Executive Summary

In investment treaty arbitration, claimants are increasingly seeking third-party funding to finance their claims. This phenomenon introduces a new player into investment disputes, the third-party funder, which has implications for the conduct of the arbitration. Just as an arbitrator may have a prior or on-going relationship with a party, he or she may have such a relationship with a third-party funder. In light of potential conflicts of interest, that relationship may need to be disclosed by the claimant and the arbitrator, and it may be a ground for recusal or disqualification of the arbitrator. Moreover, if an impecunious claimant has recourse to a third-party funder and a costs award is rendered against it, the respondent will not be able to enforce the costs award against the funder. Aware of this risk, a respondent may apply to the tribunal for an order that the claimant post security for the costs of the arbitration. The terms of the third-party funding agreement may also raise serious questions about whether the third-party funder or the claimant is the real party to the arbitration, which in turn may affect the jurisdiction of the tribunal. Finally, third-party funding may affect the apportionment and recovery of costs in an arbitration.

1.0 Introduction

Third-party funding involves a professional entity financing a party’s claim in exchange for a portion of the proceeds in the event of success. It is increasingly common for claimants to resort to third-party funding in investment arbitration. Third-party funding of respondent states remains rare.

As third-party funding is a relatively recent phenomenon in investment arbitration, it is likely that there will be significant legal developments in this area in the future.

This chapter discusses four legal issues that may arise where a third-party funder is involved in an investment arbitration:

  1. Potential conflicts of interest between funders and arbitrators;
  2. Whether a claimant relying on third-party funding may be required to provide security covering the costs of arbitration;
  3. The implications of third-party funding for issues of jurisdiction; and
  4. Allocation of the costs of arbitration.

2.0 Conflicts of Interest

As in commercial arbitration, arbitrators in investment treaty arbitration must be independent and impartial.1 When an arbitrator has a pre-existing relationship with a third-party funder, his or her independence or impartiality may be compromised.

[Page136:]

In light of the risk of conflicts of interest, there is a growing consensus that claimants should disclose that they are being funded by a third-party funder and the identity of their funder. Several investment tribunals have ordered claimants to disclose this information.5 The IBA Guidelines provide that parties have a duty to disclose thirdparty funding arrangements,6 and several recently negotiated investment treaties contain an obligation to disclose these arrangements.7

To allow arbitrators to assess potential conflicts of interest, parties to an investment arbitration should disclose that they are being funded by a third-party funder and the identity of the funder.

Where an arbitrator and a third-party funder involved in an investment arbitration have a prior relationship, should the arbitrator continue to adjudicate the dispute? There is no straightforward answer to this question. The arbitrator should certainly disclose the relationship.8 Depending on the nature of the relationship, the arbitrator may decide to recuse herself or himself from the arbitration or a party may decide to challenge the arbitrator.9

3.0 Security for Costs

As discussed in Chapter 19, investment tribunals have the power to make orders for interim relief. Security for costs is a form of interim relief that is of particular relevance in arbitrations involving a claimant that has recourse to third-party funding.

The claimant may have obtained third-party funding because it does not have the means to finance the arbitration, making it unlikely that the respondent will be able to collect on an eventual costs award. Moreover, it is unlikely that the respondent will be able to enforce a potential costs award against the funder because it is not a party to the arbitration and is outside the jurisdiction of the tribunal. Indeed, there is also a risk that the third-party funder may withdraw from the arbitration at any time, leaving the respondent with no recourse to recover its costs. In light of these concerns, a respondent may request the tribunal to order the claimant to post security for costs. Two main issues arise in this context.

First, is the respondent’s interest in securing compliance with a potential costs award a right capable of being preserved by an order for provisional measures? This issue usually arises in ICSID arbitration where the Arbitration Rules state that provisional measures are for the preservation of rights.10 Most commentators and ICSID tribunals have recognised that provisional measures can preserve conditional rights like a respondent’s potential claim for cost reimbursement.11

Second, does the claimant’s reliance on third-party funding constitute grounds for ordering security for costs? Many commentators respond in the affirmative in light of the risks identified above, but some argue that ordering security for costs in these circumstances may prevent claimants from bringing meritorious claims.12 In

[Page137:]

commercial arbitration, tribunals have granted requests for security for costs where a claimant is relying on third-party funding,13 but only one investment tribunal has granted such a request, as described below.

Disclosure of certain terms of the funding agreement is another issue that arises in connection with applications for security for costs. In assessing the risk that a funded claimant may not comply with an adverse costs decision, the provisions of the funding agreement concerning whether a funder is liable to pay costs ordered against the claimant, and when a funder can stop financing the claimant, are both relevant. To date, one investment tribunal has ordered a claimant to disclose “the nature of the arrangements concluded with the third-party funder(s)” on the basis of a potential application for security for costs by the respondent.20 Other tribunals have denied similar requests.21

Investment tribunals have been reluctant to grant requests for security for costs. The trend may change as the effects of third-party funding on investment arbitration, including the conduct of proceedings and satisfaction of costs orders, are more fully understood. In that respect, it may be noted that ICSID has announced that “it will consult member states on the enforceability of costs awards in their favour with a view to improving their protection against ‘judgment-proof claimants’.”22

At the time of writing (December 2017), the ICSID Secretariat was preparing working papers on “six priority areas for rule reform”, including “rules governing disclosure of third-party funding and its impact on security for costs.”23

4.0 Jurisdiction

If the agreement between the claimant and the funder is deemed to assign the claim or a portion of it to the funder, the funder arguably becomes the real party in interest in the arbitration, which may in turn affect the jurisdiction of an investment tribunal. There is no clear test for determining this question. However, the nature of the interest acquired by the funder depends on the terms of the funding agreement. The agreement may expressly provide that the claimant has assigned or sold its claim to the funder. Alternatively, other provisions in the funding agreement may indicate that there has in fact been an assignment of the claim to the funder. These provisions may include

[Page138:]

the funder’s entitlement to receive a portion of damages awarded to the claimant and provisions conferring a significant degree of control or influence to the funder over the claim, such as controlling the selection of counsel, and fact and expert witnesses.

The issue is important because under international law, the beneficial owner, rather than the nominal owner, of a claim is the proper party before an international tribunal.24 In investment treaty arbitration, tribunals can only adjudicate the claims of investors with the nationality of one of the state parties to the investment treaty at the time the arbitration was initiated. If a claimant is deemed to have expressly or de facto assigned its claim or a portion thereof to a funder, the claimant is arguably the nominal owner and the funder is arguably the beneficial owner of the claim or the portion thereof that has been assigned. If the funder does not have the same nationality as the claimant investor, the investment claim may not meet the requisite nationality requirements. However, as of December 2017 there have not been any cases considering the nationality of an investment claim where the funder does not have the same nationality as the claimant and became the beneficial owner of the claim before initiation of arbitration.

Whether a third-party funder is the real party in interest in an investment claim will depend, to a large degree, on the terms of the funding agreement.

5.0 Allocation and Recovery of Costs

As discussed in Chapter 23, decisions in investment arbitration regarding which party should bear the costs of the arbitration are left to the discretion of the arbitrators, although some rules provide guidance as to the allocation of costs. For example, Article 42(1) of the 2010 UNCITRAL Arbitration Rules states that “in principle” costs are borne by the losing party, but the tribunal may apportion costs “between the parties if it determines that apportionment is reasonable, taking into account the circumstances of the case.”

In making decisions as to costs, a tribunal must first decide how costs will be allocated. The tribunal may decide that each party will bear its own costs or order the losing party to pay the whole or a portion of the winning party’s costs. In the latter case, the tribunal must then decide which costs are recoverable.

Is third-party funding relevant to a tribunal’s decision on costs? Some investment tribunals have found third-party funding to be irrelevant to their decision.27 But at least one tribunal decided not to award costs to the prevailing claimants on the ground that the claimants were financed by a third-party but were under no obligation to hand over damages recovered to that third party.28

In a recent ICC commercial arbitration, a sole arbitrator found the respondent liable for breach of contract and ordered it to pay the claimant’s costs on an indemnity basis, including the costs of the claimant’s litigation funding. An English court upheld this decision.29 The conduct of the respondent was key to the arbitrator’s findings, in

[Page139:]

particular that the respondent had set out to cripple the claimant financially. This decision illustrates that the conduct of the parties may be relevant when a tribunal exercises its discretion on costs.

Whether third-party funding is a factor to be considered in decisions on costs may depend on the circumstances of the case, including the conduct of the parties, and whether the involvement of a funder increased costs.

Notes

1
1. The independence and impartiality of arbitrators is further discussed in Chapter 15.

2
2. IBA Guidelines, Part I, General Standard 6(b) and Explanation to General Standard 6, pp. 13-14.

3
3. IBA Guidelines, Part I, Explanation to General Standard 2(d), 6, Part II, Practical Application of the General Standards, paras. 2, 17.

4
4. IBA Guidelines, Part II, Non-Waivable Red List, para. 1.2.

5
5. See, e.g., Muhammet Çap & Sehil Inşaat Endustri ve Ticaret Ltd. Sti. v Turkmenistan, ICSID Case No. ARB/12/6, Procedural Order No. 3 dated 12 June 2015 (“Sehil v Turkmenistan”), paras. 9, 13; South American Silver Limited (Bermuda) v Plurinational State of Bolivia, PCA Case No. 2013-15, Procedural Order No. 10 dated 11 January 2016 (“SAS v Bolivia”), paras. 70, 79, 85(b); Eurogas Inc. and Belmont Resources Inc. v Slovak Republic, ICSID Case No. ARB/14/14, Transcript of First Session and Hearing on Provisional Measures dated 17 March 2015, pp. 144-145; Corona Materials, LLC v Dominican Republic, ICSID Case No. ARB(AF)/14/3, Award on the Respondent’s Expedited Preliminary Objections in accordance with Article 10.20.5 of the DR-CAFTA dated 31 May 2016, para. 22.

6
6. IBA Guidelines, Part I, General Standard 7(a).

7
7. See, e.g., Comprehensive Economic and Trade Agreement (CETA) between Canada and the European Union and its Member States, signed October 30, 2016, Article 8.26.

8
8. See, e.g., ICC, Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration under the ICC Rules of Arbitration (1 March 2017), para. 24 (Regarding disclosure by an arbitrator, “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.”).

9
9. Challenges to arbitrators are further discussed in Chapter 15.

10
10. ICSID Arbitration Rule 39(1) states: “At any time after the institution of the proceeding, a party may request that provisional measures for the preservation of its rights be recommended by the Tribunal. The request shall specify the rights to be preserved, the measures the recommendation of which is requested, and the circumstances that require such measures.”

11
11. See, e.g., Rachel S. Grynberg et al. v Government of Grenada, ICSID Case No. ARB/10/6, Tribunal’s Decision on Respondent’s Application for Security for Costs dated 14 October 2010, para. 5.8; Victor Pey Casado and President Allende Foundation v Republic of Chile, ICSID Case No. ARB/98/2, Decision on Provisional Measures Requested by the Parties dated 25 September 2011, para. 46; Tethyan Copper Company Pty Limited v Islamic Republic of Pakistan, ICSID Case No. ARB/12/1, Decision on Claimant’s Request for Provisional Measures dated 13 December 2012, para. 137. For the minority position holding that a right to future costs recovery cannot be preserved by provisional measures see, e.g., Alasdair Ross Anderson et al. v Republic of Costa Rica, ICSID Case No. ARB(AF)/07/3, Award dated 19 May 2010; Luke Eric Peterson, “In New Ruling, BIT Tribunal Holds that Alleged Right to Future Costs-Recovery Is Not a Right Capable of Grounding an Interim ‘Security for Costs’ Request”, Investment Arbitration Reporter (26 September 2016), http://www.iareporter.com/ (reporting on an unpublished decision, dated 21 September 2016, in Valle Verde Sociedad Financieras S.L. v Bolivarian Republic of Venezuela, ICSID Case No. ARB/12/18, that dismissed the respondent’s request for security for costs).

12
12. Compare Gary B. Born, International Commercial Arbitration (2nd ed., Kluwer Law International 2014), p. 2496; Aren Goldsmith and Lorenzo Melchionda, “Third Party Funding in International Arbitration: Everything You Ever Wanted to Know (But Were Afraid to Ask): Part 2”, 2 International Business Law Journal 221 (2012), pp. 222-223 (arguing that third-party funding constitutes grounds for ordering security for costs), with William Kirtley and Koralie Wietrzykowski, “Should an Arbitral Tribunal Order Security for Costs When an Impecunious Claimant Is Relying upon Third-Party Funding?”, 30 Journal of International Arbitration 17 (2013), p. 30 (arguing that ordering security for costs may prevent meritorious claims).

13
13. See, e.g., X v Y and Z, ICC Case, Procedural Order dated 3 August 2012, reproduced in Philippe Pinsolle, “Third Party Funding and Security for Costs”, 2 Cahiers de l’Arbitrage 399 (2013); X SARL, Lebanon v Y AG, Germany, International Court of Arbitration of the International Chamber of Commerce, Procedural Order No. 3 dated 4 July 2008, 28(1) ASA Bulletin 37 (2010).

14
14. RSM Production Corporation v Saint Lucia, ICSID Case No. ARB/12/10 (“RSM v St Lucia”), Decision on Saint Lucia’s Request for Security for Costs dated 13 August 2014.

15
15. RSM v St Lucia, Decision on Saint Lucia’s Request for Suspension or Discontinuation of Proceedings, dated 8 April 2015.

16
16. Investor’s Failure to Post Security Bond Leads to “With Prejudice” Termination of Arbitration with St. Lucia, Investment Arbitration Reporter (27 July 2016), http://www.iareporter.com/.

17
17. SAS v Bolivia, para. 78.

18
18. Id. paras. 67, 76.

19
19. Id. para. 68.

20
20. Sehil v Turkmenistan, paras. 10, 13.

21
21. Guaracachi America, Inc. and Rurelec PLC v Plurinational State of Bolivia, UNCITRAL, PCA Case No. 2011-17, Procedural Order No. 13 dated 21 February 2013, paras. 8, 10; SAS v Bolivia, paras. 80, 81.

22
22. Tom Jones,”ICSID to Explore Protections against ‘Judgment-Proof Claimants,’” Global Arbitration Review (21 October 2016), http://globalarbitrationreview.com/.

23
23. ICSID Secretary General’s Top Priorities for Reform, Global Arbitration Review (3 May 2017) http://globalarbitrationreview.com/.

24
24. See, e.g., Occidental Petroleum Corporation and Occidental Exploration and Production Company v Republic of Ecuador,ICSID Case No. ARB/06/11, Decision on Annulment of the Award dated 2 November 2015, para. 268.

25
25. Teinver S.A., Transportes de Cercanías S.A. and Autobuses Urbanos del Sur S.A. v Argentine Republic, ICSID Case No. ARB/09/1, Decision on Jurisdiction dated 21 December 2012, para. 245.

26
26. But see El Paso Energy International Company v Argentine Republic, ICSID Case No. ARB/03/15, Decision on Jurisdiction dated 27 April 2006, para. 135 (stating that a transfer of the investment after commencement of the arbitration does not affect jurisdiction because the claimant continues to own the claim itself, “unless, of course, it can be shown that it was sold with the investment”).

27
27. See, e.g., Ioannis Kardassopoulos and Ron Fuchs v Republic of Georgia, ICSID Case Nos. ARB/05/18 and ARB/07/15, Award dated 3 March 2010; RSM Production Corporation v Grenada, ICSID Case No. ARB/05/14 (Annulment Proceeding), Order of the Committee Discontinuing the Proceeding and Decision on Costs dated 28 April 2011.

28
28. Quasar de Valores SICAV S.A. et al. v Russian Federation, SCC, Award dated 20 July 2012, para. 223.

29
29. Essar Oilfields Services Limited v Norscot Rig Management Pvt Limited [2016] EWHC 2361 (Judgment of the High Court of Justice of England and Wales dated 15 September 2016).