The increased reliance on third-party funding (“TPF”) in investment treaty arbitration in recent years has led States and arbitral tribunals to examine the phenomenon more closely. Both the United Nations Commission on International Trade Law (“UNCITRAL”) Working Group III on investor-state dispute settlement (“ISDS”) reform and the International Centre for Settlement of Investment Disputes (the “ICSID”) are considering for the first time the inclusion of provisions regulating the use of TPF, addressing concerns such as the lack or apparent lack of independence and impartiality of arbitrators, and the cost of ISDS proceedings and security for costs (see Security for Costs in Investment Treaty Arbitration: More Certainty Expected under the Proposed ICSID Rules Amendments).
Proponents of TPF see this as an access to justice tool, allowing otherwise financially constrained investors to bring claims against States. Opponents on the other hand see TPF as enabling investors to exploit the ISDS systems at the expense of developing countries and their taxpayers, incentivizing unmeritorious claims and raising additional conflict of interest issues for arbitrators. The reforms proposed by both the UNCITRAL and the ICSID seek to address these concerns.
A. UNCITRAL’s Working Group III on Investor-State Dispute Settlement Reform
On 14-18 October 2019, the UNCITRAL Working Group III on ISDS reform will hold its thirty-eight session in Vienna, Austria.
As part of its agenda, the Working Group is expected to continue its consideration of third-party funding in ISDS, based notably on document A/CN.9/WG.III/WP.172 on third-party funding. The document provides an overview of possible reform options in light of the suggestions made during the deliberations of the Working Group at its thirty-seventh session, including (1) prohibiting third-party funding entirely in ISDS; and (2) regulating third-party funding by introducing mechanisms to ensure a level of transparency including through disclosures (which could also assist in ensuring the impartiality of the arbitrators), by imposing sanctions for failure to disclose, and by providing rules on third-party funders and on when they could provide funding.
The Working Group will also consider the various means of implementation of a third-party funding reform in ISDS, such as a prohibition or regulation developed so as to be included in arbitration rules, as model clauses with variants for investment treaties, or through an opt-in convention that could be modelled after the Mauritius Convention on Transparency in Treaty-based Investor-State Arbitration and the OECD Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting.
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B. The Proposed Amendments to the ICSID Rules
On 11-15 November 2019, the ICSID will hold its next in-person consultation with Member States regarding its third Working Paper (“Working Paper #3”) on the proposed amendments to the ICSID Rules.
Among the proposed changes is the inclusion of a provision regulating the use of third-party funding. Under proposed Rule 14, a party must file with the Secretary-General “a written notice disclosing the name of any non-party from which the party, its affiliate or its representative has received funds for the pursuit or defense of the proceeding through a donation or grant, or in return for remuneration dependent on the outcome of the dispute”. The notice must be filed “upon registration of the Request for arbitration, or immediately upon concluding a third-party funding arrangement after registration”.
In Working Paper #3, the ICSID maintains its position regarding the extent of initial disclosure, imposing a positive duty on parties to disclose funding. However, it does not create a general duty to disclose the funding agreement or the terms of the funding. To prevent conflict of interest, parties are only required to disclose the existence of funding and the identity of the funder throughout the proceedings. The identity of the funder is disclosed to the arbitrators prior to appointment to avoid inadvertent conflicts of interest. Additionally, arbitrators are required to confirm that there is no conflict with the named funder through the Arbitrator Declaration.
After the in-person consultation with Member States, the amended rules will be placed before the ICSID’s Administrative Council for a vote.
3. Third-party Funding in Investment Treaties
While arbitral tribunals are considering regulating the use of third-party funding in investment treaty arbitration, States should consider incorporating provisions on third-party funding into their investment treaties which would reflect their policy objectives.
For instance, the European Union-Viet Nam Investment Protection Agreement and the Canada-European Union Comprehensive Economic and Trade Agreement both regulate the use of third-party funding, using similar language as ICSID’s proposed Rule 14.
However, other treaties such as the Argentina-United Arab Emirates Bilateral Investment Treaty have gone one step further by including a prohibition on the use of third-party funding in ISDS. Similarly, the United States restricts TPF of domestic claims against the federal government.
Addressing third-party funding in investment treaties therefore allows States to prohibit or regulate its use in ISDS by, for example, including mechanisms that place the burden on the claimant to demonstrate that it meets certain criteria such as impecuniosity, exhaustion or local remedies, and clean hands, among other.