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Third-Party Funding in Investment Arbitration

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Handbook of International Investment Law and Policy

Abstract

Modern forms of Third-party funding or Third-party financing (TPF) are no longer new to international arbitration. Recent years have seen significant increases in the number of funders, the number of funded cases, the number of law firms working with funders, and the number of reported cases involving issues relating to funding. As a result, third-party funding has increasingly drawn the attention of commentators and scholars, and even more recently of arbitral institutions, national regulatory authorities, and State trade negotiators. This chapter offers an overview of the existing state of regulation of TPF and focuses on the two most important areas which implicate TPF and ISDS, namely conflicts of interest and security for costs.

The Authors were both co-chairs, together with William W. (Rusty) Park, of the ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration. This chapter draws from their experience in that capacity and from the Report that was ultimately published by the Task Force, which is cited in the pages that follow

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Notes

  1. 1.

    The terms “third-party funding” and “third-party financing” are used interchangeably in this Chapter.

  2. 2.

    Supreme Court Judgment Persona Digital Telephony Limited & Sigma Wireless Networks Limited v The Minister for Public Enterprise, Ireland and the Attorney General [2017] IESC 27.

  3. 3.

    See Chan M, Secomb M, Tan P (2016) Third-party funding: a new chapter in Hong Kong & Singapore, 29 July. Available at http://www.jdsupra.com/legalnews/third-party-funding-a-new-chapter-in-40360/

  4. 4.

    Civil Law (Amendment) Act 2017 was passed by Parliament on 10 January 2017. See Henderson A, Waldek D (2016) Singapore arbitration update: third-party funding and new SIAC Rules 2016. Herbert Smith Freehills Arbitration Notes, 1 July. Available at https://hsfnotes.com/arbitration/2016/07/01/singapore-arbitration-update-third-party-funding-and-new-siac-rules-2016/

  5. 5.

    Section 2 of the Civil Law (Amendment) Act 2017 to amend the Civil Law Act (Chapter 43 of the 1999 Revised Edition) (the “Act”) and to make a related amendment to the Legal Profession Act (Chapter 161 of the 2009 Revised Edition), passed 10 January 2017 and assented by the President on 3 February 2017 (“Civil Law (Amendment) Act 2017”).

  6. 6.

    It is currently unclear in Hong Kong whether the doctrines of maintenance and champerty apply to third-party funding for arbitrations taking place in Hong Kong: see the Court of Final Appeal judgment in Unruh v. Seeberger (2007) 10 HKCFAR 31, at para. 123 where the Court expressly left open this question. While earlier in Cannonway Consultants Limited v. Kenworth Engineering Ltd, [1995] 2 HKLR 475, Judge Kaplan had held that the law of champerty did not extend to arbitration, later in Unruh v. Seeberger, (2007) 10 HKCFAR 31, at para. 123, the Court did not refer to this aspect of Judge Kaplan’s judgment. Accordingly, the permissibility of third-party funding with respect to arbitration in Hong Kong had been subject to uncertainty. See para. 1.6 of “The Law Reform Commission of Hong Kong Final Report on Third-party funding for Arbitration” (October 2016). Available at http://www.hkreform.gov.hk/en/publications/rtpf.htm

  7. 7.

    See Nieuwveld B, Sahani S (2012) Third-party funding in international arbitration. Kluwer, p 114.

  8. 8.

    See Article (2.4) of the Code of Conduct for Litigation Funders (January 2014). Available at http://www.associationoflitigationfunders.com/wp-content/uploads/2014/02/Code-of-conduct-Jan-2014-Final-PDFv2-2.pdf; Osmanoglu B (2015) Third-party funding in international commercial arbitration and arbitrator conflict of interest. J Int Arbitr 32:325, at p 338

  9. 9.

    See Association of Litigation Funders, definition. Available at http://www.associationoflitigationfunders.com/litigation-finance

  10. 10.

    See Article (2) of the Code of Conduct for Litigation Funders (November 2011). Available at http://www.associationoflitigationfunders.com/wp-content/uploads/2014/02/CodeofConductforLitigationFundersNovember20111.pdf

  11. 11.

    The enactment was effected under section 225(3)(a) and (d) of the ADGM Courts, Civil Evidence, Judgments, Enforcement and Judicial Appointments Regulations 2015.

  12. 12.

    This confusion is apparent even at a terminological level. As one commentator describes, ‘[t]he nomenclature to describe this kind of third-party capital investment in arbitration or litigation claims is all over the map and woefully undescriptive. It has been referred to as “third-party funding”, “third-party litigation funding or financing”, or most commonly “alternative litigation funding or financing”’. Destefano M (2012) Non-lawyers influencing lawyers: too many cooks in the kitchen or stone soup. Fordham L Rev 80:2791, at p 2794

  13. 13.

    See Sebok AJ (2011) The inauthentic claim. Vand L Rev 64:61, at pp 63–67. See Veljanovski C (2011) Third-party litigation funding in Europe. J L Econ Pol 8:405, at p 430 (“[Third-party litigation funding investors] rely on Special Purpose Vehicles, which … are legal entities created for … the acquisition, financing, or both, of a project or the setup of an investment. They are usually used because they are free from pre-existing obligations and debts, and are separate from the parties that set them up for tax and insolvency purposes.”).

  14. 14.

    For example, just as excessive repeat appointment of an individual arbitrator by a party or law firm can be a basis for challenging that arbitrator, under the IBA Guidelines on Conflicts of Interest in International Arbitration repeat appointment of an arbitrator by the same third-party funder can raise similar challenges. See IBA Guidelines 3.1.3. If funding is done through a special purpose vehicle created for the particular case, it may mask the repeated appointment by a particular third-party funder that owns the SPV.

  15. 15.

    See Kantor M (2009) Third-party funding in international arbitration: an essay about new developments. ICSID Rev 24:65, at p 74; Trusz JA (2013) Full disclosure? Conflicts of interest arising from third-party funding in international commercial arbitration. Georgetown Law J 101:1649, at p 1654; Chaisse J, Eken C (2020) The monetization of investment claims: promises and pitfalls of third-party funding in investor-state arbitration. Del J Corp Law 44(2):463–509

  16. 16.

    See Press Release by Uruguay’s Counsel, Foley HOAG LLP (2010) Government of Uruguay Taps Foley Hoag for representation in international arbitration brought by Philip Morris to overturn country’s tobacco regulations, p 8 (October 2010). Available at http://www.foleyhoag.com/news-and-events/news/2010/october/uruguay-taps-foley-hoag-for-representation

  17. 17.

    See Cabrera Diaz F. RSM Production Corp. files second arbitration against Grenada, sues Freshfields. Available at https://www.iisd.org/itn/2010/04/08/rsm-production-corp-files-second-arbitration-against-grenada-sues-freshfields/

  18. 18.

    For an analysis of the common interest privilege for insurers and related privilege extended to third-party funders, see Chapter 5, pp 133–135.

  19. 19.

    Veljanovski, “Third-Party Litigation Funding in Europe”, p 420

  20. 20.

    See Smith M. Chapter 2: Mechanics of third-party funding agreements: a funder’s perspective, pp 28–35. Available at http://www.calunius.com/media/7098/mechanics%20of%20third-party%20funding%20agreements%20(mick%20smith%20-%202012).pdf; Veljanovski, “Third-Party Litigation Funding in Europe”, pp 418–420

  21. 21.

    See, e.g., Blackett R. Still stuck in the stone: third party funding in the Excalibur case. Available at https://www.andrewskurth.com/insights-1491.html

  22. 22.

    Burford Capital. Beyond litigation finance. Available at http://www.burfordcapital.com/wp-content/uploads/2016/09/Burford-Beyond_Litigation_Finance-US_Web.pdf. See also Chaisse J, Eken C (2020) The monetization of investment claims: promises and pitfalls of third-party funding in investor-state arbitration. Del J Corp Law 44(2):463–509

  23. 23.

    See Rowles-Davies N (2014) Third-party litigation funding. Oxford University Press, p 72

  24. 24.

    See Reisman S. Burford clinches portfolio funding deal with UK firm. Available at https://www.law360.com/articles/949613/burford-clinches-portfolio-funding-deal-with-uk-firm

  25. 25.

    Molot J. “Theory and practice in litigation risk” and “Burford has no control over litigation or settlement decisions and it does not interfere with the attorney client relationship”. Available at http://rippmedia.com/Molot-TheoryandPractice.pdf

  26. 26.

    Excalibur Ventures v. Texas Keystone and others [2016] EWCA Civ 1144.

  27. 27.

    von Goeler J (2016) Third-party funding in international arbitration and its impact on procedure. Kluwer, p 35

  28. 28.

    It has also been reported by funders that they are occasionally approached directly by arbitrators or arbitration experts to provide such advice.

  29. 29.

    See Goldstein M (2011) Should the real parties in interest have to stand up? Transnat Dispute Manag 4:7

  30. 30.

    See Maniruzzaman M (2011) Third-party funding in international arbitration – a menace or panacea? Kluwer Arbitration Blog (29 December 2011). Available at http://kluwerarbitrationblog.com/2012/12/29/third-party-funding-in-international-arbitration-a-menace-or-panacea/?doing_wp_cron=1503332583.8441140651702880859375

  31. 31.

    For an extended discussion of standards for granting security for costs, see ICCA-Queen Mary Task Force Report on Third-Party Funding International Arbitration, ICCA Reports No. 4 (2018), Chapter 6, and for an extended discussion of competing views in the underlying policy debate, see Chapter 8 of the same ICCA-Queen Mary Task Force Report.

  32. 32.

    Globally, there is some disagreement about the effect of an arbitrator’s lack of knowledge of a conflict. In the United States, the approach of US courts is summarized in the Reporters’ Notes to the Restatement: “Some courts have taken the view that an absence of knowledge about a conflict per se precludes a finding of evident partiality.”

  33. 33.

    See proposed Article 21 in ICSID Working Paper (March 2019) paras 121 et seq.

  34. 34.

    Singapore International Arbitration Centre Practice Note, PN – 01/17 (31 March 2017), Administered Cases under the arbitration rules of the Singapore International Arbitration Centre, On Arbitrator Conduct in Cases Involving External Funding (31 March 2017). Available at http://www.siac.org.sg/images/stories/articles/rules/Third%20Party%20Funding%20Practice%20Note%2031%20March%202017.pdf

  35. 35.

    See ICC Note to Parties and Arbitral tribunals on the Conduct of the Arbitration under the ICC Rules of Arbitration (22 September 2016) p. 5, at para. 24; Note to parties and arbitral tribunals on the conduct of the arbitration under the ICC Rules of Arbitration (1 March 2017) para. 24. Available at https://iccwbo.org/publication/note-parties-arbitral-tribunals-conduct-arbitration

  36. 36.

    Born, International Commercial Arbitration, pp 2494–2495

  37. 37.

    Section 38(3) of the English Arbitration Act 1996 provides that “The tribunal may order a claimant to provide security for the costs of the arbitration.” See also Article 25.2 of the 2014 LCIA Rules providing that “[t]he Arbitral tribunal shall have the power upon the application of a party, after giving all other parties a reasonable opportunity to respond to such application, to order any claiming or cross-claiming party to provide or procure security for Legal Costs and Arbitration Costs by way of deposit or bank guarantee or in any other manner and upon such terms as the Arbitral tribunal considers appropriate in the circumstances.”

  38. 38.

    See, e.g., French Code of Civil Procedure (2011), Art. 1468; Swiss Private International Law Act (2017), Art. 183(1); German Code of Civil Procedure, (2013) Art. 1041(1)

  39. 39.

    RSM Production Corporation v. Saint Lucia, (ICSID Case No. ARB/12/10) Decision on Saint Lucia’s Request for Security for Costs (13 August 2014) para. 55. Whether the explanation offered by the tribunal in this case is accurate or supported by the history of drafting the ICSID Convention is questionable, and the question of the propriety and jurisdiction to order a State to post security for costs is much more complex.

  40. 40.

    See proposed Rule 51(1).

  41. 41.

    Craig, Park and Paulsson, International Chamber of Commerce Arbitration, p 467 (who report that even when the ICC Rules did not yet contain a general clause for granting interim measures, ‘ICC tribunals had found that they had the power to grant security for costs as part of their inherent powers in connection with the conduct of arbitral proceedings’) (with further references); Commerce Group Corp. & San Sebastian Gold Mines, Inc. v. the Republic of El Salvador, (ICSID Case No. ARB/09/17), Annulment Proceeding, Decision on El Salvador’s Application for Security for Costs (20 September 2012), para. 45.

  42. 42.

    See ICCA-Queen Mary Task Force Report on Third-Party Funding International Arbitration, ICCA Reports No. 4 (2018) pp 172–173

  43. 43.

    ICSID Article 53(1).

  44. 44.

    ICSID Article 54(3).

  45. 45.

    Emilio Agustín Maffezini v.Kingdom of Spain, (ICSID Case No. ARB/97/7) Procedural Order No. 2 (28 October 1999) para. 15.

  46. 46.

    Rachel S. Grynberg, Stephen M. Grynberg, Miriam Z. Grynberg and RSM Production Company v. Grenada, (ICSID Case No. ARB/10/6), tribunal’s Decision on Respondent’s Application for Security for Costs (14 October 2010), para. 5.16, in fn. 9.

  47. 47.

    EuroGas Inc. and Belmont Resources Inc. v. Slovak Republic (ICSID Case No. ARB/14/14), Procedural Order No. 3 (23 June 2015).

  48. 48.

    Eskosol S.P.A. in Liquidazione v. Italian Republic, (ICSID Case No. ARB/15/50) Procedural Order No. 3 (Decision on Respondent’s Request for Provisional Measures), (12 June 2017) para. 35.

  49. 49.

    Ibid., para. 34.

  50. 50.

    See in more detail, See ICCA-Queen Mary Task Force Report on Third-Party Funding International Arbitration, ICCA Reports No. 4 (2018), p 173 et seq.

  51. 51.

    See, e.g., South American Silver Limited v. The Plurinational State of Bolivia, (PCA Case No.2013-15), Procedural Order No. 10 (11 January 2016), para. 59; RSM Production Corporation v. Saint Lucia, (ICSID Case No. ARB/12/10), Decision on Saint Lucia’s Request for Security for Costs (13 August 2014), para. 75 and the cases cited therein.

  52. 52.

    See similar concerns expressed in commercial arbitration by Schwartz E (2016) Security for costs and third-party funding, a bridge too far. In: Liber Amicorum William Laurence Craig. LexisNexis, pp 371–388

  53. 53.

    Emilio Agustín Maffezini v. Kingdom of Spain, (ICSID Case No. ARB/97/7), Procedural Order No. 2 (28 October 1999), para. 21; Libananco Holdings Co. Limited v. Republic of Turkey, (ICSID Case. No. ARB/06/8), Decision on Preliminary Issues (23 June 2008), para. 59; Guaracachi America, Inc. (U.S.A.) and Rurelec plc (United Kingdom) v. Plurinational State of Bolivia, (PCA Case No. 2011-17), Procedural Order No.14 (11 March 2013), para. 8.

  54. 54.

    Victor Pey Casado and President Allende Foundation v. Republic of Chile, (ICSID Case No. ARB/98/2), Decision on Provisional Measures (25 September 2001), para. 89; Burimi S.R.L. and Eagle Games SH.A. v. Republic of Albania, (ICSID Case No. ARB/11/18), Procedural Order No. 2 (3 May 2012), para. 39; Alasdair Ross Anderson et al. v. Republic of Costa Rica, (ICSID Case No. ARB(AF)/07/3), Award (19 May 2010), para. 9; Abaclat and others v. The Argentine Republic, (ICSID Case No. ARB/07/5), Procedural Order No. 10 (18 June 2012); Rachel S. Grynberg, Stephen M. Grynberg, Miriam Z. Grynberg and RSM Production Company v. Grenada, (ICSID Case No. ARB/10/6) tribunal’s Decision on Respondent’s Application for Security for Costs (14 October 2010), para. 5.21; Libananco Holdings Co. Limited v. Republic of Turkey, (ICSID Case. No. ARB/06/8), Decision on Preliminary Issues (23 June 2008), para. 59; Guaracachi America, Inc. (U.S.A.) and Rurelec plc (United Kingdom) v. Plurinational State of Bolivia, (PCA Case No. 2011-17), Procedural Order No. 14 (11 March 2013), para. 7, Dawood Rawat v. Republic of Mauritius, (PCA Case No. 2016-20), Order Regarding Claimant’s and Respondent’s Requests for Interim Measures (11 January 2017), para. 144.

  55. 55.

    BSG Resources Limited v. Republic of Guinea, (ICSID Case No. ARB/14/22), Procedural Order No. 3 (25 November 2015), para.78; Libananco Holdings Co. Limited v. Republic of Turkey, (ICSID Case. No. ARB/06/8), Decision on Preliminary Issues (23 June 2008), para. 59; Rachel S. Grynberg, Stephen M. Grynberg, Miriam Z. Grynberg and RSM Production Company v. Grenada, (ICSID Case No. ARB/10/6) tribunal’s Decision on Respondent’s Application for Security for Costs (14 October 2010), para. 5.19.

  56. 56.

    Burimi S.R.L. and Eagle Games SH.A. v. Republic of Albania, (ICSID Case No. ARB/11/18), Procedural Order No. 2 (3 May 2012), para. 41; Gustav F W Hamester GmbH & Co KG v. Republic of Ghana, (ICSID Case No. ARB/07/24), Award (18 June 2010), para. 17; Commerce Group Corp. & San Sebastian Gold Mines, Inc. v. the Republic of El Salvador, (ICSID Case No. ARB/09/17), Annulment Proceeding, Decision on El Salvador’s Application for Security for Costs (20 September 2012), para. 52.

  57. 57.

    Commerce Group Corp. & San Sebastian Gold Mines, Inc. v. Republic of El Salvador, (ICSID Case No. ARB/09/17), Annulment Proceeding, Decision on El Salvador’s Application for Security for Costs (20 September 2012), para. 49.

  58. 58.

    See notably RSM Production Corporation v. Saint Lucia, (ICSID Case No. ARB/12/10), Assenting Reasons of Gavan Griffith (12 August 2014).

  59. 59.

    Guaracachi America Inc. and Rurelec plc v. Plurinational State of Bolivia PCA Case No. 2011-17, Procedural Order No. 14 (11 March 2013).

  60. 60.

    Ibid., paras. 6–7.

  61. 61.

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

  62. 62.

    Ibid., para. 86. It is worth noting that on 15 pages of reasons, only one paragraph is in truth devoted by the tribunal to third-party funding.

  63. 63.

    EuroGas Inc. and Belmont Resources Inc. v. Slovak Republic, (ICSID Case No. ARB/14/14), Procedural Order No. 3 (23 June 2015).

  64. 64.

    South American Silver Limited Bolivia v. The Plurinational State of Bolivia, (PCA Case No.2013-15), Procedural Order No. 10 (11 January 2016), para. 27, citing RSM Production Corporation v. Saint Lucia, (ICSID Case No. ARB/12/10), Assenting Reasons of Gavan Griffith (12 August 2014).

  65. 65.

    South American Silver Limited Bolivia v. The Plurinational State of Bolivia, (PCA Case No.2013-15), Procedural Order No. 10 (11 January 2016), paras. 59, 83.

  66. 66.

    Ibid., para. 77.

  67. 67.

    Eskosol S.P.A. in Liquidazione v. Italian Republic, (ICSID Case No. ARB/15/50) Procedural Order No. 3 (Decision on Respondent’s Request for Provisional Measures), (12 June 2017). See also above p 173.

  68. 68.

    Luis Garcia Armas v. Venezuela and Manuel Garcia Armas et al. v. Venezuela, (ICSID AF Case No. ARB(AF)/16/1) Procedural Order (7 July 2017) administered by ICSID’s Additional Facility Rules; PCA Case No. 2016-08, administered by the Permanent Court of Arbitration, (Both with the seat in The Hague, The Netherlands).

  69. 69.

    Proposed Rule 51 which currently reads as follows:

    “Rule 51 Security for Costs

    1. (1)

      Upon request of a party, the tribunal may order any party asserting a claim or counterclaim to provide security for costs

    2. (2)

      The following procedure shall apply:

      1. (a)

        The request shall specify the circumstances that require security for costs.

      2. (b)

        The tribunal shall fix time limits for written or and oral submissions, as required, on the request.

      3. (c)

        If a party requests security for costs before the constitution of the tribunal, the Secretary-General shall fix time limits for written submissions on the request, so that the tribunal may consider the request promptly upon its constitution.

      4. (d)

        The tribunal shall issue its decision on the request within 30 days after the latest of:

        1. (i)

          The constitution of the tribunal

        2. (ii)

          The last written submission on the request or

        3. (iii)

          The last oral submission on the request

    3. (3)

      In determining whether to order a party to provide security for costs, the tribunal shall consider:

      1. (a)

        That party’s ability to comply with an adverse decision on costs and

      2. (b)

        That party’s willingness to comply with an adverse decision on costs

      3. (c)

        The effect that providing security for costs may have on that party’s ability to pursue its claim or counterclaim

      4. (d)

        The conduct of the parties and

      5. (e)

        All other relevant circumstances.

    4. (4)

      The tribunal shall specify any relevant terms in an order to provide security for costs and shall fix a time limit for compliance with the order.

    5. (5)

      If a party fails to comply with an order for to provide security for costs, the tribunal may suspend the proceeding until the security is provided. If the proceeding is suspended for more than 90 days, the tribunal may, after consulting with the parties, order the discontinuance of the proceeding.

    6. (6)

      A party must shall promptly disclose any material change in the circumstances upon which the tribunal ordered security for costs.

    7. (7)

      The tribunal may at any time modify or revoke its order for on security for costs, on its own initiative or upon a party’s request.”

  70. 70.

    Para 363.

  71. 71.

    Reporting on a recent survey, the letter notes that “Responses to the survey also indicated that, among the 22 costs awards in favour of respondent states that had been paid either in full or in part, 14 awards were paid voluntarily (64%), two awards were paid pursuant to a settlement (9%), and six awards were paid through enforcement (27%).” Ibid. at 3 (citing Judith Gill QC, Hodgson M (2015) Costs awards – who pays? Global Arbitr Rev 10(4). Available at http://globalarbitrationreview.com/article/1034757/costs-awards-%E2%80%93-whopays

  72. 72.

    In one case, it seems there may have been concerns raised, but they became moot before ever being formally addressed. See Perry S. Pakistan fights bid to revive treaty claims as funder is revealed. Available at https://globalarbitrationreview.com/article/1150573/pakistan-fights-bid-to-revive-treaty-claims-as-funder-is-revealed

    Notably, the issue never became ripe because the dispute in which the issue arose was transferred to another tribunal comprised of different arbitrators.

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Authors and Affiliations

  1. Queen Mary University of London, London, UK

    Stavros Brekoulakis

  2. Penn State Law School, University Park, PA, USA

    Catherine A. Rogers

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  1. Stavros Brekoulakis
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  2. Catherine A. Rogers
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Correspondence to Stavros Brekoulakis .

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Editors and Affiliations

  1. School of Law, City University of Hong Kong, Kowloon, Hong Kong

    Julien Chaisse

  2. School of Business and Law, University of Portsmouth, Portsmouth, UK

    Leïla Choukroune

  3. Institute of Malaysia and International Studies, National University of Malaysia, Bangi, Selangor, Malaysia

    Sufian Jusoh

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Brekoulakis, S., Rogers, C.A. (2020). Third-Party Funding in Investment Arbitration. In: Chaisse, J., Choukroune, L., Jusoh, S. (eds) Handbook of International Investment Law and Policy. Springer, Singapore. https://doi.org/10.1007/978-981-13-5744-2_75-1

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