Is Third Party Funding a Relevant “Investment” for the Purposes of a IIA Protection?

by Duarte G. Henriques, BCH Advocados*

During a meeting on the occasion of the last ICCA Congress in Mauritius, someone asked whether a Third Party Funding is considered an “investment” for the purposes of protection afforded by international investment agreements (“IIAs”) and investor state dispute settlement (“ISDS”). Contrary to my first reaction—“no, TPF is not protected”—the question is not so easy to address and might not have one single answer.

Although related, this question is different from a similar issue, which has generated lively debates around the recoverability of costs and other expenditure incurred by a funded party through a funding structure. At least in one case the tribunal did not award the costs of the arbitration to the prevailing party because it had been funded by a funder, the latter having no contractual right vis-à-vis the claimants for reimbursement of the arbitration costs (see Quasar de Valores v. Russia). Nevertheless, the trend in investment arbitral tribunals is to award costs to the funded party even if those costs have been funded by a third party (see inter alia others Kardassopoulos v. Georgia).

Let us recall what TPF is. Broadly speaking—and thinking of the most common business model (or financial structure)—a third party funding may be encapsulated in the following idea: an entity external to a dispute provides to a party in dispute a non-recourse funding for the latter to pursue a claim, against a retribution consisting of a share over the proceeds. Applied to the “investment arbitration” setting, this means that an investor is funded by a third party to pursue its claim against the host State, and the third party funder will pay all the costs of the arbitration (legal fees, arbitration costs, experts, and the like) and receive in return a share calculated upon the proceeds. If the claim does not prevail, the funder’s “investment” will not be repaid.

However, according to almost every investment protection treaty, a claim against a host State must meet some requirements related to jurisdiction and admissibility. I will not elaborate much on this and will limit myself to some brief considerations. Of course one may ask whether or not a TPF “investment” meets all the requirements of some tests that are used to assess the availability of protection under an IIA (for instance, it is common to apply the so-called “Salini test”, while other investment tribunals resort to quantitative and qualitative indicia).

However, my goal is to address a more overarching requisite that may be found in the definition of the protected investments themselves.

Currently, the number of existing bilateral investment treaties and other international investment agreements in force amounts to more than 2,900. Each international instrument has a specific language, but regarding the definition of a protected investment, the wording is almost identical across the spectrum, with some specificities which are not particularly remarkable. Accordingly, we may pick an instrument at random—in this case, I chose the “BIT” between the United Kingdom and the Republic of Colombia of March 2010.

For the purposes of this “BIT”, an investment is defined as ‘every kind of economic asset, owned or controlled directly or indirectly, by investors of a Contracting Party in the territory of the other Contracting Party, in accordance with the law of the latter, including in particular, but not exclusively, the following: (i)  movable and immovable property, as well as any other rights in rem, including property rights; (ii)  shares in, and stocks and debentures of, a company and any other kind of economic participation in a company;  (iii)  claims to money or to any performance under contract having an economic value; (iv)  intellectual property rights, including, among others, copyrights and related rights, and industrial property rights such as patents, technical processes, manufactures’ brands and trademarks, trade names, industrial designs, know-how and goodwill; (v)  business concessions granted by law, administrative acts or contracts including concessions to explore, grow, extract or exploit natural resources.’ (Article I/1/a).

Having no regard to specific exclusion provisions (such as those that were foreseen in the UK/Colombia “BIT”), the first question that arises is whether this provision contains an exhaustive list of protected investments or, on the contrary, the provision is merely illustrative (“open clause”).

This question is not so misplaced as one might initially think. Indeed, very recently, in a somewhat parallel matter—that of an investment related to a Greek bond issuance bought by the investor Poštová Banka in the secondary market—an investment arbitral tribunal considered that the definitional clause contained a list of examples to which some meaning should be given, and no provision applied to the specific lending products in question. Therefore, the tribunal considered that it lacked jurisdiction to hear the claim (a detailed analysis of this case by Professor George Affaki may be found here). However, this understanding contrasts with at least three previous awards (Ablacat, Deutsch Bank and Ambiente Officio), where the tribunals considered that the “definitional” provision should be read broadly so as to include these financial products and other similar ones as a protected investment.

In all these cases, we are speaking of financial products with somewhat fragile links to the economy of the States in question and, therefore, one may rightfully ask whether a similar approach may be taken regarding a “Third Party Funding” investment.

Be that as it may, one may think of possibly qualifying investments more connected to the “local economy” in the context of Third Party Funding. Let us think of one example, which might well be taken from a real case: an investor mining company invested in country A and created a few hundred jobs for local employees; this was the only asset of the investor company; the host State revoked the exploration and exploitation licence and, therefore, the investor became insolvent and the company was dismantled with those hundreds of employees made redundant. However, this investor was able to have its claim against the host State funded by a third party funder. The claim was a mix of compensation and restitution and was successful enough to have the company exploitation and the jobs reinstated. In the meantime, the host State promulgated legislation prohibiting any repatriation of funds and, therefore, the Third Party Funder was not able to receive its share of the proceeds.

Is this a protected investment or not? Did the host State violate its international commitments to protect foreign investment from national individuals and companies nationals of the other contracting State?

Ultimately, the answer to this question will rely how the definitional provision of the relevant IIA should be understood. If one adopts an approach similar to the arbitral tribunal in the case Poštová Banka, the Third Party funding may fall outside the scope of the investment protection instrument. However, if the approach is broader, then I do not see why a protection should not be accorded to such an investment, albeit of a “third party” to the dispute and to the main investment made in the host State.

I’d welcome your thoughts on this.


Duarte G. Henriques, Rua Fialho de Almeida – 32 – 1 E, 1070-129 Lisbon • Portugal, dghenriques@bch.ptwww.bch.pt.

 

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