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Third-party funding in investment arbitration

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United Kingdom

As rising numbers of investors seek funding to pursue claims against states, Fieldfisher dispute resolution specialist Galina Borshevskaya considers the need to balance access to justice against the potential costs for countries.

 
With the average length of investment arbitrations exceeding three years and average costs exceeding $5 million, initiating an investment state dispute is a resource-intensive activity.

This creates a barrier for businesses that lack the funds to pursue such disputes. Anecdotally, the number of business with prohibitive cash flow positions has risen steadily during the Covid-19 crisis.

For these businesses, securing third-party funding, or a contingency fee arrangement, may be the only way of pursuing a valid claim. It is no wonder, then, that the use of third-party funding in investment arbitration is on the increase.

However, unlike commercial arbitration, where third-party funding is neither new nor particularly controversial, the use of this type of funding in investment treaty disputes has attracted criticism and concern from various quarters.

As a result, it has prompted arbitral institutions[1] to consider amending their rules to address the most-frequently voiced concerns, which include:

  1. The imbalance between the investor and the state in these funding arrangements, because third-party funding is usually only available to the former but not the latter;

  2. Any undue influence third-party funding arrangements may have on arbitrator impartiality, leading to a conflict of interest where an arbitrator has an interest in the funding vehicle;

  3. The control a third-party funder can exercise over the progress of proceedings – this might include encouraging an investor to pursue unmeritorious or weak claims, thereby draining a state's resources.

Current practice has been to regulate funding arrangements to address these concerns, rather than prohibit them altogether.

This is partly an acknowledgement that in the absence of third-party funding, there is little assistance for claimants who would otherwise have no access to justice.

It is also recognised that at least the second and third objections above can be effectively mitigated by regulation.

With respect to conflicts of interest, increasingly, the preferred approach is to require early disclosure of third party funding arrangements to allow arbitrators to disclose whether it affects their impartiality.

The new ICC rules, effective from 1 January 2021, require that "each party to an ICC arbitration must promptly inform the secretariat of the court, the arbitral tribunal (if already constituted) and other parties of the existence and identity of any non-party to the case who has an economic interest in the outcome thanks to a funding agreement".[2]

A similar stance was taken by the UNCITRAL Working Group III and the ICSID Rules Amendments Proposals.
Mandatory disclosure requirements already exist in the national legislation of Hong Kong and Singapore and in CIETAC International Investment Arbitration Rules.

When it comes to facilitating the pursuit of unmeritorious claims, this concern can be addressed by tribunals making orders for security for costs where appropriate. Tribunals typically take the existence of third-party funding arrangements into account when making such orders.

This may result in the claimant having to put up security, which the third-party funder may not be prepared to finance; the natural outcome of this may be that the claimant is no longer able to pursue the claim.

Regulators could consider making it mandatory for tribunals to take the existence of third party funding into account when making orders for security for costs. But in doing so, tribunals must carefully balance a claimant's right of access to justice against a state's concerns to recover costs.

It is likely that efficient regulation in this area can help achieve such balance without the need to forego third-party funding arrangements altogether.

A brief overview of the recent developments in the field of third-party funding of investment disputes clearly shows that, despite various concerns, there are currently no attempts to eradicate this resource.

In fact, there is every indication that funding arrangements will become more common, albeit in the face of increasing scrutiny.

Investors therefore need to consider not only how they intend to cover their own costs, but also those of the respondent state in the event of an order for adverse costs or security for costs.

This article was authored by Galina Borshevskaya, dispute resolution associate at Fieldfisher.
 
 
 

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