Originally designed for domestic litigation in Australia as from the 1990’s, Third-party Funding is a contractual mechanism pursuant to which a third person (a fund, a lawyer1 or a third person interested in the outcome - a company, sharing indirect interests in the success of the claim2) undertakes financial arrangements or material support of costs of a Party in certain proceedings in exchange for a remuneration, often a share of the award. Resorting to a Third-party funder is certainly a mean for an impoverished Party to access international arbitration but it is also a convenient risk-sharing mechanism for wealthy companies. Despite its rapid development in many arbitration-friendly jurisdictions, Third-party Funding remains restricted in certain countries, i.e. in Ireland,3 but the majority of countries either do not have specific legislation or a dispute has not arisen before local courts.
II. Development in International Investment law
In investment arbitration, there is more funding in support of the investor-claimant, which seems to be due to the fact that Respondent-states present less counterclaims, when they are at all allowed to.4 Due to the considerable increase of Third-party funders, States have expressed concern about their impact on the ISDS system and expressed willingness to regulate the phenomenon in the next reform (restricting Third-party to certain situations, limiting the risks of excessive costs etc.).5 Modern bilateral initiatives tend to either expressly ban Third-party Funding, i.e. in the Argentina-United Arab Emirates BIT,6 or to ensure its disclosure in arbitration (See Section IV below).
III. Security for Costs
The Arbitral Tribunal can order Security for costs against the funded Party when it is satisfied that the enforcement of an award on costs may prove to be difficult, with the existence of a funder being one element to take into consideration.7 However, the use of these exceptional measures is left at the discretion of the Tribunal, which sometimes prefers not to muffle a meritorious claim by ordering Security for costs.8
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, paras. 75-82 (“In accordance with Article 47 ICSID Convention and ICSID Arbitration Rule 39 (1), an order of security for costs has to be required by the circumstances. As held by previous tribunals, such order can be made only in exceptional cases. Pursuant to jurisprudence of ICSID tribunals, ICSID Arbitration Rule 39 (1) is construed to the effect that it requires (1) necessity of the measure to protect a certain right and (2) urgency which leaves no room for waiting for the final award.”); South American Silver v. Bolivia, PCA Case No. 2013-15, Procedural Order No. 10, 11 January 2016, paras. 77-78 (“If the existence of these third-parties alone, without considering other factors, becomes determinative on granting or rejecting a request for security for costs, respondents could request and obtain the security on a systematic basis, increasing the risk of blocking potentially legitimate claims. In sum, the existence of a funder is an element to take into account, but tribunals have been clear in that the existence of the funder alone is not sufficient to grant security for costs.”).
Guaracachi America, Inc. and Rurelec plc (United Kingdom) v. The Plurinational State of Bolivia, PCA Case No. 2011–2017, Procedural Order No. 14, 11 March 2013, para. 7-10 (“The Respondent has not, however, been able to supply evidence to justify the extraordinary measure that it requests. As a factual matter, the Respondent has not shown a sufficient causal link such that the Tribunal can infer from the mere existence of third party funding that the Claimants will not be able to pay an eventual award of costs rendered against them, regardless of whether the funder is liable for costs or not. The Respondent’s analysis of Rurelec’s balance sheet and other related financial documents also does not sufficiently demonstrate that Rurelec will lack the means to pay a costs award or to obtain (additional) funding for that purpose. To the contrary, Rurelec appears to be an ongoing concern with assets beyond those involved in this arbitration and the Claimants have promptly paid all the requested deposits of costs with no suggestion that they have had trouble finding the necessary funds to do so. Given the above, it is unnecessary to look at the issue of the Respondent’s good faith – as measured by its payment of its share of the deposits of costs – as a pre-condition for the right to request security for costs (as suggested by one of the Respondent’s authorities). Nor is it necessary for the Tribunal to analyze – in accordance with Article 26(3)(b) of the UNCITRAL Rules – whether there is a ‘reasonable possibility that the requesting party will succeed on the merits of the claim.’ This can be a difficult hypothetical exercise, even with the benefit of the Parties’ full written submissions. It is also unwise to risk even the most minor prejudgment of the case so close to the date of the final hearings. Such determinations are therefore best avoided unless absolutely necessary to come to a decision on the request for interim measures, which is not the case here.”); EuroGas Inc. and Belmont Resources Inc. v. Slovakia, ICSID Case No. ARB/14/14, Procedural Order No. 3, 23 June 2015, para. 119-124.
IV. Conflict of Interests and Duty of Disclosure
Adding a third party interested in the outcome of the dispute increases the number of potential situations in which an arbitrator could be in conflict with a Party. Indeed, except in modern investment treaties where the burden lies on the funded party,9 there is no procedural obligation for the Claimant to disclose the existence of a funder. Thus, the existence of a funder does not trigger other tests than those already applicable to the detection of a conflict of interests. As an illustration, the IBA Guidelines have integrated that Third-party funders having a direct economic interest in the award shall be assimilated to a Party.10 Verification of conflicts, in revealing the identity of the funder, does not automatically expose the terms of the funding agreements (whether the revelation of the Funder has led to declaration of absence of conflicts by the Arbitral Tribunal11, or where the Tribunal orders the disclosure of the name of the funder).12
Comprehensive and Economic Trade Agreement (CETA), Article 8.26, Section A, Chapter 8; Transatlantic Trade and Investment Partnership (TTIP – agreed draft) Article 8, Section 3, Chapter II; EU–Vietnam Free Trade Agreement, Section 3, Article 11.1; Australia – Indonesia Comprehensive Economic Partnership Agreement, Article 14.32; EU- Singapore Investment protection Agreement, Article 3.8.
Guaracachi America, Inc. and Rurelec PLC v. The Plurinational State of Bolivia, PCA Case No. 2011–2017, Procedural Order No. 13, 21 February 2013, paras. 8-9 (“The Tribunal decides not to order the production of the ‘agreement’ or ‘further documentation’ by the Claimants. Regarding the possible existence of a conflict of interest, the Respondent has failed to specify what the conflict of interest created by the ‘agreement’ would be. Moreover, the Respondent states in its request for cautio judicatum solvi (security for costs) that it has discovered by means of other documents the identity of ‘The Funder’, Salvia Investment Limited. In any case, the applicable provisions governing conflicts of interest in the present proceedings (i.e. Articles 11 to 13 of the UNCITRAL Arbitration Rules) do not foresee the production of document by the Parties, but rather disclosure by the arbitrators upon becoming aware of circumstances that could create a conflict of interest. Therefore, in order to remove any doubt, the members of the Tribunal hereby declare that they have no relationship with Salvia Investment Limited, and are not aware of any circumstance that could give rise to justifiable doubts as to their impartiality and independence on account of the financing of the Claimants’ claims by Salvia Investment Limited.”)
Muhammet Çap & Sehil Inşaat Endustri ve Ticaret Ltd. Sti. v. Turkmenistan, ICSID Case No. ARB/12/6, Procedural Order No. 3, 12 June 2015, paras. 13 (“Accordingly, the Tribunal has decided and hereby orders that within 15 days of the date of this Procedural Order, Claimants shall confirm to Respondent whether its claims in this arbitration are being funded by a third-party funder, and, if so, shall advise Respondent and the Tribunal of the name or names and details of the third-party funder(s), and the nature of the arrangements concluded with the third-party funder(s), including whether and to what extent it/they will share in any successes that Claimants may achieve in this arbitration.”); South American Silver Limited v. The Plurinational State of Bolivia, PCA Case No. 2013-15, Procedural Order No. 10, 11 January 2016, paras. 69–84 (“For Bolivia, the existence of a third-party financing the arbitration is an indication that neither the Claimant nor SASC have sufficient economic resources to bear the costs and expenses of this arbitration, and there is no evidence that the third-party funder has assumed the obligation to reimburse Bolivia’s costs and expenses in this arbitration61. Bolivia states that when there is evidence of the existence of a third-party funder, some arbitrators consider that there is a presumption in favor of ordering security for costs. In addition, Bolivia considers that the identity of the funder should be disclosed to preserve the integrity of the arbitration given that there could be conflicts of interests between the funder and the arbitrators. With respect to the first point, the Tribunal must establish whether the existence alone of a third- party funder financing the arbitration is a determining factor to decide whether to grant or not the request for security for costs. […]”); EuroGas Inc. and Belmont Resources Inc. v. Slovakia, ICSID Case No. ARB/14/14, First Session and Hearing on Provisional Measures, 17 March 2015, pp. 144-145.
V. Recovery of Funding Costs
At the stage of discussing the allocation of costs, the prevailing funded Party may sometimes seek recovery of the funded costs from the other Party. Taking into account the specific wording of each Arbitration rules, neither expressly including nor excluding the allocation of funding costs,14 the question is left to the Arbitral Tribunals to decide:
ICC Rules, 2017, Art. 38.1 (“The costs of the arbitration shall include the fees and expenses of the arbitrators and the ICC administrative expenses fixed by the Court, in accordance with the scale in force at the time of the commencement of the arbitration, as well as the fees and expenses of any experts appointed by the arbitral tribunal and the reasonable legal and other costs incurred by the parties for the arbitration.”) ; LCIA Arbitration Rules, 2014, Art. 28.3 (“The Arbitral Tribunal shall also have the power to decide by an award that all or part of the legal or other expenses incurred by a party (the “Legal Costs”) be paid by another party. The Arbitral Tribunal shall decide the amount of such Legal Costs on such reasonable basis as it thinks appropriate. The Arbitral Tribunal shall not be required to apply the rates or procedures for assessing such costs practised by any state court or other legal authority.”); UNCITRAL Arbitration Rules, 2010, Art. 40.2(e) (“The term ‘costs’ includes only: (a) The fees of the arbitral tribunal to be stated separately as to each arbitrator and to be fixed by the tribunal itself in accordance with article 41; (b) The reasonable travel and other expenses incurred by the arbitrators; (c) The reasonable costs of expert advice and of other assistance required by the arbitral tribunal; (d) The reasonable travel and other expenses of witnesses to the extent such expenses are approved by the arbitral tribunal; (e) The legal and other costs incurred by the parties in relation to the arbitration to the extent that the arbitral tribunal determines that the amount of such costs is reasonable; (f) Any fees and expenses of the appointing authority as well as the fees and expenses of the Secretary-General of the PCA.”)
Kardassopoulos and Fuchs v. The Republic of Georgia, ICSID Case Nos. ARB/05/18 and ARB/07/15, Award, 3 March 2010, para. 691 (“The Tribunal knows of no principle why any such third party financing arrangement should be taken into consideration in determining the amount of recovery by the Claimants of their costs”); see also RSM Production Corporation v. Grenada, ICSID Case No. ARB/05/14, Annulment Proceeding, Order of the Committee Discontinuing the Proceeding and Decision on Costs, 28 April 2011, para. 68 (“As for the Applicant’s submission that the Committee should not order costs where those costs have allegedly been met by ‘an undisclosed third party’, the Committee concurs with the Tribunal in Ioannis Kardassopoulos and Ron Fuchs v. Georgia (ICSID Case Nos ARB/05/18 and ARB/07/15, Award of 3 March 2010), which stated that it knew ‘of no principle why any ... third party financing arrangement should be taken into consideration in determining the amount of recovery’ by parties of the costs incurred in arbitration proceedings (para 691).”); ATA Construction, Industrial and Trading Company v. The Hashemite Kingdom of Jordan, ICSID Case No. ARB/08/2, Annulment Proceeding, Order Taking Note of the Discontinuance of the Proceeding, 11 July 2011, para. 34 (“ATA, however, contends that such a decision cannot be taken in the present case, due to the fact that ‘APC continues to fund the Applicant in the present proceeding, just as it did in the underlying ICSID arbitration’. In this respect, the Committee will only observe that, in any event, it ‘knows of no principle why any...third party financing arrangement should be taken into consideration in determining the amount of recovery by [parties] of their costs’ incurred in arbitration proceedings (Ioannis Kardassopoulos and Ron Fuchs v. Georgia- ICSID Cases No. ARB/05/18 and ARB/07/15, Award of 3 March 2010 §691; RSM Production Corporation and Grenada –ICSID Case No. ARB/05/14, Annulment proceeding, §68).”).
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