Keep Calm and Third Party Funding: Investment Arbitration

by Dr Crina Baltag

University of Bedfordshire

 

The Draft Report of the ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration raises relevant issues for investor-state arbitration and for the promotion and protection of investment in the wider context of investment law.

 

One issue which is acknowledged by the Report and frequently raised as a real concern for investment arbitration cases (and for commercial arbitration, alike) refers to the number of cases which allegedly made their way on the table of arbitral tribunals because of this funding made available by third-party funders. The Report makes reference to the potential “speculative, marginal, or frivolous” claims which put States in a delicate position. (Report, p. 159). There is, undoubtedly, a significant increase in the number of investment arbitration cases. The known number of such cases, as reported by UNCTAD, is 817. If we take the example of the Energy Charter Treaty, in less than five years, the number of cases tripled, from 33 to 108. In this particular case, although other factors might be relevant, the impact of the photovoltaic claims involving Spain and Italy was decisive. Some of these cases, no doubt, could only proceed if some funding was made available to the claimants. However, such information cannot be verified, unless the third-party funding becomes relevant during the arbitration proceedings (see, for example, RSM Production Corporation v. Grenada, ICSID Case No. ARB 10/6).

 

Voices who criticize third-party funding in the context of investment arbitration do so because they believe that frivolous claims, which otherwise were unable to proceed, can now be heard by an arbitral tribunal. As the Report shows (pp. 159 et seq.), there is no empirical evidence to sustain this proposal. Moreover, the mechanisms of the third-party funding is as such as to consider only claims with a real chance of success. In addition, statistics show that, excluding cases which were settled or discontinued, States are likely to prevail in investment arbitration cases. No doubt, investor-State arbitration is an expensive arbitration (only the lodging fee of the ICSID amounts to USD 25,000) and usually puts the claimant in a difficult position in terms of funding. Third-party funding is indeed an interesting option in the context of investment arbitration for both parties and the funders: as mentioned, the excessive costs add an unusual burden for the business which is already crippled, but also create a unique opportunity for funders as the claims in investment arbitration cases do not have less than seven zeros. Third-party funding is not exclusive to claimants. Given the excessive costs – in particular the legal costs – States also seek external support for ensuring that proper legal representation is provided (also cited in the Report, p. 166, Philip Morris v. Uruguay, ICSID Case No. ARB/10/7, although the funds provided were a donation). Funders, on another hand, while defending their policy in funding the claims, argue that they also exert the important paper of providing access to justice to parties (investors and States, alike) who otherwise would have not been able to defend their position in front of an arbitral tribunal. (Report, pp. 4 et seq.).

 

It is important to highlight here that investment arbitration involves sensitive matters, such as public interest, confidentiality, balancing investors’ and States’ rights, the purpose and legitimacy of investor-State arbitration system itself etc. Third-party funding, in this context, does touch there sensitive issues. However, it is important to retain here, distinctive from the discussion concerning a desired reform of this system, that the parties involved in investment arbitration (States, institutions etc.) do recognize the necessity to address third-party funding and ensure transparency and regulation of this practice. As acknowledged by the Report (pp. 46 et seq.), investment treaties and institutional rules for investment arbitrations tackle the issue of third-party funding. The ICSID, who is currently in the process of amending its Rules and Regulations, added to the list of potential matters to be addressed by this process possible provisions on third-party funding.

 

No evidence transpires from the current investment arbitration cases, which indicates that third-party funding is damaging in any way the desired balance of interests between States and investors with the view of promoting and protecting foreign investments. Thus, if properly regulated, with the sensitive issues addressed accordingly, given the specificity of investment arbitration, third-party funding might indeed contribute to the proper development of investment law, in general.

 

Dr Crina Baltag

crina.baltag@beds.ac.uk

Attorney-at-law
Associate Editor, Kluwer Arbitration Blog
Ph.D., Queen Mary University of London
LL.M., Stockholm University
M.Sc., Academy of Economic Studies Bucharest

This entry was posted in Blog.

2 Comments

  1. Reply Duarte Henriques said

    Very recently, CIETAC published its new rules applicable to investment arbitration cases. Third-Party Funding was not forgotten. I guess that in the near furture virtually every arbitration center will have specific regulation applicable to Third-Party Funding. Yet, it remains to be seen to what extent the regulation will apply to the disclosure of an external financing agreement: existence of the funding? identity and other particulars of the funder? details of the funding agreement?

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