a BIT, namely the arbitration initiated by Italy against Cuba, under the BIT in force between them, for the recovery of damages allegedly suffered by sixteen Italian entrepreneurs as a result of breaches of the BIT that Italy imputed to Cuba.
The alleged breaches included unfair treatment, denial of justice and State measures tantamount to expropriation for which no indemnification had been paid or provided. The case was conducted in French in Paris.14
It was somewhat unclear whether Italy was acting on the basis of diplomatic protection or in representation of the Italian investors for violation of the BIT protections. This appears from the difficulties that the tribunal had to overcome in order to accurately define the nature of the complaint. Be that as it may, the outcome was unfavourable to Italy. Of the sixteen original investors claiming to be the victims of Cuba's wrongdoings, the tribunal declined jurisdiction in respect of Italy's claim in protection of four investors for which local remedies had not been exhausted and rejected the claim in protection of the remaining investors on the merits, either because it did not consider the alleged wrongdoings to be attributable to the State or because Italy had not established clear proof that the BIT had been violated.15
It should be noted that, under the Italy-Cuba BIT, the sixteen investors could also have opted for the investor-to-State arbitration provided therein rather than assembling their claims and delegating their defence to Italy in a State-to-State arbitration. They probably preferred the first solution in order to avoid at least some of the difficulties encountered in Abaclat, although the Argentinean case had not yet commenced when the Cuban case was initiated and decided.
The Cuban arbitration is worth mentioning because it suggests that, rather than directly and cumulatively suing the host State by themselves in a collective proceeding, multiple investors might opt for the alternative of asking their own State to initiate the State-to-State arbitration available under the same BIT.
However, one must not forget that this alternative is not totally devoid of procedural difficulties. First, the State is not obliged under domestic or international law to intervene in the protection of its nationals. Political worries have an obvious bearing on this decision, which concerns the international relationship between the two States in question. Second, if the State accepts to aggregate the claims of its nationals and defend them in a unified procedure against the other contracting State, this does not remove the kind of serious "quantitative" problems that emerged in Abaclat. The examination of the merits would still require the adoption of ad hoc procedural devices permitting the defendant State mount a reasonable defence in relation to each investor and each individual claim.
In this respect, the tribunal in the abovementioned Cuban example was not faced with an impossible task, since the total number of claimant investors was only sixteen. Had they numbered several thousand, one may reasonably assume that an inter-State tribunal would encounter the same procedural difficulties encountered by the Abaclat tribunal in the evidentiary phase for deciding the merits.
As correctly observed by the tribunal in Abaclat, further disputes may need to be referred to arbitration in connection with the repayment or restructuring of State sovereign debt. In the light of the number of States that are currently issuing bonds and securities in the regulated market as the most frequent means of raising funds, it cannot be ruled out that such arbitral disputes will arise again and again.
From this perspective, it might perhaps be useful for various arbitral institutions - such as ICSID - to design proper procedural methods for dealing with mass or collective claims rather than leaving this issue to the discretionary procedural powers that the ICSID Convention assigns to tribunals.
1 Abaclat and Others v. Argentine Republic, ICSID case no. ARB/07/5, Decision on Jurisdiction and Admissibility, 4 August 2011.
2 Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., 130 S.Ct. 1758 (2010) and AT&T Mobility LLC v. Concepcion (No. 09-893), 131 S.Ct. 1740 (2011).
3 RosInvest Co. UK Ltd v. Russian Federation, SCC case no. 079/2005, Final Award, 12 September 2010.
4 Quasar de Valores SICAV S.A. and Others v. Russian Federation, SCC case no. 24/2007, Award, 20 July 2012.
5 Chevron Corporation and Texaco Petroleum Company v. Republic of Ecuador, UNCITRAL, PCA case no. 2009-23 (2009).
6 Final Award of 31 August 2011.
7 S&T Oil Equipment and Machinery Ltd v. Romania, ICSID case no. ARB/07/13, discontinued.
8 Ioannis Kardassopoulos v. Georgia, ICSID case no. ARB/05/18, Award, 3 March 2010.
9 Bernardus Henricus Funnekotter and Others v. Republic of Zimbabwe, ICSID case no. ARB/05/6, Award, 22 April 2009.
10 Waguih Elie George Siag and Clorinda Vecchi v. Arab Republic of Egypt, ICSID case no. ARB/05/15, Award, 1 June 2009.
11 Oxus Gold plc v. Republic of Uzbekistan, the State Committee of Uzbekistan for Geology & Mineral Resources, and Navoi Mining & Metallurgical Kombinat, UNCITRAL, Notice of Arbitration, 31 August 2011.
12 Philip Morris Brand Sàrl (Switzerland), Philip Morris Products S.A. (Switzerland) and Abal Hermanos S.A. (Uruguay) v. Oriental Republic of Uruguay, ICSID case no. ARB/10/7, pending.
13 In contrast, the third-party funder in other cases such asS&T Oil, Funnekotter, Oxus and Philip Morris was (or is) a professional financial institution and was (or is) remunerated as such.
14 République d'Italie c/ République de Cuba, ad hoc arbitration, Preliminary Decision on Admissibility and Jurisdiction of 15 March 2005 and Final Award (with Dissenting Opinion) of 15 January 2008, available at: http://www. investmentclaims.com and http://italaw.com.
15 The two awards made in the arbitration between Italy and Cuba a recommented on in 'Investissements Internationaux et Arbitrage', directed by I. Fadlallah and C. Leben, in Les Cahiers de l'Arbitrage - The Paris Journal of International Arbitration, issue 4 (2012), pp. 906-913.