Young ISDS Club – ICSID and UNCITRAL Draft Code of Conduct for Adjudicators in ISDS disputes

By Suksham Chauhan, International Arbitration Trainee, Quinn Emanuel Urquhart & Sullivan, Paris  

Young ISDS Club for the second time provided a great platform for a very engaging and interesting discussion on 8 June 2020. The Young ISDS Club remained steadfast to its core value of open discussion. It was a most candid discussion where participants and speakers took strong stances and critically analysed the Draft Code without any inhibitions.

1. Introduction

Ketevan Betaneli (Freshfields), who moderated the session, commenced the webinar by introducing the topic: “ICSID and UNCITRAL Draft Code of Conduct for Adjudicators in ISDS”. She gave a brief overview of the Draft Code of Conduct for Adjudicators (the “Draft Code”).

She noted that the Draft Code was jointly prepared by the Secretariats of ICSID and UNCITRAL and that it deals with duties and responsibilities and independence and impartiality, as well as with conflicts of interest and confidentiality relating to adjudicators. At the outset, she stated that the definition of “Adjudicators” is comprehensive and includes arbitrators, members of international ad hoc, annulment or appeal committees, and judges of a permanent mechanism for the settlement of investor-State disputes.

Thereafter, she introduced the speakers : Margaret Ryan (Shearman & Sterling); Tim Rauschning (Luther); and Nandakumar Srivatsa (Dentons). She remined the participants that the discussions in the webinar remain confidential and no participant or speaker should be quoted unless they had so agreed. She also pointed out that all the speakers and participants would be speaking in their personal capacity and the views expressed did not reflect those of their respective law firms or clients.

In line with the spirit of Young ISDS Club discussions rules – no statement or comment is attributed to any participants or speakers in this report.

2. The First Speaker – Conflicts of Interest: disclosure obligations (Article 5)

At the outset, the first speaker pointed out that Article 5 of the Draft Code is one of the most widely discussed provisions for its extensive and detailed disclosure obligations for adjudicators and candidates.

Discussion then moved onto the second sentence of Article 5 (1) of the Draft Code which states that adjudicators and candidates shall disclose any interest, relationship, or matter that could reasonably be considered to affect their independence or impartiality. The second sentence adopts an objective standard based on the perspective of what a reasonable third person would consider affecting an arbitrator’s independence and impartiality. The current ICSID Rules and the IBA Guidelines on Conflict of Interest in International Arbitration (IBA Guidelines), on the other hand, are based on a subjective test, and require the disclosure of circumstances that might cause the parties to question the arbitrator’s independence and impartiality.

Policy of enhanced disclosure

Thereafter, the first speaker stated that on a bare reading of Article 5 (2) of Draft Code, it is clear that the policy is to enhance disclosures. This is abundantly clear from the Draft Code’s commentary which states that “the policy reason underlying the disclosure requirement is to permit a full assessment by all parties and to avoid possible problematic situations during the proceedings”. The question which arises is whether this formalistic approach to disclosure will have unintended consequences, and might lead to more arbitrator challenges overall resulting in higher cost and delay and eliminating honest candidates. On the other hand, the approach could lead to consistent practice among arbitrators.

Further, the Draft Code under Article 5 (2) (a) proposes that adjudicators and candidates be required to disclose any relationships that have existed within the previous five years. The commentary states that the existence of relationships earlier than five years previous is presumed to be too remote to create a conflict. A relationship that existed before the five-year threshold but could reasonably affect the adjudicators’ independence or impartiality would still be subject to a duty of disclosure in accordance with Article 5(1). It is interesting to note that the amendment to the ICSID Rules also adopts the five -year period. In this context, the question arises whether the five-year period strikes the right balance? Or is it overly burdensome, given the list of items that need to be disclosed under 5(2)(a)?

Disclosure of Third-party interest

The first speaker then discussed Article 5(2)(a)(iv) which obligates the adjudicator or candidate to disclose any significant relationship with any third-party funder within the past five years. It was pointed out that the provision raises various questions. An arbitrator can only know whether it has a relationship with a third-party funder if the identity of the third-party funder is known. This may be possible under the proposed amendments to the ICSID Rules which incorporates an affirmative duty for the parties to disclose the existence of third-party funding when filing the Request for Arbitration. However, the problem arises where the applicable rules don’t require disclosure of third-party funder. In view thereof, how is a prospective arbitrator to know whether they have a relationship with a third-party funder involved in the arbitration?

The Draft Code does not seek to regulate repeated appointments but instead proposes extensive disclosure of “all ISDS [and other [international] arbitration cases]” where the arbitrator has been or is involved in one of various capacities i.e., as counsel, arbitrator, annulment, committee member, expert, [conciliator or mediator]. There is no five-year time limit and it suggests that all ISDS and International cases (both commercial and investment cases) will have to be disclosed. This requirement is wider than under the proposed amendments to the ICSID Rules.

Issue conflict

Similarly, Article 5(2)(d) requires disclosure of all publications and [relevant speeches] without any time limit. Questions arise on necessity and practicability of this requirement, which diverges from the approach of the IBA Guidelines which include previous expressed legal opinions in the list of green items that do not need to be disclosed.

General questions for discussion

The first speaker concluded by stating that various other issues may arise from the interaction between the Draft Code and other rules on disclosure that might govern the arbitration. E.g. the current proposal for amendments of the ICSID Rules has less extensive disclosure obligations as compared to the Draft Code. Similarly, specific investment treaties at issue might have rules on disclosure that differ from the code.

Article 12 addresses the enforcement of the code and contemplates various options for enforcement. However, the Draft Code does not address how the disclosure obligation has to be implemented. Whether the disclosure procedure should be under the control of a central mechanism or should instead rest with the arbitrator (self-policing)? Who might play the role of enforcing the disclosure obligation?

3. The Second Speaker – Article 6 – Limiting of roles

At the outset, the second speaker stated that Article 6 of the Draft Code addresses the concern that an adjudicator who is involved in other ISDS or other international proceedings in different roles would lack sufficient independence and impartiality because of the multiple roles played. Article 6 of the Draft Code essentially aims at limiting additional roles and it is a hotly debated article which is evident from the various square brackets in the Draft Code. Four elements may be considered under Article 6 of the Draft code:

(i) The consequences arising from Article 6 – whether it should prohibit multiple roles or merely seek disclosure of multiple roles;

(ii) The scope of Article 6 – whether it should extend only to counsel and arbitrators or also to witness, experts or any other relevant role;

(iii) Time period – whether it should be limited to concurrent service as arbitrator in one case and counsel (or any other role) in another case or also extend to previous and subsequent service as counsel; and

(iv) The factors to be considered when regulating multiple roles – (a) same parties involved; (b) same facts involved; and/or (c) same treaties involved.

Thereafter, the second speaker stated that, as a code of conduct, the draft does not necessarily only reflect perceived existing rules relating to conflict of interest but may also reflect much broader rules desired for policy considerations. In view thereof, the second speaker first provided an overview of (arbitral) jurisprudence and guidelines addressing conflict of interest due to arbitrators wearing multiple “hats”. Thereafter, various issues from a policy perspective were addressed i.e., issues that may be regulated and the potential consequences of regulating these issues.

Overview of jurisprudence and guidelines regarding multiple roles

The second speaker focused on the most frequent combination of roles, namely that of arbitrators also acting as counsels, and distinguished the following constellations: (i) same parties involved; (ii) same facts involved; or (iii) same treaty involved.

(i) It was explained that, under the IBA Guidelines, serving as an arbitrator concurrently with representing or advising one of the parties in another case is considered a red list item, i.e. one which raises justifiable doubts as to the arbitrator’s impartiality and independence. Additionally, past service as counsel for one of the parties within the last three years is considered an orange list item, i.e. one which should be disclosed.

(ii) Where arbitrators concurrently serve as counsel in cases involving the same or similar facts, in a number of challenge decisions the person concerned has been given a choice to withdraw either as a counsel or as an arbitrator. Accordingly, this jurisprudence takes no issue with past service, including counsel work just terminated. Once a person has terminated their role as counsel, a conflict of interest no longer exists. As an illustration of what kind of issues some courts and tribunals consider as similar or having something in common with another case, the second speaker referred to the example of The Republic of Ghana vs Telekom Malaysia Berhad, where the District Court of The Hague decided that Prof. Gaillard’s role as counsel in the annulment proceedings in RFCC v Morocco was incompatible with Prof. Gaillard’s position as arbitrator in the Telekom Malaysia arbitration because in the latter Ghana relied on the RFCC Award. The District court therefore asked Professor Gaillard to step down from the counsel position which he eventually did.

(iii) As regards cases where the same treaty is involved, the decision in the ECT arbitration KS Invest vs Spain was referred to, where Kaj Hobér was challenged as arbitrator because he was concurrently acting as a counsel for North Stream 2 in an ECT arbitration against the European Union. Spain argued that there would be a conflict of interest as similar legal problems under the same treaty (the ECT) will be discussed. The Chairman of the ICISD Administrative Counsel ruled on the challenge and held that there is no conflict of interest as the disputes concern different parties, different sub-sectors of the energy industry, and different measures.

In conclusion, the second speaker summarised the above jurisprudence and guidelines as follows: Service as arbitrator in one arbitration and as counsel for one of the parties in another is considered incompatible if such service is concurrent, while prior counsel work within the last three years has to be disclosed. In relation to the same facts, concurrent service of arbitrators and counsel is considered to be incompatible. Prior counsel work does not appear to be incompatible. As regards cases involving the same treaty, there is still only limited jurisprudence

Policy Considerations

It was pointed out that if one wanted to further restrict multiple roles for policy reasons, likely the most relevant areas would be rules relating to counsel work before and after acting as arbitrator and whether to limit “double hatting” restrictions to having multiple roles in disputes under the same treaty. In this context, reference was made to the approach adopted by the EU in different multilateral treaties (e.g. CETA, EU-Singapore, and EU-Vietnam). Under these treaties, the provisions dealing with multiple roles are very broad: Concurrent service is prohibit under “any international agreement”. After acting as arbitrator, the person may inter alia not act for one of the parties in arbitrations under the same treaty. The 2019 Dutch Model BIT not only prohibits concurrent counsel work but also prior counsel work in any ISDS disputes in the five years prior to acting as arbitrator. Conversely, the US-Mexico-Canada agreement (USMCA) is less strict as it only prohibits concurrent counsel work in cases under the USMCA.

Questions for discussion

As questions for discussion, the following were proposed, inter alia: What is the reason behind prohibiting arbitrators from subsequently acting as counsel, in particular in cases under the same treaty or with regard to the same facts? Do the participants share the analysis of tribunals that an arbitrator is not influenced by positions argued as counsel on a similar issue? And, of course, what would be the consequence of far-reaching limitations on multiple roles?

4. The Third Speaker – Article 8 – Arbitrator’s availability

The Third Speaker considered a few seminal questions that arose in the context of Article 8 of the Draft Code.

Genesis and drafting history of Article 8 of the Draft code

In considering the genesis and drafting history of Article 8, the third speaker stated that it was manifestly clear from ICSID’s Working Papers II and III on the amendments to the ICSID Arbitration Rules, that member States and the public desired that arbitrators be made to adhere to a code of conduct in relation to their availability. At its 38th Session, the UNCITRAL through its Working Group III considered the possibility of a code of conduct for arbitrators and deliberated on whether such a code should contain any provisions governing the availability of arbitrators. This was a part of the genesis of Article 8 of the Draft Code.

Then the discussion moved on to the drafting history of Article 8. It was pointed out that Article 8 was based on the model declaration annexed to the UNCITRAL Rules on Arbitration, which requires arbitrators to devote the time necessary to conduct the arbitrations in which they sit. The UNCITRAL Rules, however, do not provide any mechanism for enforcing the declaration. UNCITRAL’s Working Group III did not address this issue during the 38th Session and simply noted that arbitrators should not accept appointments if they cannot carry out their duties promptly.

ICSID had a more comprehensive discussion on the question, as is evident from paragraph 307 of the Working Paper I, which reads as follows: “…This requirement has been added in light of the comments expressing concern about delays in proceedings occasioned by extended periods of arbitrator unavailability, and by some arbitrators accepting appointments despite insufficient availability. The requirement is intended to provide the parties with specific information regarding the availability of the arbitrators in their dispute. The addition of this requirement does not convey any change in the applicable standards for the challenge of an arbitrator.”

In view thereof, it is clear that the intention of the declaration under Draft Arbitration Rule 19(3)(b) of ICSID Working Paper IV was to provide the parties with specific information regarding the availability of arbitrators. However, the scope of Article 8 (2) of the Draft Code is much wider, i.e. it does not merely provide information to the parties concerning the availability of arbitrators, but attempts to limit the number of appointments that an arbitrator can accept.

Availability of an arbitrator

The current declaration (under Rule 6.2 of 2006 ICSID Arbitration Rules ) does not require arbitrators to make any commitment as to their availability. However, the declaration under Draft Arbitration Rule 19(3)(b) of ICSID Working Paper IV requires arbitrators to commit their time and availability to the effective and efficient performance of their duties.

Further, ICSID’s Working Paper II reveals that States raised concerns about arbitrators’ availability and one State proposed that there should be a cap on the number of appointments accepted by arbitrators. This suggestion was originally brushed aside by ICSID, which stated that the proposal had already been dealt with in its Working Paper III. Curiously, however, the proposal was implemented in Article 8.2 of the Draft Code, which incorporates a provision capping the number of appointments accepted by an arbitrator.

Thereafter, the third speaker pointed out that the reason for discussing the Draft Code is ICSID’s suggestion to annex the Draft Code, once it has been finalised and adopted, to the arbitrators’ declaration under Draft Arbitration Rule 19(3)(b) . This essentially means that any arbitrator appointed under the ICSID rules will be bound by all of the provisions incorporated in the Draft Code. Therefore, the questions for discussion include whether (i) an arbitrator can be restrained from accepting more than a certain number of appointments, (ii) any efforts can be made to enforce such a policy and (iii) self-restraint on the part of arbitrators is the only plausible approach to the question.

Further, it was pointed out that the rule on incapacity under the ICSID Arbitration Rules has been amended to include an arbitrator’s disqualification on account of his or her failure to perform the required duties. In this regard, it has been suggested that where arbitrators are found not to have sufficient time for tribunal proceedings or hearings, the parties may seek to disqualify the arbitrator in question on the ground that he or she did not perform the required duties. Thus, the rule allowing for the disqualification of an arbitrator owing to his or her failure to perform the required duties is arguably one of the greatest checks against arbitrators’ lack of availability.

The third speaker concluded by pointing to the example of Vacuum Salt, where Judge Jennings advised ICSID that he would accept his appointment (as President) only if he were allowed to remain absent from the Tribunal’s oral proceedings. Further to this arrangement, Judge Jennings was not present at the Tribunal’s first session. He was absent from the Tribunal’s second session too. He ultimately did participate in the deliberations allowing issuance of the award. There was however no suggestion form either party that Judge Jennings had failed to perform the duties required of him as president of the Tribunal.

5. Discussions

Thereafter, Ketevan opened the floor for discussion to the participants. In addition to the questions raised by the speakers, this section incorporates the questions, queries, and issues raised throughout the discussion. Some of the issues raise pertinent legal questions – it would be nice to have the views of the readers on these issues.

1. Overall the feeling was that the Draft Code is a weak document. In addition to the lack of effective substantive provisions, the Draft Code is poorly drafted creating confusion and contradictory statements.

2. Some participants considered that the distinction in Article 6 with respect to the same parties, the same facts, and the same treaties does not answer the problem of double hatting. There were suggestions that the code should have taken a stronger stand regarding double hatting, i.e. either to retain the possibility of multiple roles or do away with multiple roles completely. In this regard, as drafted, the participants questioned the benefit of restrictions on double-hatting and raised concerns with regard to failing to promote diversity and the disadvantage it might have on un-represented groups, or young practitioners, for whom the current article might further reduce the chances of being appointed.

3. Article 5(2)(d) of the Draft Code requires disclosure of any relevant publications or public speeches. It was echoed that this provision is vague, as drafted, as it uses ambiguous terms (e.g. relevant public speeches) that can be interpreted broadly, while serving little purpose for meaningful disclosure, which is likely to aid unmerited arbitrator challenges.

4. Some participants were of the view that issue conflict vis-à-vis prior publication is not a critical point as it is in the green list under the IBA Guidelines. The critical issue which needs consideration is whether there is an issue conflict in relation to a legal position taken by adjudicators in prior cases. The debate of issue conflict vis-à-vis the legal positions taken by adjudicators in prior cases is not dealt with in the commentary on the Draft Code. It was considered unclear whether the Draft Code thereby wanted to leave the debate of issue conflict arising from the legal positions taken by adjudicators in prior cases wide open or confirms the understanding that prior legal positions taken in a case do not pose an issue conflict.

5. Third-party funders – what would be the consequences if an arbitrator were not to disclose the relationship with the third party which has an indirect interest in the dispute? Will mere non-disclosure of a relation with the third party funder amount to lack of independence and impartiality? Some participants were of the view that mere violation of the disclosure obligation in relation to the third party funder without any additional violation is not sufficient for a successful challenge.

The discussion went beyond the scheduled time and Ketevan stepped-in to close an engrossing discussion, which gives reason to continue the discussion with the participants on another occasion, hopefully soon.

Coming out of the Closet: Third-Party Funding in International Arbitration

by Andrii Hubai*

The recent rise of third-party funding in international arbitration has opened a completely new dimension for arbitration itself. An opportunity of funding the parties of the process became a big deal breaker in many aspects that are visible at a first glance and those hidden behind the privacy clauses of funding agreements. This article is prepared in order to dive the readers into the changes of the procedural part: what circumstances change the vectors of development, who benefits from uncovering the financial facts, etc? The new figure comes into play and it is necessary to simulate possible variations of how it can influence the whole “game” of arbitration.

Introduction

Since 2012 the third-party funding (hereinafter – “TPF”) market has grown rapidly by 500%, this figure corresponds to the increase of agreements and actual investors looking for particular cases.[1] Consequently, the topic of uncovering those who sponsor this market is currently on agenda of practitioners.

The urge that drives us to discuss such issue comes from the importance of such field for the business community in general. International commercial arbitration stays on the crossroads of law and trade while providing with solutions and benefits to both. It is important to improve this legal instrument and to keep it up to date so that the end consumers (private companies with impressive turnovers) are facilitated and satisfied. Even more, the world economy depends on arbitration, the GDP of every country directly depends on how the businesses make the deals and, in case it is necessary, solve possible disagreements with the help of arbitration. With this being said, we cannot undermine the importance of a single aspect of international commercial arbitration, especially the third-party funding.

The mentioned above issue starts to be addressed more often by the European research academia and international community on various levels. Notwithstanding, it is necessary to mention following: scientific majority, in most of the cases, while observing such aspect, highlights the issue irregardless of the physical borders since international commercial arbitration presumes no borders in its essence. It is an autonomous field with its own fundamental regulatory acts (New York Convention 1958)[2] but yet very customizable and rather free from local obligations. This article will highlight the progress on different levels (countries, supranational organisations etc) but purely for informative reasons in order to underline the progress that has been done around the globe.

The research is based on the recent academic publications and statistical data from the circle of European and international academics (David Abrahams, Derric Yeoh, Edouard Bertrand, Jeniffer Trusz, Jern-Fei Ng etc.) solely on the matters of the third-party funding. For those readers, who are not fully accustomed with the basics of the international arbitration, the author recommends to refer an attention towards the books of Gaillard Emmanuel[3], Margaret Moses[4] and others. Alongside the work, particular scientific methods were used so to achieve the best result possible, among them: comparison method, historical method, statistical method, model method etc.

While drafting the practical part, the briefings of the private companies, particular cases and recent professional opinions were utilised in order to provide the readers with the insights coming from the real business world (e.g. roundtable discussions of private companies). However, elaborating on the practical part still appears as a challenge due to a high level of privacy. 

  1. The battle of transparency against the privacy

When entering into the TPF, the funder is rather not interested to be revealed due to a simple reason of confidentiality in the business world[5]. It is fair to say that the same reason was one of the triggers for creating the arbitration in general – so to avoid extra eyes glancing the disputes.

However, nowadays trend prioritises the transparency over confidentiality in the matters of international arbitration. In the Queen Mary International Arbitration Survey 2015[6] many practitioners expressed strong desire in the need of TPF being disclosed. However, the most peculiar aspect was that soft law was chosen as the way of how to implement such desire. The business, as usual, wants it to be less radical. Nevertheless, many national legislators have gone further and decided not to limit themselves only with the soft law but to envisage a mandatory clause obligating the parties to disclose the TPF in arbitration relations.

It seems rather clear that this aspect starts to be addressed more often on all the levels: (a) National, (b) Regional and (c) Institutional. In author’s opinion, such differentiation represents the best overall picture by going one layer after another with providing the notorious examples on each level.

(a) National level

Australia is considered as a forerunner in funding the arbitration by third parties. It is a big industry that was first limited to bankruptcy cases but subsequently expanded on civil matters of all kinds. One of the major cases that helped the TPF to spread and gain its power was Campbells Cash & Carry Party, Ltd. v Fostif Party Ltd.[7] that provided the funder with a wide range of control over the case itself.

The Australian High Court confirmed that funding agreement was not in abuse of local laws.  Thus, the claim of the opponent based on such ground was dismissed. The panel justified the presence of the funders and the influence over the case in various matters: appointment of own legal team, deciding on the crucial aspects concerning settlements, variations in choosing the defence tactics etc. Such case, accordingly, triggered the changes on the legislative level based on the argument of support of consumer rights.

The High Court of Australia added that any risk of over influencing the case should be precluded by the professional code of conduct, which always stands, regardless of the legislation gaps concerning the TPF. Such rules oblige the advocates to perform on behalf and in the best interest of the client.[8]

Recent legislative update coming from Singapore prescribes the requirements necessary for the TPF being revealed to the parties. It became obligatory to disclose the fact of funding together with the identity of the funder.[9] Nevertheless, the terms of the agreement may still be kept confidential.

Furthermore, there are some sanctions expected to appear when the funder constitutes non-compliance with the funding agreement in Singapore. This is done so to avoid any bias happening during the arbitration process when the other party may expect the opponent to have the financial support but be mistaken by that.

The reason for such updates lies behind the aspirations of Singapore to strengthen its position at the arbitration market in Asia[10] and to keep up with the modern trend of sponsoring arbitration, which has been already utilised by other well-known arbitration arenas (London, Hong Kong, Vienna etc).[11]

(b) Regional level

The update concerning the disclosure of TPF also came from the European Union, which is currently seeking the conclusion of FTA agreement with Vietnam and other international partners[12]. The clauses requiring the TPF to be disclosed in the arbitration proceedings have been envisaged into the mentioned above FTA agreements. Such clause prescribes to notify the tribunal of arbitrators about the fact of TPF, nature of the agreement itself and the contact details of the funder (full name, address). No other details are required.[13]

The same applies for the EU-Canada relations – the update on the free trade agreement was carried out by the partners and constituted into the Comprehensive Economic and Trade Agreement (hereinafter – CETA)[14]. While resolving the disputes in a specially created tribunals, CETA obliges third-party funders to be immediately uncovered.[15] Even more, the fact of sponsorship may be taken into account by the tribunal while deciding on allocating the security costs. The usage of such controversial method does not receive much of appreciation from the side of the author. The funders are not amused of the possibility to be engaged as a party of the process since this might oblige to pay more than the funding contract prescribes.

Nevertheless, such a tribunal is an ad hoc being exclusively created for the purposes of resolving disputes arising from the trade relations between the partners and should not be influencing the trade relations outside of its scope nor be a precedent for other cases.

(c) Institutional level[16]

The first attempts to regulate the TPF by the arbitration institution were carried out by the Association of Litigation Funders of England and Wales. Such organisation came up with the first in kind Code of Conduct for the mentioned above industry.[17] Later one the practitioners commented[18] that such Code was rather vague leaving big blanks in most important areas without being actually binding for those, arbitrating outside the institution.[19] However, the problem of obligation to follow the rules in particular jurisdiction will always stand due to shortcomings of international law. The positive influence that brings such endeavours rests in attempts rather than actual results.

The Singapore International Arbitration Centre has also released new arbitration rules that fit purely for investment arbitration. Such rules provide with explicit power for arbitrators to order the disclosure of TPF while deciding on the particular case.[20]

Additional aspect that should be touched when commenting about the institutional level is an authority of such institutions in creating the lists of trustworthy funders along with the already known lists of arbitrators. The academicians[21] elaborate on this issue as an important aspect of the overall regulation of TPF worldwide. This step may also bring in line all the requirements necessary for the funders to be achieved in order to sponsor the party of the process. It seems quite complicated for the author to imagine unified standards of compliancy for the funders across the world. However, it is a good trend towards regulating the field. To add to this, it is better to have different requirements at different institutions than to have none at all.

  1. The Client-Funder-Lawyer triangle

When the funder swirls into the arbitration, it breaks the standard lineal Client – Lawyer relationships by creating a triangle of Client – Funder – Lawyer relationships. Moreover, the funder himself stands on top of them. Depending on the funding agreement, the sponsor may exercise almost full control over the case, the so called “hands on” approach (deciding the arbitrators panel, lawyer, position of the party and forming the position up until the final order or deal with another party) or take it easy and observe the situation from the side (“hands off” approach).[22] Considering the fact that every investor cares about the income he will receive from the money invested, it is reasonable to think that most of the funders might want to influence the case at least at some manner and engage into the process their own legal team.

Edouard Bertrand, in his book underlined that the funder, in a strictly legal sense, is not a party to arbitration since one does not receive any rights or obligations. However, in an economical sense, the funder is a party due to a reason that if the opponent raises a strong defence, it will influence the defendant and the funder in a direct manner.[23] Thus, even not present at the hearings physically, he receives the same legal “punch” as a defendant.

Due to that, the funder is ought to influence both the client and the lawyer in case he wants to recover his money. The right to decide partially passes to the one who sponsors the whole process. When the client might want to agree on the deal with another party without going further, the funder might not be willing to agree with this and will try to push it forward just because such deal will not bring expected profits. Meanwhile, the lawyer, who de jure owes the duty to the client, de facto shifts such duty to the funder. This turns out in giving such advices to the client that are not necessarily in his best interest simply because the funder has decided on particular lawyer and he is his paymaster.

This triggers the ethical question that might stand on the path of the future of the TPF. However, we might argue in defence that the TPF agreement, as any other private contract, can be terminated by the request of one of the parties. Even though it seems that the funder is on a top of a “TPF triangle”, the client can go beyond that and simply break the deal by refusing the interference of the funder. However, this seems rather illogical since the main idea of TPF is to receive the money for the purpose of arbitration. Thus, both, the client and the funder have one common aim – to win the case and to recover the damages meaning that they are well aware about the rules of the game and are willing to play it. Even more, neither client nor funder will go for such extremes since they both act in a reasonable way with pursuing the same interest.

  1. Modes of disclosure

 While discussing the institutions and countries being concerned by such issue, it is worth mentioning the types of disclosure used in arbitration process. We will explore such phenomena based on distinctive feature of the amount of information that is revealed about the TPF:

(а) Full disclosure

It is a very rare case when full disclosure may occur. The principle it is based on, is giving the full information about the funder, the funding agreement and other details including price, the interest rate etc. Such approach may infringe the sanctity of the private contracts and fundamental principles of civil law. The only justification for full disclosure may be reasoned by the need of affirming the fact that arbitrator is independent while deciding particular case. It might be invoked when there is a negative and possible likelihood for the arbitration process to be terminated in the middle, or even worse – at the final stage due to dependency of the arbitrator.[24]

Nevertheless, it is possible to avoid such an extreme measure with the improvement of arbitration rules, especially on the institutional level. Jeniffer Trusz in the article “Full Disclosure? Conflicts of Interest rising from Thid-Party Funding in International Arbitration” proposed simple but yet extremely useful solution.[25] The professor offers a four-step system of rules that should be incorporated by the arbitration institutions for the mechanism of disclosure of TPF without the need of going into full disclosure.

 

(b) Partial disclosure

This form of disclosure respects the sanctity and privacy of the agreement concluded between the funder and the funded party. It requires disclosing the mere fact of the funding without going into details and informing about the terms of the agreement. One of the issues that may arise in this case is that the TPF may be nominal, meaning that the opponent may not know for what exact amount the party was funded (it can be full funding or partial). On the other side, the influence that it brings for the case may exceed any expectations in a positive manner – another party may be willing to settle the dispute without even having the knowledge about the minimum funding level.

Notwithstanding, what if the price of the funding agreement is $1 USD? The opponent and the panel will not be aware about such details since, usually, they are not revealed – only the mere fact of sponsorship is communicated to the parties of the process. Thus, the opponent may make an offer based on the knowledge that the other party is sponsored without realising that the amount of investments equals to almost nothing. This creates a negative influence on the arbitration process leaving the opponent being not well informed and because of that, the opponent might be forced to make an offer which he would not make otherwise. This issue is something fresh on the “TPF market” since it has not been discussed yet.[26] In order to eliminate this gap, the arbitration institutions might consider including the obligation to reveal the price while drafting the update of rules.

For better or for worse, TPF has conquered most major arbitration arenas leaving the practitioners and academics with the urge of proposing the way how such mechanism may be smoothly implemented into the whole architecture of arbitration.

  1. The changes: positive-negative ratio

If we consider the benefits of disclosure, many positive aspects may be mentioned. One of the most important – elimination of the possible conflict of interest between the revealed funder and other parties of the process, support of justice by providing the weaker party with an opportunity for defence, rise of economy by boosting the investment industry and, the last but not least, changing the negative approach towards the mechanism of TPF.

Australian experience shows the following: it is confirmed statistically that the cases being funded by the TPF are less likely to be reversed and are more citied in the scientific researches. The reason behind that is the funder himself, who assesses the case thoroughly with selecting the lawsuits that have prediction of winning at least of 70%.[27] It may sound as an exaggeration, but the TPF will be a story of success because it deals with successful cases in the matters of the trustful parties, reliable panel of arbitrators etc. Thus, there is no reason for the funder to hide in the shade. The presence of the investments should be considered as an indication of quality mark.

These day, it is no longer a problem to get the side funding which was previously called maintenance or champerty in common law practise and was prohibited by most of the States.[28] Such definition traces back to the medieval ages aiming against fraudulent practices of high figures intermeddling into the court procedures.[29] The justification against that was straightforward: no gambling should be done when the justice is dispensed

Thus, no medieval practices are applied any more. There are many instruments available in order to indicate the fraud rather than prohibiting the whole industry based on the “once and for all” principle. Both parties of the process are free to get the funding; the only matter is to check whether it does not influence the arbitration process in a negative manner. A good way to ensure this is to come up with an update of institutional rules, which is already on its way. Even more, the author suggests to consider the opportunity of creating the new treaty –  the New York Convention II [30]aimed to facilitate this sphere and other potential fields lacking the uniformity in regulation. Such proposal will become a new chapter and logical continuation of the original Convention.  Additionally, it as a chance to power up the positive influence over the arbitration industry while sticking to the uniformity principle.

The pro argument of proposing the New York Convention II is the interest of the states to become signatories due to purely economic reason. It may sound harsh, however it is a proven fact that majority, if not all signatory states follow the New York Convention 1958 impeccably. Even such a big player at the international arena as Russia, which at times is not willing to implement he decisions of the European Court of Human Rights[31], strictly follows the New York Convention 1958 on the matters of arbitration. The reason for that is simple – the money matter makes its influence. It is in the best interests of every state to create good conditions for arbitration in order to gain from that. Unlike, for example, the Convention on Human Rights[32] which brings to the State nothing but the economic loss.[33]

The same mechanism of “money reason” was put before and should be inserted into the fundaments of the new international treaty again. This will unify the rules on third-party funding in international commercial arbitration, and provide with the useful method of regulating the TPF industry.

What are the negative sides? While deciding, the arbitrator may put an obligation to cover the security costs by the funder, despite the mentioned already fact, that the funder is not a party of the process in a strictly legal sense. This pushes the investors to go behind the “curtain” of privacy clauses, again. Such fears have been offset by the recent cases. In Kardassopoulos v. Georgia case of 2010, it was confirmed by the arbitrators that the funder should cover no security costs[34]. However, it is quite complicated to change the overall attitude of the funders[35] just by a handful of cases. What needs to be addressed in here is the solid assurance of preventive clauses being put into arbitration rules of particular institutions confirming such approach.

The academician Derric Yeoh expresses an idea that TPF can become a slippery slope for the arbitration process due to many factors that have been mentioned already. However, it is not only the TPF that can do so, there are many potential risks arising every day in different legal fields, and not only the legal ones. Thus, much wiser move would be not to prohibit the TPF in particular parts but to create an instrument that regulates it.[36]

Meanwhile, it is obvious that positive aspects outweigh the negative ones without any doubts. Yet, the main approach in international arbitration concerning TPF was in applying the policy “Don’t ask, Don’t tell” which evidently has seen better days. This article became an opportunity to underline phenomena of third-party funding and guide the readers through the new path of more transparent arbitration process. The approach that is transparent not towards the public, but exclusively towards the parties of the process, meaning, that arbitration itself does not lose its major benefit – the privacy. It is fair to say that both parties including the arbitrators’ panel deserve to know who are the players behind the curtains, and whether they exist in general.

Overall, the main message that needs to be addressed as a closing line: TPF comes out of the closet. Third-party funding becomes public not in harm to the parties but for the benefits of the process.

Conclusions

Following the thorough research of the topic and applying various approaches so to receive the best result possible, following conclusions may be provided:

  1. The TPF is a recent trend in arbitration that becomes popular with astronomic progression. The statistical data shows the rise of interest among investors for more than 500%. This triggers the developing of new field of arbitration that is, however, lacks some primary regulation and universal approach.
  2. The countries, which are known as being world arenas for the international arbitration have already adopted the regulations concerning the TPF. This is a signal of importance of TPF and the call to the world governments to do the same.
  3. It is not only countries who update their laws, such changes have also reached out the regional and supranational organisations especially in the field of trade, for example, the trade agreements that have been highlighted (EU-Canada, EU-Vietnam) in this article give a clear understanding of importance of TPF on all the levels.
  4. International arbitration institutions that are relatively autonomous make their own effort towards updating the rules so to assist the TPF and to make it more efficient. Such institutions might become the locomotives, influencing the creation of more unified legislation for TPF.
  5. The changes of classical lineal relations “client-lawyer” in procedural part of arbitration were discussed. The entrance of the new figure into play – the funder, changes the weight system and shifts the lawyer’s duty to the person who sponsors him. Eventually this heavily influences the decisions of the party of the process who is behaving under the money influence from the funder.
  6. Additional attention was given to procedural aspect in the case where the party of the process is nominally funded so just to be called funded (e.g. the fact of the funding is existent, however the party receives only 1 US dollar). When the party receives the title of being funded, it changes the approach the opponent will take, without even realising that the funding agreement is nominal.
  7. The proposal of drafting the new international Treaty aimed towards regulating the TPF in international arbitration by example of the New York Convention 1958 was communicated. The author proposed simple but yet efficient method of assuring the implementation of such Treaty by the governments.
  8. Overall message that was distilled from the article comes as follows: “The changes make no harm to the essential value of arbitration – its privacy – but rather serve as an extra instrument in supporting the justice, if the process of sponsorship is done according to the commonly accepted standards.”

Footnotes

[1] DELANEY, J. Mistakes to avoid while approaching third-party funders. Global Arbitration Review, 2014, p..9.

[2] United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958, New York.

[3] GAILLARD, E. Legal Theory of International Arbitration, Martinus  Nijhof Publishers, 2010

[4] MOSES, M. The Principles and Practice of International Commercial Arbitration, Cambridge Press, 2008

[5] Roundtable discussion: Third Party Funding in international arbitration in Europe: Part 1 – Funders’ perspectives, International Business Law Journal, 2012, p.207.

[6] See official web-site http://www.arbitration.qmul.ac.uk/research/2015/ [last accessed 8 May 2017].

[7] Campbells Cash & Carry Party, Ltd. v Fostif Party Ltd (2006) 229 ALR 58 (Australia).

[8] Singapore Legal Profession (Professional Conduct) Rules, r. 2(2)(c).

[9] See official web site of the Parliament of Singapore https://www.parliament.gov.sg/sites/default/files/Civil%20Law%20%28Amendment%29%20Bill%2038-2016.pdf [last accessed 21 May.2017].

[10] KUSHUBO, H. Third-Party Funding in International Arbitration: Regulating the Treacherous Trajectory, Asian International Arbitration Journal, 2016

[11] News channel: see the web site http://www.channelnewsasia.com/news/singapore/two-bills-passed-to-boost-singapore-s-position-as-dispute-resolu-7554516 [last accessed 21 May.2017].

[12] Ashurst web-site: Third Party Funding in International Arbitration, 2017 see electronic article https://www.ashurst.com/en/news-and-insights/legal-updates/quickguide—third-party-funding-in-international-arbitration/ [last accessed 19 May 2017].

[13] EU-Vietnam Free Trade Agreement Article 11, p. 33. See the electronic copy: http://trade.ec.europa.eu/doclib/docs/2016/february/tradoc_154210.pdf

[14] Comprehensive Economic and Trade Agreement between EU and Canada. See the text on the official web site http://trade.ec.europa.eu/doclib/docs/2014/september/tradoc_152806.pdf [last accessed 07 June 2017].

[15] Dechert’s Law Firm, Theh EU succeeds in establishing a permanent investment court in its trade treaties with Canada and Vietnam,  Legal briefing from the Dechert’s International Arbitration,  2016.

[16] Author’s commentary: by the institutional level the author implies to the international arbitration institutions that are established by private entities or governments and provide their own rules (e.g. the Arbitration Institute of the Stockholm Chamber of Commerce etc). The research would not be full without mentioning such institutions.

[17] Association of Litigation Funders of England and Wales, Code of Conduct for Litigation Funders, 2011.

[18] BLACKABY, N. & REDFERN, A. Law and Practice on International Commercial Arbitration, Sweet & Maxwell London 2004 p.34-12

[19] U.S. Chamber Institute for Legal Reform Comments on the Code of Conduct for Litigation Funders, U.S. Chamber Institute for Legal Reform 2-6, 2011.

[20] SIAC Investment Arbitration Rules 2017; and the official web-site http://www.siac.org.sg [last accessed 05 May 2017]

[21] SAHANI, V. Judging the Third-Party Funding. UCLA Law Review, 2016, p.389.

[22] BENCH, L. & SHANNON, V. Third Party Funding in International Arbitration, 2012, p. 4-12

[23] BERTRAND, E. The Brave New World of Arbitration: Third-Party Funding, ASA Bulletin, 2011 p.610.

[24] LANDI, N. The Arbitrator and the Arbitration Procedure: Third Party Funding in International Commercial Arbitration – An Overview, Austrian Yearbook of International Arbitration 85, 2012, p.96

[25] TRUSZ, J. Full Disclosure? Conflicts of Interest Arising from Third-Party Funding in International Arbitration, 2013, p.1661-1673.

[26] Such comment is made based on the best knowledge of the author/

[27] ABRAHAMAS, D. & CHIEN. D, A Market of Justice: A First Empirical Look at The Third Party Litigation Funding, 15(4) J.Bus. L. 1075, 2014, p.1105-1106.

[28] REDERN, A. & HUNTER, M. International Commercial Arbitration, Thomson Sweet & Maxwell 2004, p.10-17

[29] JERN-FEI, N. The Roles of the Doctrines of Champerty and Maintenance in Arbitration, Essex Court Chambers, 2010.

[30] In this matter the author refers to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 as a great example of unified regulation of international commercial arbitration across the world.

[31] News article: Russian Federation: Constitutional Court Allows Country to Ignore ECHR Rulings, Library of Congress 18.05.2016 see the official web site http://www.loc.gov/law/foreign-news/article/russian-federation-constitutional-court-allows-country-to-ignore-echr-rulings/ [ last accessed 09 June 2017].

[32] The Convention for the Protection of Human Rights and Fundamental Freedoms, 4.11.1950, Rome.

[33] Author’s commentary: by highlighting this aspect, the author does not, in any matter, tries to undermine the importance of the European Court of Human Rights or deprive the importance of fundamental rights. This comment rather serves as a message to the society on nowadays disbalance in various rights and how different the approaches of governments to different corpus of rights. The same situation is applied not only to the Russian Federation but also to Ukraine and other European States.

[34] Kardassapoulos case, ICISD Case Nos. ARB/05/18, ARB/07/15.

[35] KIRTLEY, W. & WIETRZYKOWSKI, K. Should an Arbitral Tribunal Order Security for Costs When Impecunious Claimant Is Relying Upon Third-Party Funding, Journal of International Arbitration, 2013, p.17-30

[36] YEOH, D. Third Party Funding in International Arbitration: A Slippery Slope or Levelling the Playing Field? Journal of International Arbitration 33, no.1, 2016, p.115-122.


* Andrii Hubai, Vilnius University, Law Faculty, LL.M student in International and European Union Law; email: andrii.hubai@gmail.com

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.

 

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, dghenriques@bch.ptwww.bch.pt.