Third-Party Funding

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.

See also Not-for-profit third party funding.

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.⁷ (See Section IV below)

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

The role of third-party funders in investment arbitration proceedings varies from case to case.⁸ In cases where third-party funders were heavily involved (i.e. the funded party was recruited by the funder, the funder exercised certain amounts of control over the claims, etc.), Respondent States have attempted to challenge the jurisdiction of arbitral tribunals, contesting its jurisdiction ratione personae,⁹ the validity of the parties’ consent¹⁰ and/or by alleging an abuse of process.¹¹ Tribunals have retained jurisdiction considering that third-party funders were not parties to the arbitration (albeit their important role in the proceedings).¹² This reasoning has however been questioned or contested.¹³

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.¹⁴ 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.¹⁵

See Security for costs, Section IV.

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.¹⁶ Usually, there is no procedural obligation for the Claimant to disclose the existence of a funder¹⁷ and 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.¹⁸ 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 Tribunal,¹⁹ or where the Tribunal orders the disclosure of the name of the funder).²⁰

There is however a trend towards a disclosure obligation by the funded party, be it in modern investment treaties,²¹ or in new arbitration rules.²² Also, 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.²³

See Conflict of interest; Transparency.

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,²⁴ the question is left to the Arbitral Tribunals to decide:

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.

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. and 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. and 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.

UNCITRAL, Working Group III, Possible reform of investor-State dispute settlement (ISDS) - Draft provisions on third-party funding.

World Bank / ICSID, Proposals for Amendment of the ICSID Rules, WorldBank/ICSID, Working Papers No. 4, Vol. I, February 2020.

World Bank / ICSID, Proposals for Amendment of the ICSID Rules, WorldBank/ICSID, Working Papers No. 5, Vol. I, June 2021.

Proposals for Amendment of the ICSID Rules — Working Paper No. 6, ICSID Secretariat, November 2021.

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.