Professional Documents
Culture Documents
by Sara Pedroso*
28 February 2017
*
Lawyer; LLM candidate 2017, Leiden University,
BSocSc, JD, LLL, University of Ottawa,
Contact: pedroso.sara@gmail.com.
The increasing phenomenon of private funders in international investment arbitration raises legal
and ethical concerns which are largely unregulated by the provisions of major arbitral
institutions. Given the prohibitively high cost of international investment arbitration, third-party
funding permits a certain levelling of the playing field between parties to a dispute. In some
instances, external funding may enable investors with insufficient financial resources to launch
claims against host states and have their claims assessed on the merits.
Broadly-speaking, third-party funding is the private financing of a partys costs arising from the
settlement of a dispute; in return for bearing a partys arbitration or litigation costs, third-party
funders generally receive a portion of the final award. The 2014 International Bar Association
[] any person or entity that is contributing funds, or other material support to the prosecution or
defence of the case and that has a direct economic interest in, or a duty to indemnify a party for, the
award to be rendered in the arbitration.2
1
The 2014 IBA Guidelines apply to both commercial and investment arbitration, 2014 IBA Guidelines, ii).
2
2014 IBA Guidelines, Explanation to General Standard 6, b).
3
V. Frignati, 506; E. De Brabandere and J. Lepeltak, 6.
4
E. De Brabandere and J. Lepeltak, 6-7; G. Shaw, 4-6.
5
S. Khouri, K. Hurford and C. Bowman, 4.
6
As witnessed, in part, by the proliferation of arbitral institutions, J. Trusz, 1651, 1671.
7
Although International investment arbitrations have traditionally been closed-door processes, investment arbitral
awards are often publicly available, J. Trusz, 1664; van Boom, 13; G. Shaw, 6.
8
Whereas confidentiality is one of the main distinct features of international commercial arbitration and has been
characterized as part of the very nature of arbitration, it may argued that concerns for a partys confidentiality of
third-party funding arrangements is diminished in the context of international investment arbitration, E. Shirlow,
623, citing UNCITRAL, Report of Working Group II (Arbitration and Conciliation) on the Work of its Fifty-Third
Session, 57 and UNCITRAL, Report of Working Group II (Arbitration and Conciliation) on the Work of its Fifty-
Fourth Session, 101.
9
E. De Brabandere and J. Lepeltak, 7; G. Shaw, 6.
10
Aspects considered include: merits and prospect of success of a claim; specific terms of a treaty or an agreement;
enforceability of an award against a state; substantive applicable law to the dispute; future additional costs which
may arise during proceedings; and expertise of the legal team of a party seeking funding. E. De Brabandere and J.
Lepeltak, 6-7; S. Khouri, K. Hurford and C. Bowman, 5; G. Shaw, 3.
2
2.2. Legal and ethical dimensions of third party funding in investment arbitration
Third-party funding is not problematic per se. Historically, third-party funding of litigation was
prohibited by the ethical doctrines of champerty and maintenance in common law.11 Today,
these prohibitions have lost their relevance and third-party funding has become common practice
in international commercial and treaty arbitration.12
Despite its clear advantages, third-party funding raises a number of legal and ethical concerns,
which have sparked debate, and with which investment tribunals are only starting to engage.13
Third-party funding provides several benefits, but also potential drawbacks, for the parties to an
arbitral dispute. On the one hand, third-party funding has an access to justice dimension
because it allows an investor14 who is either impecunious or who may be reluctant to bear the
financial risks associated with arbitration to institute a claim against a host State.15 Third-party
funding permits a certain levelling of the playing field between states and investors.16
On the other hand, it has been argued that third-party funding encourages frivolous claims
against host-states.17 This concern is, however, arguably overstated.18 The potential rise of non-
meritorious claims prompted by third-party funding is tempered by the fact that funders will
generally not risk financially supporting parties with unfounded claims. In principle, third-party
funders due diligence investigations previous to entering into funding agreements, which
constitute highly commercial and objective assessments claims,19 may even decrease the
11
V. Frignati, 505; G. Shaw, 4; S. Khouri, K. Hurford and C. Bowman, 2
12
V. Frignati, 505
13
J. Honlet, 711.
14
Respondent states may also be funded by third-party, although this practice is rare: Examples of such third-party
funding include a US non-profits financing of Uruguays defence in Philip Morris Brands Sarl, Philip Morris
Products SA and Abal Hermanos SA v Oriental Republic of Uruguay, ICSID case no ARB/10/7; Grenadas outside
funding in RSM Production Corporation v Grenada, ICSID case no ARB/05/14; and Jordans funding arrangement
in ATA Construction, Industrial and Trading Company v Hashemite Kingdom of Jordan, ICSID case no ARB/08/2,
G. Shaw, 5, footnote 34; B. Osmanoglu, 328.
15
RSM Production Corporation v Saint Lucia (Decision on Saint Lucias request for security for costs of 13 August
2014), 87; J. Honlet, 712; S. Khouri, K. Hurford and C. Bowman, 3-4.
16
G. Shaw, 4; V. Frignati, 507; D. Yeoh, 115.
17
S. Khouri, K. Hurford and C. Bowman, 2.
18
E. De Brabandere and J. Lepeltak 7; S. Khouri, K. Hurford and C. Bowman, 2.
19
Figures indeed show that only a very small number of claims submitted to third party funders are effectively
funded by the major third party funders, E. De Brabandere and J. Lepeltak, 7; S. Khouri, K. Hurford and C.
Bowman, 5.
3
likelihood of frivolous claims.20 Another concern is the risk of third-party funders exerting undue
influence, pressure or control over parties and their counsel, which may compromise the integrity
of the overall arbitral process, due to the potential tensions between those players respective
interests.21 Although a partys counsel must ensure the proper protection of his or her clients
best interests at all times,22 the dynamics introduced by third-party funders may engage counsels
professional ethics obligations, particularly in respect of the attorney-client privilege.23 Finally,
much debate has centred around whether third-party funding arrangement should be considered
by arbitrators as a relevant factor upon allocating costs or security for costs, areas in which they
have a broad discretion. 24
Most significantly and directly relevant to the present discussion, the new dynamics created by
third-party funding in investment arbitration raise cause for concern in relation to the
independence of arbitrators, which may directly compromise the integrity and effectiveness of
arbitral proceedings.
The core problem considered here is as follows: if the existence of a third-party funding
arrangement is not disclosed to the tribunal by the parties at the outset, an arbitrator may not
know that he or she may be in a position of conflict of interest. For example, an arbitrator may
not be aware that she has been indirectly appointed by a third-party funder in several different
proceedings.25
20
Disclosure of third-party funding could further reduce the incentive of frivolous claims, G. Shaw, 7.
21
A classic scenario would be where it is in a funded partys interest to settle a dispute at an early stage, but in a
third-party funders interest to see a dispute drag-on, in the hope that a more profitable sum be awarded to that same
party. Contradicting interests and undue influence may also affect counsel whose services are paid for by the third-
party, S. Khouri, K. Hurford and C. Bowman, 7; G. Shaw, 2.
22
ie. through lawyers professional code of conduct rules, D. Yeoh, 120.
23
A claimants counsel is an important check and balances on the funder and is obliged to ensure the proper
protection if his or her clients interests E. De Brabandere and J. Lepeltak, 9; V. Frignati, 512; J. Trusz, 1657.
24
E. De Brabandere and J. Lepeltak, 10-13; J. Honlet, 704-707.
25
J. Trusz, 1652. The 2014 IBA Guidelines provides lists of scenarios of conflicts of interests classified by red,
orange or green depending on their degree of severity and whether they warrant disclosure. For instance,
situations in the Orange list contain scenarios that are not automatically conflicts of interest but nonetheless warrant
disclosure, B. Osmanoglu, 335.
4
The potential consequences arising from a conflict of interest between an arbitrator and a third-
party funder of one of the parties to a dispute are significant and may disrupt the overall arbitral
process. Beyond concerns of legitimacy and integrity of arbitral tribunals, the need for a
disclosure regime of third-party funding agreements is also prompted by concerns of
effectiveness. For instance, investigations deriving from a challenge to the independence or
impartiality of an arbitrator on the basis of a conflict of interest may lead to considerable delays,
especially if an arbitrator is a member of a large law firm.26 In the event that an arbitrator must
recuse him or herself or is disqualified, the arbitration will have to start anew with a newly
appointed arbitrator.27 Another, arguably worse, scenario, is where annulment proceedings are
instituted after the issuance of a final award on the basis of lack of independence or impartiality
of an arbitrator because of a conflict of interest with a third-party funder.28 Annulment would
translate into considerable time and resource expenditures which could have been avoided
through mandatory disclosure of third-party funding arrangements,
The principles of independence and impartiality are provided in the rules of the major arbitral
institutions. Articles 11 and 12 of the United Nations Commission on International Trade Law
26
B. Osmanoglu, 334.
27
J. Trusz, 1668.
28
see J. Trusz, 1669.
29
The independence and impartiality of international arbitrators is considered to be a fundamental principle in
arbitral proceedings, see E. De Brabandere and J. Lepeltak, 17; B. Osmanoglu, 332; M. Kurkela and H. Snellman,
156; J. Trusz, 652.
30
J. Trusz, 1652; M. Kurkela and H. Snellman, 157.
31
J. Trusz, 1652; E. De Brabandere and J. Lepeltek, 17.
32
E. De Brabandere and J. Lepeltak, 17.
5
[UNCITRAL] Arbitration Rules provide for the independence and impartiality of arbitrators and
their corresponding duty to disclose circumstances that may give rise to a challenge of those
principles.33 Article 14(1) of the International Centre for the Settlement of International
Disputes [ICSID] Convention requires that arbitrators be of high moral character [] and may
be relied upon to exercise independent judgment34 and Article 57 of the ICSID Convention
provides for the disqualification of an arbitrator on account of any fact indicating a manifest
lack of the qualities required by paragraph (1) of Article 14.35 The 2014 IBA Guidelines provide
for the impartiality and independence of arbitrators vis--vis the parties at the time of accepting
an appointment and shall remain so until the final award has been rendered or the proceedings
have otherwise finally terminated.36 Article 7 of the 2014 IBA Guidelines imposes on both the
parties and the arbitrators a duty to perform reasonable enquiries to identify, investigate and
communicate any potential conflict of interest as well as any facts or circumstances that may
cause his or her impartiality or independence to be questioned.37 Failure to disclose a potential
conflict is not excused by lack of knowledge if the arbitrator makes no reasonable attempt to
investigate.38 Although not formally binding, the 2014 IBA Guidelines provide a standard of
best practices in international arbitration.39
Independence and impartiality of arbitrators in investment arbitration, which are paramount for
securing the integrity and effectiveness of proceedings, cannot be ensured without transparency
attained through a shared duty of disclosure of third-party funding agreements on the parties and
arbitrators alike.40
The threat posed by third-party funding on the independence of arbitrators raises particular
concerns in the context of international investment arbitration. The distinctive features of
investment treaty arbitration allow it to review the exercise of public authority of sovereign
33
UNCITRAL Arbitration Rules.
34
ICSID Convention, Art. 14(1)
35
ICSID Convention, Art. 57.
36
2014 IBA Guidelines, Art. 1.
37
2014 IBA Guidelines, Art 7.
38
2014 IBA Guidelines, Art. 7.
39
IBA Conflicts of Interest Subcommittee, 52.
40
J. Truzs, 1665, 1673.
6
states and therefore involve public interests which excee[d] the private bilateral relations
between the parties.41 Because of its public international law foundation,42 international
investment arbitration demands enhanced transparency, and is clearly distinguishable from other
types of (private) commercial arbitration.43 Certain distinct features of investor-state arbitration,
such as similar applicable substantive law and even similar fact patterns across disputes add a
layer of complexity to arbitrators requirement of independence.44 The phenomenon of repeat
arbitrators in the highly specialised field of investment arbitration45 where an arbitrator is
appointed by the same investor-claimant in various disputes, creating a potential financial
dependence between the two further jeopardizes the independence of a tribunal.46 In other
words, the involvement of a third-party funder, who may also be repeatedly funded by a same
third-party, further problematizes potential conflicts of interests between arbitrators and funded
parties.
41
E. De Brabandere, 151; G. Van Harten and M. Loughlin, 123.
42
See E. De Brabandere.
43
[B]ecause of the need for transparency in international investment arbitration, considering the involvement of a
sovereign State acting in its sovereign capacity, third party funding may be even more irreconcilable with
proceedings in international investment arbitration, E. De Brabandere and J. Lepeltak, 19; L. Malintoppi, 351; G.
Shaw, 6.
44
E. De Brabandere and J. Lepeltak, 17
45
G. Shaw, 8.
46
E. De Brabandere and J. Lepeltak, 17.
47
E. Shirlow, 649, citing UNCITRAL, Report of Working Group II (Arbitration and Conciliation) on the Work of
its Fifty-Third Session (Vienna, 4-8 October 2010), 25 and UNCITRAL, Report of Working Group II (Arbitration
and Conciliation) on the Work of its Fifty-Fourth Session, 112.
48
UNCITRAL Convention Arbitration Rules, Art. 1; E. Shirlow, 631.
49
E. Shirlow, 631.
7
Moreover, the consequences of a successful challenge to an arbitrators independence and
impartiality due to a conflict of interest with a third-party funder has not only severe
repercussions for the parties involved, but can also lead to costly public expenditures due to the
participation of a state:50 since investment tribunals may award substantial damages to foreign
investors for a states exercise of its sovereign powers, secrecy in the procedure is indeed
improper.51
The 2014 IBA Guidelines explicitly address disclosure of third-party funding by extending the
duty to disclose any relationship between the arbitrator and an individual having a controlling
50
G. Shaw, 8.
51
E. De Brabandere, 151.
52
For example, Part 44.15 of the English Civil Procedure Rules, S. Khouri, K. Hurford and C. Bowman, footnote
35.
53
E. de Brabandere and J. Lepeltek, 16; G. Shaw, 9.
54
The third-party funding agreement is legally disconnected from the arbitration agreement, which means that the
tribunal does not have jurisdiction over it. E. De Brabandere and J. Lepeltak, 16, 18; see J. Trusz, 1672.
55
S. Khouri, K. Hurford and C. Bowman, 10; G. Shaw, 9.
56
ICSID Rules, Rule 6.
8
influence on the party in the arbitration or with any person or entity with a direct economic
interest in [...] the award to be rendered in the arbitration [] at the earliest opportunity.57
The broad scope of the duty to disclose found in Article 7 undoubtedly extends to an arbitrators
relationship with a third-party funder. Significantly, as mentioned above, Article 7(d) provides
that a failure by an arbitrator to disclose a conflict is not excused by lack of knowledge.58 This
imposes a duty on the arbitrator to assess the nature of the third-party funding relationship and is
a further indication that the duty to disclose third-party funding relationships is shared by both
the parties and arbitrators in a dispute.59
57
Compare with the previous 2004 IBA Guidelines, 2014 IBA Guidelines, Art. 7.
58
2014 IBA Guidelines, Art. 7(1).
59
The duty of arbitrators to disclosure relationship with third party funding corporations combined with the duty on
a party to disclose to an arbitral institution that it is receiving funding are both part of a four-part solution to the
problems raised by third-party funding proposed in an article by Jennifer Trusz, J. Trusz, 1673 ff.
60
EuroGas Inc and Belmont Ressources Inc v Slovak Republic, ICSID case No ARB/14/14. Transcript of the First
Session on Hearing and Provisional Measures (17 March 2015) at 145; J. Honlet, 708.
61
Muhammet ap & Sehil insaat Endustri ve Ticaret Ltd Sti v Turkmenistan, ICSID case No ARB/12/6, Procedural
Order No 3 (12 June 2015).
62
Muhammet ap & Sehil insaat Endustri ve Ticaret Ltd Sti v Turkmenistan, ICSID case No ARB/12/6, Procedural
Order No 2 (23 June 2014); J. Honlet, 708.
9
but they also acknowledge the role of a third-party funder as an interested party in investor-state
arbitration.63
There is a discernable trend towards increased transparency and a regime of disclosure of third-
party arrangements in arbitral decisions and regulatory schemes. Although the most progressive
advances are in the form of non-binding guidelines, they nonetheless contribute to the positive
development of regulating third-party funding in investment arbitration and securing
independence and impartiality of arbitral tribunals.
Last month, both Singapore and Hong Kong reformed their laws which previously included
common law prohibitions of third-party funding in international arbitration, announcing a shift in
the legal landscape this respect.64 This is unsurprising considering that Hong Kong and
Singapore are amongst the five most preferred venues for international arbitration, along with
London, Paris and Geneva;65 decriminalizing and regulating third-party funding will likely
contribute to securing more arbitration in those centers. More specifically, the Law Commission
of Hong Kong recently proposed legislative amendments to the Arbitration Ordinance and
associated regulations, including the requirement that within 15 days, a funded party must give
written notice of the existence of a funding agreement and of the identity of the funder to the
other parties and to the arbitral institution and tribunal.66 Other proposals made by the
Commission include the development of specific standards and rules directly regulating third-
party funding.
Another recent development was the coming into force of the Singapore International Arbitration
Centre [SIAC] Investment Arbitration Rules on 1 January 2017, applicable to disputes involving
States, State-controlled entities or intergovernmental organisations.67 Article 24 (l) of the Rules
provide that the tribunal shall have the power to order the disclosure of the existence of a
63
J. Honlet, 108-109; D. Desierto (online).
64
J. Mackojc (online).
65
Queen Mary University of London and White & Case, 2.
66
S. Jhangiani and R. Coldwell (online).
67
Investment Arbitration rules of the Singapore International Arbitration Centre.
10
Partys third-party funding arrangement and/or the identity of the third-party funder and, where
appropriate, details of the third-party funders interest in the outcome of the proceedings, and/or
whether or not the third-party funder has committed to undertake adverse costs liability.68 They
are the first rules of a major arbitral institution to grant express authority to arbitral tribunals to
order the disclosure of third party funding agreements.69
Finally, on 12 February 2016, the International Chamber of Commerce adopted a Guidance Note
on conflict disclosures by arbitrators [Guidance Note] aiming to enhance the transparency and
predictability of the arbitration process in response to users needs.70 For the purposes of
disclosure, the Guidance Note states that arbitrators should consider, upon assessing whether to
make disclosure, relationships with any entity having a direct economic interest in the dispute
or an obligation to indemnify a party for the award,71 therefore adopting the same broad
language as in Article 7 of the 2014 IBA Guidelines which includes third-party funders.72
5. Conclusion
Third-party funding highlights the tension between the limited jurisdiction of investment
tribunals to resolve inter partes disputes, and the need to secure effectiveness and integrity of
international arbitral proceedings.73 Third-party funding introduces an additional player to
international investment arbitral proceedings thereby increasing the probability of a conflict of
interest existing between third-party funders and arbitrators. Transparency, through disclosure,
can act as a guarantor of independence and impartiality in investment arbitral proceedings and
remedy some of the legal and ethical concerns raised above. The public international law
foundation of international investment arbitration, as structurally distinct from commercial
arbitration, demands a higher threshold of transparency through the disclosure of the existence
and (at a minimum) identity of third-party funders, due to the public interests involved in
investment arbitral proceedings to which sovereign states are parties.
68
Investment Arbitration rules of the Singapore International Arbitration Centre.
69
M. Mangan and H. Defriez (online).
70
The Guidance Note is incorporated in the ICC Note to arbitrators and to parties (22 September 2016), ICC Press
Release.
71
ICC Guidance Note.
72
A. Goldsmith and L. Melchionda (online).
73
E. De Brabandere and J. Lepeltak, 4; J. Trusz, 1672.
11
Formal and explicit rules or provisions requiring disclosure by third-funded parties are currently
inadequate to address the rising phenomenon;74 however, recent arbitral awards, orders,
legislation, and non-binding guidelines and guidance notes which provide best practices,
indicate a demand for more transparency at the international level. These developments hint at a
gradual shift in the regulatory framework around third-party funding, which will likely
contribute to an increase in the effectiveness and integrity of international investment tribunals.
74
It noteworthy that the scenario where a third-party funder is funding both the claimant and the state in a dispute is
largely unregulated, G. Shaw, 11.
12
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13
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14
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15