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,


Transnational Court of Investment Arbitration

by Duarte G. Henriques, BCH Advocados*

In the context of the discussions surrounding the Transatlantic Trade and Investment Partnership (TTIP), much criticism has been raised against ISDS (Investor-State Dispute Settlement). We know now that the European Parliament echoed public complaints and voted against the inclusion of an ISDS mechanism in the TTIP. It further recommended to the European Commission that disputes falling under the investment protection framework should be adjudicated by a system similar to state courts, where the decision-makers are appointed from among judges from the US, EU and third countries. Accordingly, the proposal advances the creation of a new court system (Investment Court System) consisting of a Tribunal of First Instance and an Appeal Tribunal.

At the same time, this proposal resonates the suspicions raised regarding the lack of impartiality of some arbitrators and paves the way to the implementation of an adjudication system subject to public scrutiny.

However meritorious it could be, this idea nevertheless forecloses the right of the investor to (at least) participate in the process of selection of the decision-maker, a principle paramount to international arbitration stemming from the distrust of a system where the adjudicator might be swayed by parochial views, not to mention political and economic pressures.

I am still not convinced that an arbitral system is not apt to provide a neutral, impartial and independent means for solving disputes between foreign investors and host states. But I do not look at the current ISDS status quo without some hesitation either, especially if we think of the system instituted by ICSID, its locations positioning and its “ad hoc committee” revision method. The circumstance that the ICSID system operates under the aegis of a banking institution (World Bank) lending money to sovereign states, but at the same time with a level of financial power strong enough to go as far as to impose changes in regulation, and in the economic and political environment of those countries, gives room for criticism concerning its bias in favour of investors. This criticism has led a few nations (Venezuela and Bolivia, for instance) to withdraw from the ICSID Convention, claiming that BITs were made to protect “investments” and not “investors”.

On the other hand, at first glance I do not have to struggle with the idea of waiving the principle of finality of arbitral awards: indeed, why not submit the arbitral decision to a revision similar to the state courts system of appeals? In my country, foreign investors wishing to pursue their claims before the state courts are given the right to appeal against the decision. This right to appeal, however, is subject to limitations: it may be restricted to a single level of appeal (usually the “Court of Appeal”), and it only comprises the revision of the factual findings if the decision contains “egregious” errors of determination. Interpretation and application of the legal rules are subject to full revision.

That being said, a suggestion (and here I underline that the following is a mere suggestion, subject to further development) might be put forward to create an international body for settling investment disputes. Most likely, the idea has already been suggested, but in any case, I will dare to name it as the “Transnational Court of Investment Arbitration”.

Explaining the idea involves speaking about each of its four words.

Firstly, it would be a Court in the sense that it consists of a permanent institutional body with permanent facilities, structured in the same fashion as traditional state courts, and permanently dedicated staff. Arbitrators would be vested with “jus imperii” powers. Witnesses would be subject to criminal prosecution in the case of false statements, disobedience, and similar behaviour. Arbitrators, counsel, parties’ representatives, witnesses, experts, secretaries and other administrative staff would be submitted to a single regulation system, including a Code of Ethics.

Secondly, it would be a body dedicated exclusively to settling disputes between foreign investors and host states. Therefore, it would be an “Investment” Court. Underlying this notion is the consideration of the jurisdictional issue, that is, discovering, inter alia, what kind of legal instrument would afford a protection under this ISDS to the relevant “investments”. As long as an international instrument protecting foreign investments provides for arbitration as a mechanism to solve disputes arising therefrom, the Transnational Court would hold jurisdiction.

Thirdly, however closely this body might resemble a traditional “court”, it would be an institution managing arbitration (and possibly mediation in a two-tiered process). Therefore, parties are allowed to appoint their arbitrators, but also to have a tailor-made proceeding, including waiving of the right to appeal and the setting-up of time schedules, costs, bifurcation, and so on and so forth. Given the particularities of this kind of arbitration – which deals with public interests of the states involved – the right to appeal and public hearings would be set-up by default. Of course, the “traditional” requirements as to the independence, impartiality and neutrality of the adjudicators would apply, and this institution would act as an appointing authority as well (chair and arbitrators not appointed by defaulting parties). Final awards would “circulate” (that is, would be enforceable with no need for prior recognition) within the territory of all jurisdictions adhering to this system and within the geographic perimeter of the New York Convention of 1958.

Lastly, it would be a transnational court, in the sense that would cover all jurisdictions adhering to this system, potentially within the context of a multilateral free-trade agreement. That brings us to the potential to use an existing legal and institutional setting, such as the WTO, and be attached to it at the logistical level. However, it would be more than that. It would have to be a body truly independent from the states adhering to the international convention enacting this system.

Of course, it would be necessary to provide for initial financial funding from contracting states until reaching a “cruising speed” where the system would be financially self-sustained concerning maintenance and administrative costs.

Its state constituency would democratically elect the managing and supervising bodies by “one country one vote”.

Another concern related to the current ISDS system is its geographic accessibility. Currently, investment disputes are managed in Washington (ICSID) or The Hague (PCA), with hearing locations settled in association with arbitral institutions such as the DIS in Germany, the CIETAC in China or the Singapore International Arbitration Centre in Singapore. This concern suggests the notion of spreading a few regional or continental sub-Courts (or Courts of First Instance) across the globe. The distribution would be drawn according to the caseload currently brought by investors against host states. Looking below at the last statistics available at the ICSID website (2015-2), we could think of the following continental or regional Sub-Courts and respective locations: 1) South America, in Chile or Uruguay; 2) Western Europe, in Warsaw or Kiev; 3) Eastern Europe, in Geneva, Paris or London; 4) North America and Central America, in New York or Miami; 5) Africa, in Cairo, Egypt or Abuja, Nigeria; 6) Australasia, in Sydney; 7) Asia, in Beijing or HK.


This system would include what we may call “intra-EU” disputes, that is, disputes between European investors and EU member states.

The first instance level of this system would be topped by a “Superior Court” based on a movable location for a term of 5 to 10 years. Contrary to the “first instance” level, where the decision-makers would be arbitrators chosen by the parties, the jurisdictional body of the Superior Court would consist of the President of the highest Courts of Justice of each contracting state. With the exception of “egregious” determinations of facts, the Superior Court would have jurisdiction on matters of law only, and its decisions would be published.

Duarte G. Henriques, Rua Fialho de Almeida – 32 – 1 E, 1070-129 Lisbon • Portugal,

Third Party Funders: Game-Changers or Business as Usual?

by Duarte G. Henriques, BCH Advocados*

Some time ago, a question was asked to the members of the ICC Institute of World Business Law, of which I am a member, aiming at contributing to its quarterly newsletter: are third party funders a game-changer or business as usual?

At the time I was not able to timely answer that question, but now I will try to resume my thoughts.

This question is undoubtedly both challenging and distressful, but I would tend to take a different approach.

While it is challenging in consideration of the myriad of issues that may be encompassed by the idea of “third party funding”, it is at the same time capable of producing numerous sentiments, not all of a comforting nature – this is what the commentators will tell us.

Indeed, regarding this topic, it is now common to hear and read that it may raise feelings, and therefore concerns, about honesty, greed, venality, legitimacy, and above all, the integrity of arbitration as a means of resolving disputes.

Without any concern regarding citations, I would sum up some thoughts put forward in some public discussions that have already taken place (I stress that the following are observations made by others).

It has been said that it is unquestionable that third party funders play a significant, if not prevailing, role in most of the major legal actions and arbitral proceedings. They provide funding, and therefore they make an investment that is based purely on financial, patrimonial and risk assessment considerations. At the end of the day, it is “their” money that has (also) been put at stake. Consequently, it may seem obvious that the funder must be allowed to have a “word” when choosing the “players” (arbitral institutions, arbitrators, counsels, etc.). This may seem an admissible intervention, although sometimes this is the least that funders do. Often, their “word” is formally taken as advice, but in practice it may well be an instruction. So those voices say.

Hence, concerns about the independence and impartiality of the arbitrators are immediately put forward. The role of counsels is also at stake: more likely than not, counsel will tend to follow the interests of the funders – who are the players that provide referrals – rather than those of the parties. Indeed, it is not uncommon to find a lawyer or counsel struggling against a settlement (or to reach a settlement) simply because it will allow an easier repayment of funds supplied by funders. Again, as others say.

It has also been asked: who will refuse to be referred by a TPF? Who will say “No” when asked by a funder to provide their CV to an interested party? Will he or she be able to later say “No” to an instruction from the funder? Will he or she be free from any bias to side with the party that appointed him or her by means of the funder’s “advice”? Furthermore, will any ethical problem connected with third party funders be solved by disclosure?

The path is not at all clear.

One may now turn to other questions regarding third party funders.

The most common question is two-folded: what kind of information should be disclosed about third party financing and what the consequences are of such disclosure?

Regarding the information to provide, the recent trend seems to point in the direction of full disclosure. For instance, very recently, in Muhammet Çap & Sehil Inşaat Endustri ve Ticaret Ltd. Sti. v. Turkmenistan (ICSID Case No. ARB/12/6), the arbitral tribunal ordered the claimant to ‘confirm to Respondent whether its claims in this arbitration are being funded by a third-party funder, and, if so, shall advise Respondent and the Tribunal of the name or names and details of the third-party funder(s), and the nature of the arrangements concluded with the third-party funder(s), including whether and to what extent it/they will share in any successes that Claimants may achieve in this arbitration’ (order no. 3 of 12 June 2015 by Julian Lew). In another recently reported case (Eurogas Inc., Belmont Resources Inc. v Slovak Republic – ICSID Case No. ARB/14/14) the arbitral tribunal decided that the claimant should disclose the identity of the third-party funder.

On the other hand, the arbitration community did not reach consensus as to the conclusions that must be drawn from disclosure nor the consequences that follow the appearance of a third party funding the claimant.

Without regard to the impact that such appearance may have with respect to the independence and impartiality of the arbitrators (see General Standard 6(b) and 7(a) of the IBA Guidelines on Conflicts of Interest in International Arbitration — 2014), some take for granted that third party funders may not be ordered to pay the costs of the arbitration should the claim collapse. However, there is already case law supporting the view that third party funders must bear the costs if they hold a sufficient degree of economic interest and control in relation to the claim (see UK cases Excalibur Ventures LLC v. Texas Keystone Inc. & Ors v. Psari Holdings Limited & Ors and Arkin v. Borchard Lines Ltd. & Ors. See also US case Abu-Ghazaleh v. Chaul). Is this a trend to observe in the near future?

Another topic raises the eyebrows in relation to the consequences of the existence of a third party funder: for the purposes of deciding security for costs, must a funded party be presumed impecunious merely because the funding flows from a third party? To the best of my knowledge, no arbitral tribunal has yet decided according to such assumption. To the contrary, in the case cited above (Eurogas v Slovakia) the arbitral tribunal expressly denied such assumption. However, Gavan Griffit’s assenting reasons to the decision on St. Lucia’s Request for Security for Costs of 13 August 2014 (RSM Production Corporation v. Saint Lucia, ICSID Case No. ARB/12/10) gave room to serious concerns and no less criticism. His words deserve nothing less of a serious thinking and a peaceful discussion:

once it appears that there is third party funding of an investor’s claims, the onus is cast on the claimant to disclose all relevant factors and to make a case why security for costs orders should not be made

This is indeed a topic full of questions and with only few clear answers. Nevertheless, the following seems to me clearer.

My first reaction when confronted with TPF for the very first time was: this topic defies the principles of the fundamental right to access Justice. In fact, let us think of a party in financial distress, incapable of supporting the costs of a legal action or of arbitration proceedings. Why upbraid a party (or its counsel) seeking financial support from a funding institution? Why reproach the funder? Is it not in the best interest of every party to have effective access to Justice even if by recourse to a funding system? Don’t those institutions perform a role of social and public interest by allowing an impoverished party to have an effective defense of its rights? It is true that sometimes third party funders may bring unbalance between the parties, but isn’t it also true that they may perform a role of leveling the playing field?

One cannot deny this.

Having this in mind, I believe that the equation stated above may not be accurate. The issue may not be whether this is “usual business” or a “game-changer” simply because third party funders may be both, and may be neither.

The issue should be an assessment of the real role they can play concerning the social and economic public interests involved when funding a legal activity, on one hand, and the close attentiveness to that funding activity that ethical and deontological concerns require, on the other.

Further, reality check is needed, and commentary and other studies concerning third party funder need more fact-finding than just the traditional “anecdotal evidence”.

While I do not question that arbitrators and counsels – at least the large majority of them – will tackle (and some have already done so) these ethical and deontological concerns by full disclosure and by maintaining full independence from third party funders, and while I do not question either that most funders will (and actually do) refrain from intervening, horror stories are not needed to prove the rule by the exception. And those exceptions require future care.

* Duarte G. Henriques, Rua Fialho de Almeida – 32 – 1 E, 1070-129 Lisbon • Portugal,