Author

Mr Arnaud Bourgeois

Associate in International Arbitration and Litigation - Egorov, Puginsky, Afanasiev & Partners, Moscow

Third-Party Funding

I. Definition

1.

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

2.

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).

3.

In practice, the involvement of a Third-party Funder may have an impact on:

1.

the possibility to obtain Security for Costs;

2.

transparency and Conflict of Interests;

3.

the determination of recoverable costs.

III. Security for Costs

4.

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

See ‘Security for Costs’.

IV. Conflict of Interests and Duty of Disclosure

5.

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

6.

The current proposals for the reform of the ICSID Rules integrate this dimension in requiring funded parties to disclose funders in efforts to enhance transparency and reduce risks of conflicts.13

See ‘Conflict of Interest’, ‘Transparency’.

V. Recovery of Funding Costs

7.

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:

-.

Some are reluctant to account funding costs as recoverable;15

-.

Others have decided that funding costs are recoverable, either falling under “other costs”,16 or assimilating them as legal costs (although in this case the funded Party did not prevail);17

8.

Conversely, a prevailing non-funded Party trying to recover in the arbitration its legal costs directly from the funder raises serious concerns as to the competence of the Arbitral Tribunal, since the funder is a third party to the arbitration agreement.

See ‘Allocation of Costs’.

BIBLIOGRAPHY

Alonso Cánovas, C., Third Party Funding: La Financiación Institucional de Litigios y Arbitrajes, Spain Arbitration Review - Revista del Club Español del Arbitraje, 2016, pp. 9-22.

Bashkova, A., Финансирование международного третейского разбирательства третьей стороной (third-party funding): преимущества и недостатки, процессуальные риски на примере новейшей практики, International Commercial Arbitration Review - Вестник Международного Коммерческого Арбитража, Association of Researchers in International Private and Comparative Law, 2014, pp. 134-148.

De Brabandère, E., “Mercantile Adventurers’? The Disclosure of Third-Party Funding in Investment Treaty Arbitration, Grotius Centre Working Paper, 2016, No. 059-IEL.

De Brabandère, E., Lepeltak, J., Third Party Funding in International Investment Arbitration, ICSID Review, 2012, pp. 379–398.

Butcher, T., Is Arbitration Portfolio Financing Going to Grow in 2018?, Kluwer Arbitration Blog, 2 February 2018.

Dos Santos, C., Third-Party Funding in international arbitration: a wolf in sheep’s clothing?, ASA Bulletin, Matthias Scherer, December 2017, pp. 918-936.

Von Goeler, J., Third-Party Funding in International Arbitration and Its Impact on Procedure, 2016.

Von Goeler, J., Show Me Your Case and I’ll Show You the Money – How to Balance Conflicts Between Third-Party Funding and Confidentiality in Arbitration Proceedings, Kluwer Arbitration Blog, 21 July 2016.

Harwood, M. K., and Others, Third Party Funding: Security for Costs and Other Key Issues, in Legum, B. (ed.), The Investment Treaty Arbitration Review, 1st ed., 2016, pp. 97-118.

Horodyski, D., Kierska, M., Third Party Funding in International Arbitration – Legal Problems and Global Trends with a Focus on Disclosure Requirement, Zeszyty Naukowe Towarzystwa Doktorantów Uj Nauki Społeczne, No. 19, 4/2017, pp. 63-80.

Kirtley, W., and Wietrzykowski, K., Should an Arbitral Tribunal Order Security for Costs When an Impecunious Claimant Is Relying upon Third-Party Funding?, Journal of International Arbitration, 2013, pp. 17 – 30.

Navarro Jiménez, S., Cuestiones relativas al third party funding en arbitraje, Arbitraje: Revista de Arbitraje Comercial y de Inversiones, IproLex 2014, pp. 801-805.

Nieuwveld, L. B., and Sahani, V. S., Third-Party funding in international arbitration, 2017.

Sahani, V. S., Revealing Not-for-Profit Third-Party Funders in Investment Arbitration, Investment Claims, 1 March 2017.

Perry, S., Third-party Funding: an Arbitrator's Perspective, Global Arbitration Review, 23 November 2011.

Pinsolle, P., Le Financement de l’arbitrage par les tiers, Revue de l’arbitrage, 2011, n°2, pp. 385-414.

ICC, Guide pratique sur le financement de l’arbitrage par les tiers (Third Party Funding), 2014.

ICC Commission on Arbitration and ADR Report, Decisions on Costs in International Arbitration, 2015.

ICCA-Queen Mary University, Draft Report for Public Discussion of the ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration, September 2017.

ICCA-Queen Mary University, Draft Report for Public Discussion of the ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration, April 2018.

UNCITRAL, Report of Working Group III (Investor-State Dispute Settlement Reform) on the work of its thirty-seventh session (New York, 1-5 April 2019), A/CN.9/970.

World Bank / ICSID, Proposals for Amendment of the ICSID Rules, WorldBank/ICSID, Working Papers #3, Vol. I, August 2019.

Bertrand, E., La relation financier-avocat, in Kessedjian, C. (ed.), Le financement de contentieux par un tiers, December 2012, pp. 45-57.

Duclercq, C., Les nouveaux coûts dans l’arbitrage international, Cahiers de l’arbitrage, 2013, pp. 899-926.

Hautot, I., La relation financier-client, in Kessedjian, C. (ed.), Le financement de contentieux par un tiers, 2012, pp. 39-43.

Pinsolle, P., Third Party Funding and Security for Costs, Cahiers de l’arbitrage, 2013, pp. 399-416.

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