An ICSID tribunal recently issued an unprecedented order in Muhammet Cap & Sehil Inşaat Endustri ve Ticaret Ltd. Sti. v. Turkmenistan (Sehil) requiring the Claimants to disclose to the Respondent and the tribunal the identity and details of any party who is funding their claim and the nature of the funding arrangements (including the extent of the funder(s)’ interest in the Claimants’ successes).
A funded party might be concerned about having to disclose its funder’s identity and/or funding terms because:
- it may need to re-negotiate its funding agreement if disclosure would amount to a breach of its terms (highly likely if it contains a confidentiality provision);
- disclosure may highlight its impecuniosity, signifying an increased risk of liability for security for costs. Even if its funder is prepared to provide this security, this is likely to increase the overall cost of funding;
- although funders are outside the arbitrators’ jurisdiction, if a tribunal is aware of a funder’s existence, it could potentially direct the funded-party to procure from its funder a legally binding undertaking to pay all adverse costs up to the amount of the funder’s costs contribution in the event that the funded-party fails to satisfy a costs order. If the funder has not agreed to bear adverse costs liability, added pressure would result from the need to change the funding arrangements, which might entail new agreements with additional funders; and
- the other side may use the information to their tactical advantage by arguing that a “conflict” has arisen, thereby delaying the proceedings and possibly leading to a re-constituted tribunal if a “conflicted” arbitrator is replaced.
Disclosure of third-party funding in international arbitration: a new trend?
Third party funding is increasingly common in international arbitration, so much so that the ICSID tribunal in Alemanni held that its presence offered “no grounds in itself for objection to the admissibility of a request to arbitrate”. However, since none of the major arbitral institutions requires funded parties to disclose the existence of their funding arrangement, until recently, the assumption has been that disclosure would only be required in exceptional circumstances. The Sehil order, read in conjunction with the 2014 IBA Guidelines on Conflicts, could signal a trend towards disclosure of third-party funding information in international arbitration.
In Sehil, the tribunal considered it had inherent powers to make the order because it was “necessary to preserve the rights of the parties and the integrity of the process”.Four factors influenced its decision:
- The need to avoid conflicts of interest between third-party funders and arbitrators: it held transparency of a funder’s existence is important “to determine whether any of the arbitrators are affected by the [funder’s] existence”, taking into account the 2014 IBA Guidelines on Conflicts. These Guidelines characterise a third party funder having a direct economic interest in the award as being equivalent to a party and oblige a party to disclose any relationship, direct or indirect, between that funder and an arbitrator “at the earliest opportunity”.
- Respondent’s intimation of a future security for costs application:Seemingly mindful of RSM v St Lucia where the existence of third party funding was a relevant factor in ordering the Claimant to pay security for costs, the tribunal ruled that disclosure would confirm the proper basis upon which to bring such an application i.e. “Claimants’ inability to pay Respondent’s costs and/or the existence of a third party funder”.
- The Claimants’ potential inability to pay the Respondent’s costs and the risk that the funders could evade a costs award in the event of an adverse decision.
- The Claimants’ failure to deny the existence of a third party funder.
What should Claimants and Respondents take away from this case?
- Third-party funding information is often sought in the context of a contemplated security for costs application. Given that the ‘conflicts’ issue was a key ground warranting disclosure and in light of the 2014 IBA Guidelines, a party may now consider applying for disclosure of its opponent’s third-party funding details on this ground alone.
- The possibility of an award being challenged or refused enforcement due to arbitrator conflict arising from undisclosed third-party funders may mean that arbitrators faced with “conflict” arguments are more inclined to order disclosure of the funder’s identity and details of the funding arrangement to avoid challenges.
- There is not yet a duty to disclose the existence of third party funding (it is absent from the institutional rules and IBA Guidelines are soft rules only) but given the increased risk of disclosure being ordered by the tribunal and its likely impact on the funder/funded-party relationship, it would be prudent for a funded party to:
- warn its funder of the disclosure risk at the outset,
- negotiate any necessary amendments to its funding arrangements (including extra protections), and
- strategically consider with its funder if it is better to make an upfront disclosure before its opponent makes an application to the tribunal.