Third party funding in investor-state dispute settlement (ISDS) is a highly sensitive area, with allegations of mercantile buccaneers taking one-way bets against cash-strapped States at one end of the spectrum and, at the other, self-styled white knights helping the downtrodden to recoup losses suffered due to State oppression. (Generally, of course, the truth lies somewhere in between these two extremes.) Against this background, ICSID’s proposed rules revisions offer food for thought, but do they really demonstrate a good grasp of the issues that they seek to address? Matthew Knowles, a partner in our International Arbitration department, offers his thoughts, drawing on his experience both as a third party funder and a corporate user of third party funding.
Third party funding (TPF)
Article 21 of the new draft ICSID Convention Arbitration Rules proposes a continuing obligation to disclose the name of any third party funder to the Secretariat. The Synopsis of Main Changes states that this is to avoid inadvertent conflicts of interest.
An important aspect of the proposal, and one that is likely to prove contentious, is the definition of third-party funding: “The provision of funds or other material support for the pursuit or defense of a proceeding, by a natural or juridical person that is not a party to the dispute (“third-party funder”), to a party to the proceeding, an affiliate of that party, or a law firm representing that party. Such funds or material support may be provided: (a) through a donation or grant; or (b) in return for a premium or in exchange for remuneration or reimbursement wholly or partially dependent on the outcome of the proceeding.”
As the onus lies on a party to decide whether to disclose an arrangement, it would be helpful for ICSID to provide additional guidance around the meaning of the definition, in particular sub-clause (b), if it is finally adopted in these terms. This guidance might usefully include discussion as to whether the determinative factor is the substance of the arrangement or a matter of form. For example, a facility may be provided to a party on a full recourse basis but where the reality is that the financier will only be repaid if the claim succeeds. Similarly, financing could be provided through an equity investment where the only or substantially the only value in the company is the claim. Should either or both of those situations constitute third-party funding for the purpose of the definition?
Perhaps more controversially, the proposed definition would exclude contingency arrangements with a party’s law firm. A law firm acting on contingency would certainly provide material support for the proceeding and may well provide funds – for example, if, as part of the arrangement, it funded disbursements such as filing fees, tribunal fees, expert costs and any paid premium element of adverse costs cover. Indeed, the law firm typically has far greater influence on its client’s conduct of proceedings than a third-party funder, habitually advising upon issues that may have a substantial bearing on the development, costs and outcome of the case. Law firms are, of course, bound by their obligations to their client, as well as other regulatory obligations, but it is curious that the obligation to disclose should differ depending upon the nature of the stakeholder rather than on the nature of the stakeholder’s interest in the claim.
Security for costs and its inter-relation with third-party funding
New draft Article 51 proposes “a new, stand-alone rule allowing a Tribunal to order security for costs”. The applicable test is “the party’s ability to comply with an adverse decision on costs and any other relevant circumstances”. A failure to comply with an order to provide security would entitle the Tribunal to suspend the proceeding for up to 90 days, and thereafter, to discontinue the proceeding after consulting with the parties.
Notably, the Working Paper on the Proposed Amendments (at paragraph 267, see also paragraph 530) states: “Proposed AR 51 on security for costs is a new Rule and does not address the effect of TPF. Instead, proposed AR 51 requires the Tribunal to consider the responding party’s ability to comply with an adverse costs decision and whether a security order is appropriate in light of all the circumstances. As a result, the mere fact of TPF, without relevant evidence of an inability to comply with an adverse costs decision, will continue to be insufficient to obtain an order for security for costs under proposed AR 51. On the other hand, the existence of TPF coupled with other relevant circumstances may form part of the relevant factual circumstances considered by a Tribunal in ordering security for costs. This will be a fact-based determination in each case.”
This implicitly recognises the increasing use of TPF as a risk management tool by parties who could use their own resources to pursue a claim but prefer to use external non-recourse funding, for example for accounting reasons or so that they can use their cash for other business priorities. It also reflects the twin realities that for other claimants, obtaining third-party funding may be the only way that they can afford to bring investment claims given the consequences of the respondent State’s actions (see paragraph 528 of the Working Paper); and that the costs of posting security may be such as to stifle claims, because they would render the claim uneconomic from a funder’s perspective.
It will be interesting, if the Rules are revised as per the draft, to see how different tribunals approach applications for security. Clearly something more than the presence of TPF will be required for an order to be made, but what? Presumably a party’s ability to pay will be weighed with matters of overarching policy – for example, the desire to allow reasonable claims to proceed, as well as the counterbalancing wish to protect States from incurring substantial irrecoverable costs defending themselves against claims that ultimately fail, in addition to case-specific factors such as:
- The track record of paying adverse costs awards of the party or those who control the party (although this will rarely be present – RSM v St Lucia was an exceptional case in this regard);
- A respectable prima facie case on jurisdiction and merits, although tribunals are, of course, likely to have the power to dismiss claims that manifestly lack legal merit pursuant to new draft Article 35; and
- The claimant’s approach to quantum – whether the case involves a substantial loss of profits element or focuses on sunk costs.
Of course, if there is to be bifurcation or trifurcation, tribunals can take a staged approach to security. Furthermore, in order to find the correct balance for any particular case, tribunals need not decide the amount of security on an all or nothing basis. One approach that may well prove generally helpful is for tribunals to take the same approach as that recently adopted in the Garcia Armas case i.e. where they order security (whether or not TPF is in place), to make it express in the order that if the claimant ultimately prevails on its claims, the respondent State will be ordered to reimburse the reasonable expenses incurred by the claimant to post the security ordered.