Abstract
Third-party funding is a risky investment and, therefore, third-party funders strive to be very careful and thorough when assessing the risks of each claim that needs funding and the impact those risks may have on the cost, duration and quantum of the claim. In this chapter, we explore the main case-related and context-related risks that may be present in investment arbitration, which has certain specificities. We look at this from the practitioner’s standpoint, with the view to making practitioners aware of third-party funders’ motivation and priorities. This may be useful to counsel when they present their clients’ application for funding to third-party funders and also, generally, to gain a better understanding of third-party funders’ stance, so that they are better equipped to interact with them and represent their clients’ interest.
The comments in this chapter, other than those attributed to a specific source, reflect the author’s personal opinions and not those of any (law) firm or organisation.
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Notes
- 1.
The International Council for Commercial Arbitration (ICCA)’s Report of the ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration (2018) (“the ICCA-Queen Mary Report”), refers to a “nascent market for funding states,” p. 223 (available at: https://www.arbitration-icca.org/publications/Third-Party-Funding-Report.html).
- 2.
For a more comprehensive and theoretical approach to the subject, please refer to the books listed in the References section, at the end of this chapter.
- 3.
See, for example, the exponential increase of investment arbitration cases against Spain, many of them arising out of the measures taken by that country in connection with renewable energies. At the time of writing, Spain had 31 pending ICISID arbitration cases against it: see https://icsid.worldbank.org/en/Pages/cases/AdvancedSearch.aspx.
- 4.
Samra (2016), p. 2299; see also von Goeler (2015), p. 2, who uses “third-party funding” “as an umbrella term for all options available to a party involved in legal disputes to obtain financing by non-parties to this dispute (‘third-party funders’), pursuant to an agreement between funder and funded party (‘third-party funding agreement’) or otherwise.” We refer here to “professional third-party funding,” it being defined as “the comprehensive financial assistance provided to a claimant [or defendant] in an international arbitration by a company actively engaged in providing this kind of financial services on a professional basis, i.e. as its ordinary business.” (Mazzoni 2019, p. 300); see also, Mechantaf (2019), p. 28 (paragraph 38).
- 5.
See Marguerat, J. and Navarro Blakemore, T. (2019), “It’s all about the money: Practical tips in securing third-party funding,” Froriep’s website: https://blog.froriep.com/en/its-all-about-the-money-third-party-funding-arbitration. According to the ICCA-Queen Mary Report, the TP Funder’s portion may go up to 40% (see the ICCA-Queen Mary Report, p. 26—available at: https://www.arbitration-icca.org/publications/Third-Party-Funding-Report.html).
- 6.
See Hooven (2019), p. 2.
- 7.
See Chopin (2019), question 2.
- 8.
See, for further detail, Chopin (2019), question 2.
- 9.
See Chapter 3 of the ICCA-Queen Mary Report (2018), p. 38 (available at: https://www.arbitration-icca.org/publications/Third-Party-Funding-Report.html).
- 10.
See Hooven (2019), p. 2.
- 11.
Burford Capital’s 2018 Litigation Finance Survey, available at: https://www.burfordcapital.com/insights/insights-container/2018-litigation-finance-survey/. This research, conducted by Burford Capital every year since 2012, studies “the degree to which lawyers in in-house legal departments and at law firms know about, understand and use litigation finance.” It comprises one-on-one interviews “with leading in-house and law firm lawyers” (in this case, 38 lawyers from 10 different countries, the ample majority of them being in-house counsel) and “an online survey with a total of 495 lawyers, among them 318 lawyers at law firms and 177 in-house lawyers” of the US, the UK and Australia. Among other questions, the survey asks the participants what types of matters are being financed, distinguishing between different types of litigation, which includes international arbitration as a category (without discriminating between commercial and investment arbitration).
- 12.
84% of respondents who have used third-party litigation and 77% of respondents who have not yet used it, but would consider to do so, agree that litigation finance is a growing and increasingly important area in the business of law (see page 25 of Burford Capital’s 2018 Litigation Finance Survey, available at: https://www.burfordcapital.com/insights/insights-container/2018-litigation-finance-survey/).
- 13.
The online survey was conducted among in-house and law firm lawyers, who numbered 495 respondents in the US, UK and Australia (see page 18 of Burford Capital’s 2018 Litigation Finance Survey, available at: https://www.burfordcapital.com/insights/insights-container/2018-litigation-finance-survey/).
- 14.
See page 33 of Burford Capital’s 2018 Litigation Finance Survey, available at: https://www.burfordcapital.com/insights/insights-container/2018-litigation-finance-survey/.
- 15.
Guven and Johnson (2019), p. 1.
- 16.
Guven and Johnson (2019), section 2.2, pp. 5–11.
- 17.
Guven and Johnson (2019), p. 43: “These [concerns] include third-party funding’s potential to generate inordinate costs for developing states, its ability to impact outcomes in particular cases and to shift the boundaries of the law in more funder-and/or claimant-friendly ways, its impact on incentives to sue and related retention of FDI, and its propensity to exacerbate situations of regulatory chill and overdeterrence.”
- 18.
Signed on 16 April 2018, not yet in force: see Article 24 of the treaty: “Third party funding is not permitted”; available at https://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/5761/download.
- 19.
Guven and Johnson (2019), pp. 38–43.
- 20.
See, for example, the Canada-European Union Comprehensive Economic and Trade Agreement (CETA) (provisionally in force since 21 September 2017), Article 8.26; the European Union-Viet Nam Investment Protection Agreement (signed on 30 June 2019), Article 3.37, among other treaties cited in the UNCITRAL’s Secretariat Note, “Possible reform of investor-State dispute settlement (ISDS) - Third-party funding – Possible solutions,” Thirty-eighth session, Vienna, 14–18 October 2019, p. 4 (footnote 7), available at: https://undocs.org/en/A/CN.9/WG.III/WP.172.
- 21.
See European Union-Viet Nam Investment Protection Agreement (signed on 30 June 2019), Article 3.37: “When applying Article 3.48 (Security for Costs), the Tribunal shall take into account whether there is third-party funding. When deciding on the cost of proceedings pursuant to paragraph 4 of Article 3.53 (Provisional Award), the Tribunal shall take into account whether the requirements provided for in paragraphs 1 and 2 of this Article have been respected.” (UNCITRAL’s Secretariat Note, “Possible reform of investor-State dispute settlement (ISDS) - Third-party funding – Possible solutions,” Thirty-eighth session, Vienna, 14–18 October 2019, p. 4 (footnote 8), available at: https://undocs.org/en/A/CN.9/WG.III/WP.172.
- 22.
See UNCITRAL’s Secretariat Note, “Possible reform of investor-State dispute settlement (ISDS) - Third-party funding – Possible solutions,” Thirty-eighth session, Vienna, 14–18 October 2019—available at: https://undocs.org/en/A/CN.9/WG.III/WP.172. According to the latest publicy available information, the UNCITRAL Secretariat continues ist research on the topic of TPF and intends to prepare a draft text on its possible regulation (see “Report of Working Group III (Investor-State Dispute Settlement Reform) on the work of its resumed thirty-eighth session,” p. 20—Vienna, 20–24 January 2020, available at: https://uncitral.un.org/sites/uncitral.un.org/files/report_1004-add1_for_submission_rev_002.pdf.
- 23.
The following is the most recent iteration of this rule: “Rule 14 Notice of Third-Party Funding (1) A party shall file a written notice disclosing the name of any non-party from which the party, its affiliate or its representative has received funds or equivalent support for the pursuit or defense of the proceeding through a donation or grant, or in return for remuneration dependent on the outcome of the dispute (“third-party funding”) // (2) A non-party referred to in paragraph (1) does not include a representative of a party. // (3) A party shall file the notice referred to in paragraph (1) with the Secretary-General upon registration of the Request for arbitration, or immediately upon concluding a third-party funding arrangement after registration. The party shall immediately notify the Secretary-General of any changes to the information in the notice.// (4) The Secretary-General shall transmit the notice of third-party funding and any changes to such notice to the parties and to any arbitrator proposed for appointment or appointed in a proceeding for purposes of completing the arbitrator declaration required by Rule 19(3)(b).” (Working Paper #3, Volume 1, August 2019, Proposals for amendment of the ICSID Rules, p. 37; available at: https://icsid.worldbank.org/en/Documents/WP_3_VOLUME_1_ENGLISH.pdf.
- 24.
Rule 52 Security for Costs: “(4) The Tribunal may consider third-party funding as evidence relating to a circumstance in paragraph (3) [a non-exhaustive list of all relevant circumstances to be considered by the Tribunal in determining whether to order a party to provide security for costs], but the existence of third-party funding by itself is not sufficient to justify an order for security for costs.” (Working Paper #3, Volume 1, August 2019, Proposals for amendment of the ICSID Rules, p. 58; available at: https://icsid.worldbank.org/en/Documents/WP_3_VOLUME_1_ENGLISH.pdf.
- 25.
See Chapter 8 of the ICCA-Queen Mary Report (2018) (available at: https://www.arbitration-icca.org/publications/Third-Party-Funding-Report.html).
- 26.
See the ICCA-Queen Mary Report (2018), pp. 186–187 (available at: https://www.arbitration-icca.org/publications/Third-Party-Funding-Report.html).
- 27.
See Merriam-Webster dictionary, available at: https://www.merriam-webster.com/dictionary/champerty.
- 28.
See Merriam-Webster dictionary, available at: https://www.merriam-webster.com/dictionary/maintenance.
- 29.
See the ICCA-Queen Mary Report (2018), pp. 186–187 (available at: https://www.arbitration-icca.org/publications/Third-Party-Funding-Report.html).
- 30.
See the ICCA-Queen Mary Report (2018), pp. 25–26 (available at: https://www.arbitration-icca.org/publications/Third-Party-Funding-Report.html).
- 31.
Typically, applicants send their requests for funding to several TP Funders at the same time, as noted in point (i) above.
- 32.
For a detailed description of the case assessment process, see von Goeler (2015), pp. 14–18, who describes the process as a “multi-disciplinary and rigorous process (…) a close cooperation between internal and external experts in dispute resolution, finance, risk assessment, quantum of damages, valuation of assets, and other areas as required by the individual case,” aimed at a rational and competent evaluation of the merits and quantum of the applicant’s case as well as of the associated risk exposures.
- 33.
See Chopin (2019), para. 7.
- 34.
See Article 10 of the Code of Conduct of the Association of Litigation Funders of England and Wales (January 2018), available at: http://associationoflitigationfunders.com/wp-content/uploads/2018/03/Code-Of-Conduct-for-Litigation-Funders-at-Jan-2018-FINAL.pdf.
- 35.
See the ICCA-Queen Mary Report, pp. 191–192 (available at: https://www.arbitration-icca.org/publications/Third-Party-Funding-Report.html).
- 36.
See Article 11 of the Code of Conduct of the Association of Litigation Funders of England and Wales (January 2018), available at: http://associationoflitigationfunders.com/wp-content/uploads/2018/03/Code-Of-Conduct-for-Litigation-Funders-at-Jan-2018-FINAL.pdf.
- 37.
See Article 11.2 of the Code of Conduct of the Association of Litigation Funders of England and Wales (January 2018), available at: http://associationoflitigationfunders.com/wp-content/uploads/2018/03/Code-Of-Conduct-for-Litigation-Funders-at-Jan-2018-FINAL.pdf; see also the checklist of “questions and issues that funders and funded parties should consider before entering into a funding agreement” in the ICCA-Queen Mary Report, pp. 196–197 (available at: https://www.arbitration-icca.org/publications/Third-Party-Funding-Report.html).
- 38.
von Goeler (2015), p. 37. This author points out that arbitration clauses seem to be preferred by TP Funders, mainly because it is (or can be) confidential.
- 39.
For a discussion of scholarly opinions on the degree of control by the TP Funder that is desirable and the practice in this regard, see the ICCA-Queen Mary Report, pp. 193–195 (available at: https://www.arbitration-icca.org/publications/Third-Party-Funding-Report.html).
- 40.
Citation included in von Goeler (2015), p. 39, of the 2013 Annual Report & Accounts of Juridica Investment Limited, p. 9.
- 41.
See Wheal et al. (2016), p. 3. This is a comment on the English Court of Appeal’s 2016 decision in Excalibur Ventures v Texas Keystone and others, [2016] EWCA Civ 1144, where the court ordered the TP Funders to bear part of the costs of the losing claimant, who was considered to have pursued a frivolous claim and to have misconducted itself, not because of any consideration of the TP Funders’ own behaviour, but rather because, since the latter seek to derive financial benefit from claims, just as much as funded claimants, the “derivative nature of a commercial funder’s involvement should ordinarily lead to his being required to contribute to the costs” on the same basis as the funded claimant (p. 1).
- 42.
See Rule 9.3, Code of conduct for litigation funders, Association of Litigation Funders (ALS), January 2018; available at: http://associationoflitigationfunders.com/wp-content/uploads/2018/03/Code-Of-Conduct-for-Litigation-Funders-at-Jan-2018-FINAL.pdf.
- 43.
- 44.
See RSM Production Corp v. Saint Lucia, ICSID Case No. ARB/12/10, Security for Costs Decision, 13 August 2014, upheld by the Annulment Committee on 29 April 2019, available at: https://www.italaw.com/sites/default/files/case-documents/italaw10600.pdf; see also García Armas v. Venezuela, PCA case No. 2016-08, Procedural Order No. 9, Decision on the Respondent’s application for interim measures, 20 June 2018, available at: https://www.italaw.com/sites/default/files/case-documents/italaw9849_2.pdf (in Spanish).
- 45.
In RSM Production Corp v. Saint Lucia, the arbitrators focused on the fact that RSM had previously initiated two ICSID arbitrations against Grenada, failing to pay required advances on costs and to reimburse Grenada for costs advanced on its behalf and in García Armas v. Venezuela, the arbitrators considered the fact that claimant’s third-party funding agreement did not cover a possible award on costs against that party (see Cilento and Guthrie 2019, p. 2).
- 46.
See the ICCA-Queen Mary Report (2018), p. 221 (available at: https://www.arbitration-icca.org/publications/Third-Party-Funding-Report.html).
- 47.
See Cilento and Guthrie (2019), p. 3.
- 48.
ICSID, Working Paper # 2, volume 2, March 2019, “Proposals for Amendment of the ICSID Rules – Consolidated Rules,” available at: https://icsid.worldbank.org/en/Documents/VOL_2.pdf.
- 49.
For example, Enron Corporation and Ponderosa Assets, L.P. v. Argentina, ICSID Case No. ARB/01/3, Award, 22 May 2007; Decision on the application for annulment of the Argentine Republic, 30 July 2010; available at: https://www.italaw.com/sites/default/files/case-documents/ita0299.pdf.
- 50.
See Friedman, M. and Lavaud, F. (2018), Damages Principles in Investment Arbitration, Global Arbitration Review, available at: https://globalarbitrationreview.com/chapter/1177418/damages-principles-in-investment-arbitration.
- 51.
Convention on the settlement of investment disputes between states and nationals of other states (Washington, 1966), which entered into force on 14 October, 1966 and is currently in force in 154 states (available at: https://icsid.worldbank.org/en/Documents/icsiddocs/ICSID%20Convention%20English.pdf).
- 52.
Káposznyák (2019), p. 427. Pursuant to Article 53(1) of the Washington Convention, “[t]he award shall be binding on the parties and shall not be subject to any appeal or to any other remedy except those provided in this Convention,” i.e., interpretation, revision and annulment based on a limited list of grounds and by an ad hoc annulment committee appointed by the President of the World Bank (see Section 5 of the Washington Convention). Under Article 54(1) of the same convention, “[e]ach Contracting State shall recognize an award rendered pursuant to this Convention as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court in that State.”
- 53.
Káposznyák (2019), p. 427. Article 54(3) of the Washington Convention provides: “Execution of the award shall be governed by the laws concerning the execution of judgments in force in the State in whose territories such execution is sought.”
- 54.
See the ICCA-Queen Mary Report (2018), pp. 25–26 (available at: https://www.arbitration-icca.org/publications/Third-Party-Funding-Report.html).
- 55.
Some commentators have pointed out that an excessive degree of control by the TP Funder can lead to conflicts of interests for counsel, in the event of disagreements between the funded party (or its counsel) and the TP Funder. This is why the funding agreement “should clearly reflect the parties’ understanding of who has final say on management and strategy for the funded dispute, and what happens when there is an unresolved dispute over management and strategy.” (see the ICCA-Queen Mary Report (2018), pp. 194–195, available at: https://www.arbitration-icca.org/publications/Third-Party-Funding-Report.html).
- 56.
This is the case in Argentina, pursuant to Emergency Law N° 25,344 (14 November 2002), as amended by Law No. 25,725, pursuant to which payments by the Argentinean state that became due prior to 2001 had to be paid in treasury bonds.
- 57.
See Palmer, D., Obama says to suspend trade benefits for Argentina, Reuters, 26 March 2012, available at: https://www.reuters.com/article/us-usa-argentina-trade-idUSBRE82P0QX20120326; see also Hodges, P. et al. (2013) Argentina settles five outstanding investment treaty arbitration claims in historic break with its anti-enforcement stance, Herbert Smith website, https://hsfnotes.com/arbitration/2013/10/14/argentina-settles-five-outstanding-investment-treaty-arbitration-claims-in-historic-break-with-its-anti-enforcement-stance/.
- 58.
See Peltz-Steele, R., Human life, human rights are the losers in unraveling Chevron-Ecuador litigation, The Savory Tort, 22 May, 2019, http://www.thesavorytort.com/2019/05/human-life-human-rights-are-losers-in.html.
- 59.
See Chevron press release: International Tribunal Rules for Chevron in Ecuador Case - Ecuador Found Liable for Violating International Law, Supporting Fraud and Corruption, September 2018 (https://www.chevron.com/stories/international-tribunal-rules-for-chevron-in-ecuador-case).
- 60.
See Walker (2019), p. 2.
- 61.
See Walker (2019), p. 2.
- 62.
See Särkänne, K. (2018), Report on the 3rd EFILA Annual Conference on Parallel States’ Obligations in Investor-State Arbitration, European Federation for Investment Law and Arbitration https://efila.org/wp-content/uploads/2018/02/FULL-Report-EFILA-Annual-Conference-2018-DEFINITE.pdf.
- 63.
A solution to this may be portfolio funding, discussed above in Sect. 2 of this chapter.
- 64.
See Smith (2017), pp. 30–33, for an overview of a TP Funder’s valuation of a claim from the qualitative and quantitative standpoints, including the use of a matrix for the former type of analysis.
- 65.
See Smith (2017), pp. 30 and 35.
- 66.
See Smith (2017), p. 36.
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Burghetto, M.B. (2021). Risk Assessment and Third-Party Funding in Investment Arbitration. In: Fach Gómez, K. (eds) Private Actors in International Investment Law. European Yearbook of International Economic Law(). Springer, Cham. https://doi.org/10.1007/978-3-030-48393-7_6
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