Third-Party Funding a Protected Investment?

 By Duarte G Henriques

The Draft Report of the ICCA / QMUL Task Force on Third-Party Funding in International Arbitration that was released last September focus on a number of very intricate and up to date issues related to this new business model. One of those issues is the question of whether an investment related to a “third-party funding” may be considered as “protected” under the numerous international instruments for the protection of foreign investments. The question was asked but remains unanswered.

Yet, in a very recent dissenting opinion in Teinver & Autobuses v Argentina, Kamal Hossain rejected the notion of a third-party investment being considered protected under the BIT in question:

‘Burford may have “invested” in the present arbitration proceedings by agreeing to fund the legal expenses but such an “investment” based on speculating on the prospect of obtaining a substantial portion the proceeds of any award resulting from a pending arbitration cannot be treated as protected “investment” under the BIT. The BIT guarantees the rights of “investors” who have made an “investment” in the territory of the host state. The BIT is not intended to enable payment of awards to third party funders who are not “investors” and who have no protected “investment”, and who only come into the situation in the circumstances described above to advance funds in order to speculate on the outcome of a pending arbitration.’[1]

However, and in spite of so many writings devoted to the third-party funding phenomenon, very few elaborate on one specific feature of this business model. Rather than a hidden facet, it is a real overarching characteristic, amounting to a fundamental principle of law: the right of access to justice. This aspect may have a potential impact in investment arbitration: serving as a capsule for new perspectives on the third-party funding realm, it may lead us to consider that a third-party funding investment is a protected investment under international investment agreements.

On the other hand, consideration of recent developments and the experience of financial products in the investment arbitration setting may also provide additional grounds to posit such protection.

These considerations served as the leitmotiv of my latest article, just published in the “Spain Arbitration Review” (issue nr. 30, Oct. 2017), where I discuss possible scenarios where we may find a positive answer to the question asked above.

Further considerations could also be addressed in this respect, inter alia the following questions:

• is it relevant that the origin of funds has no significance, as is generally recognized?
• is it applicable the contribution to the economy of the host state requisite?
• is it relevant the fact that the funder is not a party to the proceedings?
• is the funder‘s business model a speculation, and if so, is it relevant?
• how does the concept of unity of operations apply?
• can we draw analogies to legal status of arbitration awards?
• Should arbitral tribunals support the existence of “third-party funding” or should they consider this as an undesirable effect of the arbitral process?
• Lastly, is the specific type of “third-party funding” relevant (e.g. degree of control by the funder)?

Undoubtedly, a lot of food for thought. Certainly that no final answers can be provided at this stage.

I very much welcome your views on the topic !!!

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[1] See dissenting opinion of July 13, 2017, in Teinver S.A., Transportes de Cercanías S.A. and Autobuses Urbanos del Sur S.A. v The Argentine Republic (ICSID Case No. ARB/09/1), para 72, p. 30, award of July 21, 2017).