This article was originally published in Law360 and can be accessed here.
Leigh Crestohl, Partner
Petar Petkov, Solicitor
Investment arbitration usually relates to cases where a sovereign State breaches its obligations toward a foreign investor (e.g. by expropriating an investor or failing to provide fair and equitable treatment) under international law. Since this dispute resolution process can be expensive and sometimes even unaffordable for small and medium-sized enterprises (“SMEs”) or individuals, third-party funding (“TPF”) can be a lifeline for such claimants and allows them to bring claims against States that would have been impossible to action otherwise. Increasing, even well-resourced investors have discovered the advantages of TPF as a useful tool to hedge risk or make capital available for other business ventures while the claim is ongoing.
However, TPF poses certain challenges to the manner in which investment arbitration proceedings are managed. In order to deal with such challenges, namely, to prevent conflicts of interests and enhance transparency, recently amendments have been proposed to the Arbitration Rules of the World Bank’s International Centre for Settlement of Investment Disputes (“ICSID”). These include inter alia a new rule that obliges parties to disclose the existence and name of any third-party funders and an expansion of the definition of third-party funding (“TPF”).
The proposed changes are set out in Working Paper No. 3: Proposals for Amendment of ICSID Rules in August 2019.
Proposed amendments to the ICSID Arbitration Rules
At a consultation in Washington, DC in November 2019, representatives of the ICSID Member States recognised that TPF is a “widely available mechanism that provides important systemic benefits, for example, by enhancing access to arbitration” for SMEs.
At the same time, some States remain concerned about the existence and potential impact of TPF, in particular, regarding transparency of such funding arrangements and conflicts of interests. A proposed new Rule 14 would oblige parties to disclose the existence and name of the TPF provider; however, there would be no general obligation for a party to disclose the nature of the funding arrangement or its specific terms. The arbitrators would also be obliged to declare that they are conflict-fee in respect of the relevant funder.
The new proposed Rule 14(1) no longer expressly States that the disclosure of TPF is relevant “[f]or the purposes of completing the arbitrator declaration […]” as in the previous redaction of the proposed amendments. Instead Rule 14(4) would now require the ICSID Secretary-General to transmit any notice of TPF to any arbitrator proposed for appointment in order to allow the required declaration of independence to be completed with full knowledge of the stakeholders in the matter.
This a welcome amendment to Rule 14(1) that recognises that disclosure of TPF is relevant not only at this procedural step of the arbitration but has a wider impact on other aspects of the proceedings (e.g. impact on costs and on security for costs, disclosure of information to a funder not subject to confidentiality obligations, control or influence funders over the arbitration process, negative impact on the potential amicable resolution of disputes). On the other hand, the proposed new Rule 14(4) is helpful in providing parties with clarity as to the manner in which TPF notice will be dealt with by ICSID.
ICSID has also expanded the definition of TPF in the proposed Rule 14(1) to include “a donation or grant, or the provision of funds in return for remuneration dependent on the outcome of the dispute”, and made TPF a factor that ICSID tribunals may take into account when deciding whether to make an order for security for costs.
It is understood that some States had proposed provisions expressly requiring the disclosure of more details related to the funding arrangements, however, this proposal has not been accepted by ICSID. Instead, the Working Paper states that, if any further information regarding the funding arrangement is relevant to the issues in dispute, ICSID tribunals are already well-equipped to order the disclosure of additional documents or evidence (Art. 43(a) of the ICSID Convention and Rule 36(3) (current Rule 34(b)) of the ICSID Arbitration Rules) if such tribunals deem it necessary at any stage of the proceeding. Therefore, if a party believes that TPF has a wider impact on the procedure and specific information about the funding arrangements is required, it is at liberty to invite the tribunal to exercise its discretion in this respect. ICSID tribunals have already ordered parties to disclose the existence or identity of TPF using the powers that they have under the current rules.
In addition, some States have advocated for a new provision that would expressly allow ICSID tribunals to consider non-compliance with the proposed Rule 14 when allocating costs. This point is not covered in the new proposed Rule 14, instead a new proposed Rule 51(b) provides that a tribunal is to consider more generally the “the conduct of the parties during the proceeding” in allocating costs.
Finally, a new proposed Rule 52(4) provides that a tribunal may consider TPF as evidence informing of the presence of any of the “all relevant circumstances” (Rule 52(3)) in determining whether to order security for costs. However, the Rule makes it clear that the sole presence of TPF is not sufficient by itself to justify an order for security of costs. This revision is consistent with case law on TPF.
Separately, the UNCITRAL Working Group III on Investor-State dispute settlement also discussed TPF in Vienna in October 2019. Whilst acknowledging the importance of TPF for facilitating access to justice, the Working Group expressed concerns about the lack of transparency and regulation.
At the conclusion of the sessions, the UNCITRAL Secretariat was requested, working with ICSID and other institutions, to prepare draft provisions on TPF that could be deployed by States in their treaties or used in arbitration rules. These discussions are set out in the Working Group’s report.
Funders have an obvious attraction to investment arbitration cases, not only because States are respondent parties, but also because outcomes are relatively predicable and the quantum of damages is typically very significant. Therefore, TPF is bound to have an increasing important role in such matters.
The proposed amendments to the ICSID Rules are welcome in the context of the sensitivity around the issues of TPF and potential conflicts of interests. To a large extent, they reflect investment arbitration case law on TPF and good practice, therefore, if implemented, these amendments may strike an appropriate balance between the policy objective of providing access to justice while preserving the confidentiality of the funding agreement, while also reducing the risk that conflicts of interests may appear at a later stage in the procedure. It remains to be seen what concrete proposals UNCITRAL will put forward, and whether these will reflect the reflecting growing the consensus of the international community that, at least to a certain extent, TPF must be further regulated.
 E.g. Muhammet Çap & Sehil Inşaat Endustri ve Ticaret Ltd. Sti. v. Turkmenistan, ICSID Case No. ARB/12/6; EuroGas Inc. and Belmont Resources Inc. v. Slovak Republic, ICSID Case No. ARB/14/14.
 E.g. RSM Production Corporation v. Saint Lucia, ICSID Case No. ARB/12/10.