The Regulation of TPF with a view to the UNCITRAL Investor-State Dispute Settlement Reform

Introduction

The reform of Investor-State Dispute Settlement (“ISDS”) system has been the subject of various initiatives by different international organizations in recent years. Various changes were taking place at different levels of the ISDS system, for example, the adoption of the Comprehensive and Trade Agreement between the European Union and Canada (“CETA”)¹; the amendment process of the Investor ICSID Arbitration Rules²; the project of the Hague Rules on Business and Human Rights Arbitration by Judge Bruno Simma³; the Report of the ICCA-Queen Mary Task Force on third-party funding in international arbitration⁴– one of the few sources providing an outstanding framework on the matter; the United Nations Commission on International Trade Law (“UNCITRAL”) Working Group III mandate to assess the problems associated with the ISDS system and to find possible solutions to them (“ISDS reform”).

The UNCITRAL Working Group III began its work in 2017 and consisted of member States, observer States, observer intergovernmental and non-governmental organizations. The Working Group III has started with the identification and consideration of issues related to the ISDS, then considered the desirability of the reform in the light of identified problems, and finally, the Working Group III came to the conclusion about desirability of reforms to develop relevant decisions that would be recommended to the Commission.

The UNCITRAL Working Group III had made significant progress at its previous three sessions (34-36 sessions)⁵, identifying problems and considering the practicability of reforms in those areas. These concerns fell into three categories – a) the issues concerning the consistency, predictability and correctness of arbitral awards (the UNCITAL Working Paper No 150); b) the issues concerning the arbitrators and decision-makers (the UNCITAL Working Paper No 151, 152); c) the issues relating to the cost and duration of ISDS claims (the UNCITAL Working Paper No153).

During the 37th Working Group III session⁶ was discussed the fourth area of concerns – third-party funding (“TPF”). It was determined that TPF in the ISDS is a matter of concerns with regard to the multilateral reform and would thus be part of the Working Group III session to access the identified problems and propose responses. At this session were identified the following concerns – the conflict of interest and disclosure; third party control and influence; confidentiality and legal privilege; costs and security for costs; speculative and frivolous claims.
The purpose of the essay to explore TPF with regard to the ISDS reform, to find any solutions to identified concerns that can be implemented by the UNCITRAL for more effective regulation. Firstly, I think it is important to provide the definition of TPF and distinguish it from other forms of financial investment, to explore the national legislation, investment treaties and arbitration rules that provide any reference to TPF. Then express the UNCITRAL view on identified concerns and propose some measures and solutions that could make the value to the further ISDS reform discussions.

The essay consists of three parts. The first part generally considers definition and scope of TPF, particularly comparing TPF with other forms of financial investment, the participation of non-for-profit funders, TPF models. In the second part, the focus will be on the discussion of the identified concerns. The third part covers the regulation of TPF and some solutions to better regulation.

1. Definition and legal framework of TPF

1.1. Scope of TPF

In general, TPF is defined as an agreement by an entity (“TP funder”) that is not part to a dispute to provide funds or other material support to a disputing party in exchange for a fee that depends on the outcome of the dispute. TPF covers all or part of the proceedings costs such as legal fees (including fees of experts, arbitrators, and tribunal) and costs related to consecutive enforcement actions or further appeals.

The scope of TPF definition in the context of international arbitration varies from one source to another, including national legislation, investment treaties, soft law instruments.

The definition is the subject to a considerable debate as TPF can be provided through different structures⁷. Approaches also differ as to whether the definition should go beyond direct financing of economic interests and include non-for-profit funders⁸.

Non-for-profit funders

Increasingly, investment arbitration involves TP funders without profit motive or which is not a primary purpose. Such funders are called ‘non-for-profit’ funders, they are primarily motivated other goals than profit such as to set a favorable precedent for future claims, to protect state law regulations, to gather some information about parties or to support the industry.

In addition, States which participating in investment arbitration have discovered the potential for non-for-profit funders and are seeking to incorporate such type of funding into investment treaties. For example, the CETA defines TP funders both for-profit funders (‘in return for remuneration’) and non-for-profit funders (‘through a donation or grant’)⁹. Furthermore, the current draft of the EU-Vietnam Free Trade Agreement, Ch. 8, Ch. II, Sec. 3, Art. 2, contains a similar approach to TP funders, because the inclusion of ‘in the form of a donation or grant’ is a recognition of the potential involvement of not-for-profit funders¹⁰.

The fact that there are references to non-for-profit funders is a sign that such funders will be subject to the same rules like traditional for-profit funders.

Among arbitration institutions, only the International Chamber of Commerce (“ICC”) considered non-for-profit funders, although none of the major international arbitration jurisdictions have implemented any rules to TPF¹¹.

The references to non-for-profit funders in investment arbitration may not seem remarkable; however, it can be a rise of such funders in the future both on the claim and respondent side. Tribunals will be able to apply existing rules or adopt similar tools in the future to assess the participation of non-for-profit funders like for-profit funders.

TPF compared with other forms of financial involvement

At the 35th session of the UNCITRAL Working Group, it was pointed out that TPF is ‘a complex area and there are different forms and types of funding’¹².

There are the following forms of financial participation:

1. Corporate (equity) financing.

It is more like a traditional loan which allows a company to shift costs internally with the hope of paying back money on a successful occasion. It is similar to TPF in sense that it also provides non-recourse funding for duration of the claim. However, by its structure, since the funder is linked to the claimant/respondent, this relationship is apparent in the arbitration. The funder will not be part of the ‘concentrated segment’ of society already involved in TPF, which will change the calculation of incentives. Any conflicts of interest arising in the course of a case ‘are usually resolved through corporate governance mechanisms and other rules governing corporate relations’¹³.

2. Contingency fee arrangements (non-recourse funding).

It was originally intended for the purpose of the impecunious clients who otherwise would not have been able to get justice for their meritorious claim. Contingency fees are based on already disclosed a counsel-client relationship, so hidden conflicts are unlikely to arise. Counsels are bound by the Rules of Professional Responsibility, which can lead to disbarment in the case of gross violation of the rules. For example, lawyers put their contingent financial interest in the case above the best interests of the client in settlement proceedings. The main feature of contingency fee arrangements is that ‘they are often automatically disclosed in the arbitration process and are bound by rules and codes of conduct’¹⁴.

3. Insurance

This is another mechanism that parties have used in the past to fund litigation. Insurance like TPF provides funding (sometimes without recourse) for claimants under certain investment treaty. Political risk insurance (“PRI”) is sold in advance to cover the costs of possible future litigation.

However, there are three key differences between insurers and TP funders:

First, insurance companies do not provide day-to-day funding for the case, but pay the amount the claimant has filed a claim. Second, the insurance premium is much lower than typical yield required under a TPF agreement. Third, insurance companies are bound by certain internal regulations and professional rules of conduct. Insurance is considered a financial service regulated under financial regulation of the country, bound by consumer protection rules and regulated license. Some argued that TPF should be regulated by the same rules as a financial service provider.

There are three forms of insurance for funding:

After the event (“ATE”) insurance is requested after a claim is made to cover costs as soon as they begin to accrue;
Before the event (“BTE”) insurance is claimed when the claim is covered by the debtor’s non-payment (indemnity insurance contract). Insurance coverage is removed before any issues occur;
Legal expenses insurance where the claim itself is not covered, only legal costs of the claim.

A key feature between ATE and BTE insurance is that the BTE typically covers losses caused by failure of the host State to comply with the award. Moreover, the economics used in ATE is different from BTE insurance due to the fact that risk pooling may be less prominent in ATE than in BTE. Instead, the selection criteria applied by ATE can guarantee ‘a relatively comfortable chance of high returns’¹⁵.

Usually, what distinguishes TPF from the insurance contract is that ATE funders accept pecuniary interest in the case depending on the result. This calls into the question of possibility of treating proposed contract as insurance contract in the classical sense. In essence, the premium (a percentage of the amount recovered) is due only if the claimant prevails. Even so, the claimant cannot bear any out of pocket costs as the premium is kept from the proceeds.

According to the broad definition of TPF as ‘any financial solution offered to a party regarding the funding of proceedings in a given case, TP funders do not differ from ATE insurers except of financial consequences’¹⁶. However, contingency fee arrangements are considered a separate business in particular because of in such cases the client does not have any information of the legal services costs that were provided during the arbitration, whereas TPF allows the client to have such information.

The TPF concept should be defined more narrowly relying on elements to distinguish TPF from other related practices¹⁷:

First, TPF requires a third-party capital investment, which differs TPF from contingency fee arrangements where lawyers invest their professional services instead of the capital. In addition, TP funder may offer funding and make a choice of counsel to the client, while the mechanisms of contingencies block this choice. Second, TPF is designed to fund claims and where applicable to provide additional claim management services, which differs it from one-time funding that can be provided by a hedge fund. Then, the type of return differentiates TP funders and insurance companies, as the return for the funder is usually a percentage of the refund or a multiple of the invested capital.

TPF Models

TPF can be structured around a single claim where funding is applied to individual cases (claimant and respondent funding) or a portfolio of claims.

1. Claimant funding

Claimant funding is a mechanism whereby a funder creates a special purpose vehicle (SPV) to facilitate its investment in the ISDS claim. The funding entity through a SPV and the claimant negotiate a funding agreement along with an appropriate documentation sets out rights and responsibilities of the funder and the claimant. It includes clarification of the funder’s rights on certain types of information, the ability of the finder to participate in certain aspects of managing the claim, the right to terminate the funding agreement.

In considering whether to invest in a claim, funders should consider the following: – demonstration of healthy claim; – the counsel that was chosen by the claimant and how the counsel can be reimbursed; – cost of the claim; – expected margin of reimbursement relative to the budget for funding; – the amount required for advance; – jurisdictional obstacles; – available remedies; – expected nature, duration and type of proceedings; – the existence and consequences of related claims; – the possibility of settlement; – the identity of the respondent; – special impediments to enforcement¹⁸.

Claimants and funders in the ISDS have potential for significant financial growth if they can prevail over a claim especially given the obstacles preventing respondents from filing successful counterclaims (for example, disputes involving the exploitation of mineral or fossil fuel reserves).

2. Respondent Funding

Respondent funding differs significantly from the claimant funding since: – under almost all existing treating States cannot initiate but can only defend claims; – possibility of counterclaims is limited. Thus, States do not have a financial positive side, the best financial position that the respondent State can usually hope for as a result is 100% compensation of its expenses with interest and reputational damages that must be covered by the claimant. Potential profit that attracts funders on claimant position ‘does not exist for ISDS respondent with the exception of cases where there are contractual or other counterclaims’¹⁹.

Where other ways of funding respondent claims are likely to be explored or implemented, TPF of respondent claims in the ISDS seems to remain theoretical and present a major challenge.

The reality is that while the respondent can manage and limit its risk, he will still have to pay possibly ‘a significant amount to shift some of its generally unlimited risks to the funder’²⁰. Since the average cost of defending a claim is 5 million USD²¹, paying for defending against claims, even if the risk may be limited, is not a minor consideration, especially as the number of claims against States continues to rise.

3. Portfolio Funding

While funders can invest in single claims, portfolio funding increases. A portfolio agreement is an agreement in which the funder shows a financial interest in a basket of claims that may be centered around the same applicant or law firm, so the funder’s return depends on the overall net performance of the portfolio and thus is less dependent on any particular claim.

The mechanism benefits the funder as it is able to diversify investment risk and thus may also result in a reduction in the cost of funding capital for the applicant which is a win-win situation for funders and claimants.

In addition, the ability to combine claims allows securitization and creation of a secondary market. While institutional investors do not have time, experience or specialization to invest directly in claims, the ability to invest in a risk-adjusted claims may represent an attractive alternative exit of capital. Funders are actively seeking for creation such type of investments to expand capital and reduce funder risk and it is likely that portfolio funding to continue and increase.

The due-diligence analysis should be done whether the funder is reviewing a single claim or a group of claims. A portfolio may involve a law firm carrying out a number of risk cases where they share the cost of doing so with the funder and then share potential growth (common in the US where law firms have been operating with contingency fees). Alternatively, this could mean a client who has a set of similar claims to offload all costs of the cases and agree that proceeds of the claims can be used to cross-secure losses on other issues in the portfolio. This remains less common than law firms portfolios, but it is likely to increase as corporations recognize it as an option and seek to remove the cost risk in these cases from the balance sheet²².

1.2. Legal Framework

Definitions contained in various sources of law illustrate the different approaches and the changes that have taken place in the international arbitration field.

1. National legislation

TPF began in the context of domestic litigation and arbitration and was then used in international commercial and investment arbitration. Although several jurisdictions have established a funding system of legal disputes, in some jurisdictions this practice continues to expand (Singapore, China, Latin America, and Europe). However, in many of them TPF remains unregulated and debate continues as to how TPF can be regulated.

While common law doctrines against ‘the champerty and maintenance’ are best known, in ‘civil law jurisdictions professional attorney ethics rules and ownership of claim constraints take center role’ in enforcing any restrictions on TPF mechanisms²³.

Two States (Singapore, China) seem to have taken some measures to regulate TPF in international arbitration. These legislative efforts were part of efforts to legalize the funding system in international arbitration which had been previously banned under ‘the champerty and maintenance’ doctrine.

Singapore has amended its legislation and allowed TPF for dispute resolution procedures²⁴. In the Regulation 4 of the Civil Law (TPF) Regulations of 2017 defines a qualifying TP funder as an entity that ‘carries on the principal business, in Singapore or elsewhere, of the funding of the costs of dispute resolution proceedings to which a TP funder is not a party and has a paid up share capital of not less than 5 million USD or the equivalent amount in foreign currency or not less than 5 million USD or the equivalent amount in foreign currency in managed assets’²⁵.

Under this provision, the TP funder definition is intended to ensure that funders who provide funding in international arbitration in Singapore are reputable professional funders who have an incentive to comply with legal requirements. This definition do not apply to non-for-profit funders. Therefore, such funding agreements do not appear to be enforceable under Singapore law, ‘but such agreements may still be enforceable if the parties choose another law and jurisdiction to enforce the agreement’²⁶. Meanwhile, the provision that the funding agreement provides for ‘a share or other interest in the proceeds or potential proceeds of the proceeding’ would seem to exclude pro bono, as well as ATE and BTE insurance, which are not offered through the TPF agreement²⁷.

The relatively narrow scope of the Singapore definition of a qualifying TPF contract appears to be confirmed in the explanation contained in the draft version of the Bill on the obligations of funders required to exercise their rights under the funding agreement²⁸.

Similarly, Hong Long passed legislative reforms to allow TPF mechanisms that have been previously banned under the champerty and maintenance doctrine²⁹. Section 98G of the Hong Kong Ordinance provides that TPF is ‘the provision of funding for an arbitration under a funding agreement; to a funded party; by a TP funder; and in return for a TP funder receiving a financial benefit only if the arbitration is successful within the meaning of the funding agreement’³⁰.

Under Hong Kong law, a TP funder is defined as ‘someone who enters into a funding agreement and has no interest recognized by law either in the matter of an arbitration that has begun, has not yet begun, or in an arbitration that has ended’³¹. Section 98H of the Hong Kong Ordinance defines a finding agreement as an agreement for TPF that is in writing; made between a funded party and a TP funder; and made on or after the commencement date of Division 3³².

Singapore and Hong Kong’s legislative efforts to regulate TPF in international arbitration are unique. One of the reason is that these jurisdictions later than many others relaxed their prohibition on the champerty and maintenance. Only a few other have clear regulation of TPF in international arbitration.

Since States and international organizations have undertaken to assess issues that may arise with the participation of funders, and develop guidelines or rules on the matter, they will have to base their analysis and results on determination. For that reason. It is expected that the range of definitions would continue to expand.

2. Investment Treaties

In contrast to national legislation targeting for-profit funders and non-recourse funding, definitions developed by international bodies tend to adopt broader definition. For example, some investment treaties and free trade agreements have introduced provisions related to TPF, which contain broad definitions.

The draft of the EU-Vietnam Free Trade Agreement was the first investment agreement to include a reference to TPF and to regulate it³³. Article 2 of this draft provides that ‘TPF means any funding provided by a natural or juridical person who is not a party to the dispute but who enters into an agreement with a disputing party in order to finance part or all of the cost of the proceedings in return for a remuneration dependent on the outcome of the dispute or in the form of a donation or grant’.

The above definition is similar to that included in the European Union’s proposal for Investment Protection and Resolution of Investment Disputes under the Transatlantic Trade and Investment Partnership (TTIP)³⁴. Article 1 of Section 3 provides that ‘TPF means any funding provided by a natural or legal person who is not a party to the dispute but who enters into an agreement with a disputing party in order to finance part or all of the cost of the proceedings in return for a remuneration dependent on the outcome of the dispute or in the form of a donation or grant’.

Similarly, the revised version of the CETA between Canada and the EU adopted a clear definition of TPF³⁵. Article 8.1 states ‘TPF means any funding provided by a natural or legal person who is not a party to the dispute but who enters into an agreement with a disputing party in order to finance part or all of the cost of the proceedings either through a donation or grant, or in return for remuneration dependent on the outcome of the dispute’.

A draft French Model BIT provides that ‘TP funder means any natural or legal person other than the disputing party who supports part or all of the costs of the arbitration in return for remuneration as a percentage of the compensation awarded by the tribunal entrusted to settle a dispute between an investor and the recipient host State of this investment of this investor’³⁶.

The views and concerns expressed by stakeholders in the process of amending the ICSID Rules and during the discussion of the UNCITRAL Working Group III are part of the environment in which some States have developed treaty provisions on TPF. As reflected in some investment treaties, the definition of TPF is comprehensive, and the treaty provisions do not appear to be overly restrictive.

Even though treaty provisions on TPF are not strictly necessary because the existing net of treaties and powers of tribunals allow the tribunals to deal with complex issues of disclosure and cost security, it is not surprising that investment treaties include TPF provisions.

3. Arbitration Rules

In most cases, the institutional rules as well as the UNCITRAL Arbitration Rules³⁷ do not contain any provisions explicitly defining or relating to TPF, with some exceptions³⁸.

The first exception is the Brazilian CAM-CCBC, which in Administrative Resolution №18 of 20 July 2016 provides in Article 1 that ‘it is considered TPF when a natural or legal person who is not party to the arbitration proceedings provides full or partial resources to one party so as to enable or assist the payment of the arbitration costs, receiving in return a portion or percentage of any profits earned from the award or from the agreement’³⁹.

The second exception is a practice note adopted by the Singapore International Arbitration Center (“SIAC”) in 31 March 2017 in relation to the conduct of arbitrators in cases involving external funding⁴⁰. According the note, ‘external funder means any person, either legal or natural, who has a direct economic interest in the outcome of the arbitration proceedings. Direct economic interest is an interest in the arbitration proceedings resulting from the provision by a non-disputant party to a disputant party of funding for or indemnity against the award to be rendered in the arbitration proceedings’.

These definitions seem broad enough to cover both liability and BTE/ATE insurance, although the Task Force has held some debate on whether the requirement of a direct economic interest could exclude BTE/ATE insurance from the definition.

In the SIAC Investment Arbitration Rules of 2017, Article 24 provides that ‘the arbitral tribunal have the right order the disclose of the existence of a party’s TPF arrangement and identity of a TP funder and, where appropriate, details of a TP funder’s interest in the outcome of the proceedings, and whether or not a TP funder has committed to undertake adverse costs liability’⁴¹.

The SIAC Investment Arbitration Rules do not seen to contain a specific definition of TPF. The Singapore Institute of Arbitrators published “Guidelines for TP funders” which describe TPF the following – ‘when a third party (funder) provides financial support to enable a party (funded party) to pursue or defend an arbitration proceedings. Such financial support is provided in exchange for an economic interest in any favorable award or outcome that may ensue’⁴².

The China International Economic and Trade Arbitration Center (“CIETAC”) has issued guidelines for public consultation for TPF in arbitration. For the purposes of the guidelines, TPF was defined as the following – ‘TPF arises when a professional third party person or entity (funder) contributes funds or other material support to a party in arbitration (funded party) and has a direct economic interest in the award to be rendered in the arbitration’⁴³.

Notable changes relate to the Rules and Regulations of the International Center for Settlement of Investment Disputes (“ICSID”). In October 2016, the ICSID Secretariat began the process of amending this document and in its amendment proposal it was included a definition of TPF as well as the obligation to disclose to the Secretariat the name of any TP funders⁴⁴.

In these Rules, TPF is defines as follows – ‘the provision of funds or other material support for the pursuit or defense of a proceeding by a natural or judicial person that is not a party to the dispute (TP 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 through a donation or grant; or in return for a premium or in exchange for remuneration or reimbursement wholly or partially dependent on the outcome of the proceeding’⁴⁵.

2. Main issues

At the 35th session of the UNCITRAL Working Group III, it was pointed out that the practice of TPF raised ethnical issues and could have negative implications for ISDS procedures. It was also noted that TP funders could gain excessive control or influence over the arbitration process, which could lead to unreasonable claims and hinder dispute resolution (A/CN.9/935, para. 89). Issues raised in relation to TPF include potential conflicts of interest, third-party control and impact on ISDS procedures, impact on confidentiality, costs and cost security, as well as speculative, marginal or frivolous claims.

2.1. Conflicts of interest and disclosure

The issue of conflicts of interest between arbitrators and TP funders was one of the first concerns of the UNCITRAL Working Group III in the light of its potential impact on the enforceability of arbitral awards and generally on the integrity of the arbitration process and the legitimacy of international arbitration (A/CN.9/WG.III/WP.935).

Situations that may lead to conflicts of interest include when arbitrators act as consultants to funders, and when the arbitrator or the arbitrator’s law firm has a recurring relationship with a TP funder who participates in arbitration before the arbitrator, and the arbitrator or firm derives profit from that relationship.

At the 35th session of the UNCITRAL Working Group III, it was noted that the issue of conflicts of interest between an arbitrator and a TP funder was closely linked to the lack of disclosure and transparency with respect to TPF.

According to the UNCITRAL point of view, questions at stake relate to under which conditions TPF should be disclosed in order to allow arbitrators, parties and institutions to assess potential or actual conflicts of interest involving funders.

nother issue is whether an arbitrator who has a relationship with a TP funder participating in the arbitration should continue to adjudicate the arbitration. This is closely related to the impartiality of arbitrators.

The requirements of independence and impartiality of arbitrators are recognized at the international level and are contained in each institutional rules⁴⁶. These rules require arbitrators to disclose all the facts that could reasonably be considered grounds for disqualifications.

The increase in the number of funded arbitration claims, the small numbers of funders, and the relationship between funders and law firms actively involved in international arbitration are among the factors that increase concerns about potential for conflicts of interest and growing call for greater transparency.

Problems associated with party appointment of arbitrators are following: re-appointment of individual arbitrators in cases related to the same TP funder, or appointment of an arbitrator by a funded party where an arbitrator has already relationship with a TP funder, are just two of the possible conflict scenarios.

The issue has also been addressed by the International Bar Association in General Standard 7 of the Guidelines on Conflicts of Interest in International Arbitration now requires disclosure of a party’s funding arrangements under certain circumstances⁴⁷.

The ICC International Court of Arbitration in its guidance on conflict disclosure for arbitrators also addresses the issue⁴⁸. TPF is now one of the circumstances that arbitrators should consider as a potential conflict.

Whether disclosure should be limited to the existence and identity of TP funder or whether it should also extend to the terms of the funding agreement remains controversial. A funded party has no general obligation to disclose the fact of its funded mechanism. However, in the light of concerns about conflicts, there is a growing need for greater transparency.

Disclosure of funding mechanism often benefits a funded party. The fact that the claim is funded indicates that an independent third party believes in the merits of the claim and therefore its existence can contribute to a settlement. More importantly, early disclosure prevents the other party from making conflicting arguments at the enforcement stage if the funded party is successful.

However, voluntary disclosure is unlikely to become an accepted approach. Institutions are now beginning to address the issue of mandatory disclosure. The SIAC is the first institution to address this issue giving the Tribunal power to order disclosure of the existence of a TP funder’s interest in its Investment Arbitration Rules and whether it has agreed to be liable for adverse costs (Rule 24(1))⁴⁹. Recent free trade agreements have also addressed this issue requiring disclosure of the existence but not terms of any funding mechanism. In Hong Kong, where legislation allowing TPF to participate in arbitration will soon come into force, disclosure of the funding agreement to all parties will also be required.

Disclosure of the funder’s identity has been ordered in some UNCITRAL cases. In South American Silver v. Bolivia⁵⁰, for purposes of transparency, and considering that claimant did not object to the disclosure of the funder’s name, the UNCITRAL held that ‘such disclosure was made by the claimant’. However, the UNCITRAL refused to order disclosure of the funding agreement.

In Garcia Armas v. Venezuela⁵¹, the UNCITRAL went beyond the order to disclose the identity of the funder. Following a closed review of the redacted version of the funding agreement, the UNCITRAL decided that ‘the redacted version would be made available to the respondent to protect its legitimate interests in the event of a positive decision on costs, while protecting the claimant’s legitimate interest in maintaining certain confidential information’.

In general, disclosure of the existence of TPF and the identity of the funder was perceived by the UNCITRAL as a requirement of transparency to protect the integrity of the arbitration and prevent conflict of interest.

Disclosure of the funding agreement is a different matter as the agreement may include confidential information, information reflecting legal strategy and views of the claimant’s counsel in the case. The UNCITRAL and other tribunals did not order disclosure of the funding agreement, and those that considered exceptional circumstances justifying disclosure.

The rule set out in case law that the identity of TP funder should be disclosed, and even the exceptional tribunal orders to claimants to disclose the funding agreement, all took place in an investment treaty environment free from regulations on TPF. Thus, tribunals including the UNCITRAL are now equipped to deal with matters involving legitimate interests of the disputing parties and therefore treaty provisions on TPF do not appear to be strictly necessary.

2.2. Third-party control and influence

Another issue that has also been discussed at the UNCITRAL Working Group III is the potential influence of the TP funder on the proceedings, including in settlement negotiations, particularly where a TP funder’s compensation depends on the outcome of proceedings. According to the UNCITRAL, a key element to address this issue is how funding agreements are structured and to what extent TP funders control over the management of the case proceedings.

Terms and conditions should be negotiated between the TP funder and the claim holder prior to the conclusion of the funding agreement⁵². Due to its financial advantage, ‘the TP funder has a valuable leverage that could therefore abuse its authority and impose unfair terms on its contractual partner’. Remuneration of TP funders depending on ‘the success of the claim may be tempting for them to impose their views during the procedure’.

Portfolio funding allows risk diversification by combining a long-shot case with favorable potential for rule change into a broader set of claims. Where funders are given the opportunity to influence or control claims settlement decisions or have them through arbitration, funders may ensure that such cases are dealt with through an award on the merits rather than settling. Since funders have no ethnical obligations to the funded party, only to their shareholders, ‘there is no ethnical or regulatory impediment to managing the claim in this way’⁵³.

While in some cases, for example, when the funder is interested in influencing the development of the law, the funder may be interested in bringing the claim to the arbitral award. In other cases, financial settlement may be a more attractive option. It is also possible that funders will seek settlement of claims from claimants for reasons entirely unrelated to the claim itself, such as ‘the funder’s desire to make a profit over a period of time or to balance the overall risk of the funder’s investment portfolio’⁵⁴.

It would be important to understand these implications in the context of ISDS. For example, even if a funder has no direct influence or control over decisions about settlement, asymmetric inclusion of a TP funder to a claim by claimant will lead to a further shift of negotiating power in favor of a funded claimant and in the direction of the respondent State with subsequent effects on willingness to settlement and settlement results.

The traditional view of investment arbitration tribunals is that the mere presence of a TP funder has no effect on the arbitration proceedings. For example, in the UNCITRAL final award of Oxus Gold plc v. Republic of Uzbekistan case⁵⁵, para 127, was expressed the traditional view that TPF has no effect on the substance of the part of the arbitration process: “It is undisputed that Claimant is being assisted by a TP funder in this arbitration proceeding. The Arbitral Tribunal has mentioned this fact in its Procedural Order Nos. 6 and 7. However, this fact has no impact on this arbitration proceeding.”

TPF regime may vary from tribunal to tribunal, as there may be no binding substantive precedents in investment arbitration with respect to TPF. However, most tribunals including the UNCITRAL that have considered TPF in their decisions have done so on the assumption that the funder is a separate entity from the funded party and has profit as its primary motive. Since the traditional status of TP funder as a mere financier, the tribunals were essentially able to simply acknowledge the funder’s presence and move on to other aspects of the case.

2.3. Confidentiality and legal privilege⁵⁶

Considering the UNCITRAL prospective, obtaining TPF generally requires disclosure of information that would otherwise have to be disclosed to the tribunals, because of the party seeking funds may share confidential communications of analysis of the case with the funder. This is a concern because TP funders are not necessarily bound by confidentiality obligations and are not prohibited from using such information in another funded dispute, regardless of any potential conflict.

A related question from the UNCITRAL view is whether disclosure to a TP funder could result in a waiver of confidentiality, making that information vulnerable to requests for disclosure in arbitration. Different views were expressed as to whether the applicable rules of confidentiality in international arbitration should be domestic laws or whether international rules could be defined and applied. In most jurisdictions, there is no clear answer as to whether information provided to a TP funder will be protected. Indeed, most arbitration rules and the UNCITRAL arbitration rules are silent on matters of protection of confidential information and generally leave these matters to the discretion of arbitrators.

Confidentiality is the keystone of international arbitration. Although this principle allows for a number of exceptions, ‘materials and information obtained in the arbitration process are confidential and therefore not subject to disclosure’⁵⁷. A claim holder submitting its case to a potential funder, outs confidentiality at risk, which can lead to its violation.

Indeed, ‘prior to funding, a qualified team within a TP funder usually conducts a proper review of the case to decide whether to fund it or not’⁵⁸. The team not only considers elements related to the claim (for instance, the prospects of success, the quantum), examines aspects related to the arbitration itself (for example, the arbitration agreement, the seat, the composition of the arbitral tribunal, the applicable laws, the jurisdiction in which the award should be enforced, the duration of the arbitration). If a funded agreement is reached, ‘the second phase begins – the case monitoring phase – where the funder receives an update of the development of the case’⁵⁹.

Under the UNCITRAL, a funder is considered a non-signatory party in the arbitration. Therefore, it is not bound by confidentiality, even if it is applicable as such. If the case is submitted to the funder before or after the arbitration has started, the claim holder risks breaching its obligations. This could have disastrous consequences for the non-funded party, as the funder could obtain information related to them and use it to their detriment in another case.

Only one set of rules applies to the confidentiality and privilege of documents provided to TP funders. The 2018 HKIAC Administered Arbitration Rules⁶⁰ contain a confidentiality clause establishing the general rule that ‘no party may publish, disclose or communicate any information relating to the arbitration, award or extraordinary award’. The rules also provide for a list of exceptions allowing disclosure, such as disclosure to witnesses and experts of parties, government body that is required by law to publish information, or disclosure to protect a legitimate right or interest. It is important to note that these exceptions also allow disclosure to a person for the purposes of having or seeking TPF of arbitration.

While some funders seek to avoid receiving confidential information and written legal analysis from the claimant’s counsel, other funders seek access to confidential information to assess and monitor the progress of cases in which they invest. After all, how does a TP funder correctly assess the reasons for an action without receiving confidential or privileged information at the heart’s case?

According to the UNCITRAL, this practice raises a number of complex issues, since providing such confidential or privileged information to TP funders may constitute a waiver. It most likely depends on whether the jurisdiction whose privilege rules apply recognizes a privilege for TP funders or common interest exception. There are significant differences from country to country in application of privilege rules. However, even in countries where there are relatively well-developed TP regimes, the answers to these questions are not always clear and it is a distinct possibility that different rules may apply to different parties and funders in the same process. For these reasons, it would be useful to develop international standardized privilege standards that relate to TPF.

2.4. Costs and security for costs

According to the UNCITRAL Working Group III, TPF may also have an impact on costs and security for costs.

Costs issues

The UNCITRAL’s view on costs is that the existence of TPF may have an impact on the determination of recoverable costs, particularly whether legal representation and other legal costs that have been paid by a TP funder are recoverable. Arbitral tribunals generally enjoy broad discretion in deciding on the determination and allocation of reimbursable costs, so the outcomes on this matter very.

Once the tribunal has considered the substantive issues, it will have to decide on the costs. First, it should decide whether to award costs or not. Secondly, it should then determine how to distribute them. The UNCITRAL Arbitration Rules indicate that ‘costs should follow the event, unless circumstances suggest it is not appropriate’⁶¹.

In this context, the question of whether the mere availability of external funding should be taken into account in the allocation of costs was widely discussed. In Essar v. Norscot case⁶², the ICC, in awarding the costs to the claimant decided to include the amount owed by the claimant to the funder under their agreement.

Another issue on which different views were expressed was whether the arbitral tribunal should order a TP funder to pay the adverse costs if the funded claim was not satisfied. Since a TP funder is generally not a party to the arbitration agreement and has no formal participation in the arbitration, it can be argued that arbitration tribunals may not have jurisdiction to order costs against the funder. In this light, some have argued in support of the opposite view.

With regard to the allocation of costs, TPF should not influence decisions on how costs should be allocated on the outcome of the arbitration. In particular, recovery costs should not be denied on the grounds that the party seeking costs is funded by a TP funder.

The other issue that has concerned is whether a funder can be ordered to pay costs. This stems from the concern that the existence of TPF will lead to an increase in the number of claims filed and, particularly, the number of claims under investment treaties in which the potential benefits are significant. Therefore, should the funder not be liable for costs if the funded party fails (as in the case in domestic litigation in some jurisdictions)?

The SIAC Investment Arbitration Rules contain provisions on costs and TPF. The rules empower the tribunal to take into account TPF arrangements when deciding on the allocation of costs (Rule 33.1)⁶³. The tribunal may also take into account any TPF arrangements with respect to any adverse costs orders (Rule 35). The Hong Kong Law Reform Commission also considered this point, recommending further consideration of the funder’s liability for adverse costs. It may not be an issue in practice as funding agreements often deal with liability for adverse costs or appropriate insurance is arranged to cover the funded party’s liability for ordering adverse costs⁶⁴.

Security for costs

According to the UNCITRAL’s view on security for costs, the main question is whether TPF should affect the ordering of security for costs. The use of TPF by the claimant may indicate its impecuniosity. However, it can be noted that TPF is also often used as a risk management tool by parties who can use their own resources to meet requirements but prefer to use external funding, for instance, to minimize their risks and use funds for their business priorities.

Security for costs is a controversial area in international arbitration, especially in investment arbitration. On the one side is the respondent State that seeks to protect the claim, on the other side is the claimant who may become financially unable to access justice if it is asked to provide security for costs. In addition, the unclear standards as to an award for the security for costs add additional levels to the considerations that any tribunal should take into account when awarding security for costs.

Arbitral tribunals, including the UNCITRAL, have the power to order security for costs either under arbitration laws or rules expressly providing for such power or under general provisions on interim measures (A/CN.9/WG.III/WP.153, paras. 33-37). When an arbitral tribunal is faced with a security for costs, it usually balances the claimant’s interest in gaining access to arbitral justice and the respondent’s interest in recovering its costs if it wins. The UNCITRAL and other tribunals generally required sufficient evidence to conclude that the claimant’s current financial circumstances were such that it would not be able to pay the respondent’s costs at the end of the proceedings.

An arbitral tribunal deciding whether to provide security for costs or nor should exercise its power of discretion. Arbitral tribunals generally exercise their power with caution and carefully analyze the financial situation of the party against whom the measure has been requested. Is the party will be in financial difficulty and unlikely to pay the potential awarded costs, an order should be granted. In such cases, the burden of proof should be on the party requesting the measure.

The existence of TPF has drawn attention particularly to the question whether the tribunal should regularly award security for costs when the claimant is being funded.

The point of view supporting this statement assumes an impecunious party enters into a funding agreement which provides that the funder is not liable for adverse costs. In such a case, it is highly unlikely this party would be able to pay the awarded costs, justifying security for costs to be ordered. It was therefore suggested that in order to preserve the rights of the respondent, the mere presence of a funder should be the basis for the decision to secure costs.

The ICCA-Queen Task Force report on TPF points out that TPF should not be sufficient to order security for costs stating that TPF is increasingly used by large, solvent companies that simply wish to share risk and maintain liquidity. It is thus suggested that applicants for security for costs should be determined irrespective of any funding arrangement, and on the basis of impecuniousness.

Arbitral tribunals in such cases as Eurogas v. Slovakia, South American Silver v. Bolivia, Eskosol v. Italy, RSM v. Saint Lucia, Garcia Armas v. Venezuela consistently ruled that the existence of TPF in an arbitration is not a sufficient factor to justify an order of security for costs.

In Eurogas v. Slovakia case⁶⁵, the tribunal rejected the request for security for costs considering that claimants had not breached their payment obligations. The tribunal explained that ‘financial difficulties and TPF do not constitute exceptional circumstances justifying that the respondent be granted an order of security for costs’.

Similarly in South American Silver v. Bolivia case⁶⁶ the tribunal refused a request for security for costs and argues that ‘the existence of a TP funder does not evidence the impossibility of payment or insolvency. It is possible to obtain financing for other reasons. The fact of having financing does not imply risk of non-payment’.

In Eskosol v. Italy case⁶⁷ in which claimant was bankrupt and a third-party funded the claim, the tribunal rejected respondent’s request for security for costs because ‘claimant received of ATE insurance as protection against the risk of potential adverse costs’. In such circumstances, the tribunal refused to issue an order that would impede access to justice.

In RSM v. Saint Lucia case⁶⁸, the tribunal applied the same rule but concluded that ‘the following exceptional circumstances as required by ICSID rules ordering claimant to provide security for costs. The fact that claimant did not have sufficient financial resources and the fact that it was unclear whether a funder would have warranted a cost award adverse to claimant’.

In Garcia Armas v. Venezuela case⁶⁹, the tribunal agreed that ‘TPF itself is not sufficient to secure costs, but additional exceptional circumstances are required. Since there were two exceptional circumstances in this case, namely, the funder was not obliged to pay any adverse costs under the funding agreement and claimants were unable to convince the tribunal of their economic solvency, the tribunal considered no remedy other than an order to secure costs’.

Investment arbitral tribunals as well as the UNCITRAL are still in the process of developing established standards and principles for deciding on security for costs. In investment arbitration it is becoming common to shift from ‘pay your own way’ to ‘costs follow the event’. However, there are no clear rules or principles that guide tribunals in deciding on provisions on security for costs and a cautious approach is often taken even in exceptional circumstances.

To eliminate unclear standards, it is possible to use tests that refine the standards to award security for costs. The UNCITRAL should attach great importance to the existence of TPF and ensure that costs are met in such scenarios. A two-step test could be useful in shifting the burden of proof on the provision of security for costs from the respondent to the claimant and should be considered to satisfy exceptional circumstances requirement.

In the first stage, the UNCITRAL should take into account the existence of TPF. It depends on the disclosure of information by the claimant and can be a starting point for the tribunal. Secondly, an important issue may be the claimant’s inability to satisfy an adverse costs award. It can be evaluated through visibility of mere insolvency or lack of assets of the claimant. This is where the tribunal should consider ordering security for costs. In addition, the claimant’s reluctance may be proved by its previous conduct or by terms of the TPF agreement which protect a TP funder from any adverse costs liability. Once both of these criteria are met, the burden of proof must be shifted to the claimant to prove why security for costs should not be awarded. The claimant may also discharge such a burden by disclosing its financial situation in order to prove that it is able to pay security for costs.

The disclosure of the existence of a TP funder could be a precondition for investment arbitration. The idea was incorporated in the SIAC Investment Arbitration Rules in Rule 24(1)⁷⁰ that provides that ‘the tribunal has additional powers to order disclosure of TPF mechanisms’. In addition, it also provides that ‘the tribunal will seek disclosure of the funder’s commitment to adverse costs liability’. A similar provision can be found in Iran-Slovakia BIT (Article 21(6))⁷¹ which expressly provides circumstances in which the tribunal may order security for costs if it considers that ‘there is reasonable doubt that claimant will not be able to satisfy costs award or deems it necessary for other reasons’. Such provisions are step towards ensuring that the presence of a TP funder does not unduly influence the party and its ability to secure costs. It is also important that there are safeguards against respondents using TPF disclosure as a weapon rather than a shield. For example, ‘there is no need to seek disclosure of all aspects of the TPF agreement. The security for costs should be main point for disclosure’⁷².

Thus, an application for security for costs should be determined on the basis of necessary indicators without regard to the existence of any funding mechanism. The terms of any funding arrangements may be relevant if they are used to establish that the claimant can cover any adverse costs. In the event when security becomes unnecessary, the tribunal may hold the requesting party responsible for the reasonable costs of posting such security.

2.5. Speculative, Marginal and Frivolous Claims

Under the UNCITRAL, the potential impact on the number of investment arbitration claims brought against States, including speculative, marginal and frivolous claims is significant. TPF leads to an overall increase in the number of ISDS claims. TP funders have funded cases that raise new concerns and include riskier, more uncertain claims.

TPF growth in ISDS claims creates concerns that TPF encourages claimants to claim and funders to fund these claims, which do not have string virtues. Critics argue that ‘this tendency to fund frivolous claims increases legal costs for States, while investor claimants bear little risk in bringing such claims’⁷³.

A good funding agreement eliminates the financial risk of an expensive claim. This means that a corporation can sue and then transfer cash flow and risk to the funder while waiting for payment, making arbitration against States more attractive to businesses. If the money does not come, the claimant has nothing to lose, but the respondent State is still forced to pay law firms for their services.

One of the UNCITRAL’s concern was the increasing number of frivolous claims that would not be contested without external funding. While there is usually little incentive for funders to fund weak cases, bubbles in legal claims market can cause just that. A condition in a funding agreement can always make a weak case worthwhile for the funder. Ultimately, frivolous claims can inflate the value of funder’s portfolios.

Those who argue that TPF will lead to more frivolous claims state that specific-return models in disputes and the ability of funders to fund risky disputes, when they can diversify increased risk through a portfolio of investments will encourage an increase in frivolous claims. Funders say that ‘there is no point in investing in claims that are likely to fail. The key question is how frivolous claims can be defined’⁷⁴.

In addition to the problems of identifying frivolous claims that arise from the standard nature of investment treaties, several structures forces in the ISDS system make it less likely to identify frivolous claims. One is that arbitrators are relatively independent of States that are parties to the certain investment treaty and may therefore consider themselves relatively free to depart from the guidance of the parties to the treaty and to adopt their own interpretations. Thus, it may create a gap in practice between the interpretation of States and tribunals.

The second problem is that arbitrators who are paid per case rather than on a fixed salary may be incentivized not to close the doors to certain claims and instead give the impression that every claim is non-frivolous one.

The third problem that makes difficult to determine any frivolous claim is that there is no system of precedents or appeals, which means that even if the tribunal dismisses an argument or claim as frivolous, the decision will not prevent future attempts by claimants to make the same legal argument.

Therefore, due to the elusive nature applied to frivolous requirements in investment law, it is useful to go beyond. Instead, consideration should be given to whether TPF encourages frivolous claims that seek to expand its reach in unintended and potentially undesirable directions.

3. The UNCITRAL regulation of TPF

If TPF is to be permitted in the ISDS in one form or another, the UNCITRAL Arbitration Rules should require mandatory and expansive disclosure of TPF agreements in conjunction with mandatory cost security. Despite the growing consensus on the need to disclose the existence and identity of the funder, such disclosure should go further and include the terms of the funding agreements. This aligns with overall institutional trends towards greater transparency and highlights the provisions of the funding agreement that create perverse incentives. This broad disclosure will also provide much-needed information for future research into the advantages and disadvantages of TPF and allow for better regulation in the future.

While there is not currently the requirement in the UNCITRAL rules to disclose the presence or identify of TP funders, some promising steps have been taken by States in some treaties. For example, Article 8.26 of the CETA⁷⁵ provides for mandatory disclosure of the presence and identity of TP funders. Article 23 (1) of the SIAC Rules⁷⁶ grants the tribunal discretion to order disclosure of the details of the funding agreement. The strengths of both provisions should be combined into a single UNCITRAL requirement for both mandatory and extensive disclosure of the existence of TPF and the terms of the funding agreement.

In addition to mandatory broad disclosure, tribunals as well as the UNCITRAL hearing claims involving TPF funding should be given the power to impose mandatory security for costs as a matter of course. Security for costs orders require the claimant to pay the legal costs if the claim is denied and provide a disincentive to funders in dealing with weak cases only for settlement or future case value.

Admittedly, there are competing interests when it comes to disclosure versus confidentiality. However, the high probability of accidental or untimely disclosure as well as high costs to both parties of such untimely disclosure in the event of a reversal of the award mean that taken together both systematic and party interests in disclosure substantially outweigh the interests in confidentiality. Thus, there is an agreement that the existence and identity of TP funders should be disclosed.

In my opinion, the UNCITRAL Working Group III should take the following steps (probably in modifying and expanding of Arbitration rules):

1. Make the rules on reallocation of costs in investment arbitration more predictable. The rules currently used is relatively unpredictable in its operation. It is for the tribunal to decide whether and to what extent costs are transferred form the prevailing party to the losing party. This makes it difficult for either party to pre-calculate their exposure to adverse cost orders.

2. Burden the claimants in the investment arbitration procedures limited duty to disclose information about the involvement of the TP funder in order to avoid conflict of interests. Funders would prefer not to come forward and identify themselves spontaneously. There are genuine concerns about this secrecy. However, TPF funders’ reticence in disclosing their involvement is not without reason. They are unaware of the implications of disclosure of their identity for tribunal investigations, cross examination, adverse cost orders, discovery and other obligations to the tribunal. Therefore, to the possible extent, TP funders should not be directly responsible to the tribunal ad should not participate in the arbitration procedure.

Arbitral tribunals need to carefully balance the interests of the participants in the arbitration. Allowing third parties to present arguments can enhance the capacity of arbitration as an instrument of accountability and can promote fair and balanced arbitration. Similar benefits can be derived from the participation of TP funders. The involvement of funders may simultaneously causes a conflict of interests. As a result, the rules for disclosure if certain information by TP funders should have been improved and clarified.

It is clear that the duty of an arbitrator to rule independently, reliably and impartially does not mean that it cannot have any relationship with the counsel and the parties. To the extent that the rules of impartiality and their interpretation in the arbitration case provide guidance, these rules may also assess potential conflicts of interest and arbitrator bias for TP funders.

Limited disclosure of the identity of the funder will allow arbitrators to assess whether they should withdraw for reasons of conflict of interest. The claimant should regularly declare the TP funder participation and the identity of this funder at the earliest possible stage. Failure to comply with the claimant’s duty to disclose should be sanctioned by the tribunal with an adverse costs order or rejection of the claim.

The UNCITRAL Working Group III should take into account the limited disclosure obligation and predictable rules on allocation of costs, which facilitate accurate calculation prior to submission of claims. As long as the rules on costs remain unresolved and unpredictable, any obligation to disclose participation could adversely affect the willingness of TP funders to fund cases. They may reasonably fear that tribunals will issue inflated orders for adverse costs because the claimant ha insurance through TPF.

3. Ensure that TPF participation does not prejudice the arbitration and the position of the respondent. The respondent must be sure that success fees charged by the counsel or TP funder are not passed on to them. Under the rules on allocation of costs, the UNCITRAL should have assess whether the legal costs are reasonable. If standardized tariffs were used, there would be no question of reallocating costs if TPF participation to the respondent.

The respondent should also be discredited if he dismissed the claim if it found that the claimant is unable to pay the adverse cost order. It is clear that the respondent would like to know if there is a TPF involvement behind the claimant. If so, it could try to persuade the arbitral tribunal to order adverse costs against TP funder providing that the tribunal has the authority to do so. Naturally, the claimant’s solvency and liquidity are main issues for the respondent.

4. Clearly identify the incorrect behavior of TP funder, which can cause negative external effects and cannot be effectively restrained indirectly by attracting to the claimant liability for such offenses. In addition to criminal sanctions, the UNCITRAL Arbitration rules should hold the claimant liable for such wilful misconduct, for example, by dismissing the claim and ordering adverse costs.

However, indirect sanctions do not always effectively address the misconduct of TP funders. In general, however, arbitration tribunals as well as the UNCITRAL have no more aggressive instruments than to deny the claimant damages and to order adverse costs. Even if tribunals would be empowered to give adverse costs orders, the impact of such sanctions will still depend on whether a TP funder to be held financially liable. Probably there should be more effective tools to combat intentional misconduct of TP funders.

5. Provide mandatory and extensive disclosure of TPF agreements not only about the existence and the identity of TP funders, but the overall structure of funding agreements, the financial position of a funder, the expected return of the investment as well as provisions on the control, priority and alignment of risks.

Funding agreements vary in terms, but often contain same basic components. One of the most important aspects is the control that the TP funder can exercise over judicial decisions. It makes sense that funders would be interested in whether and when the claimant decides to settle rather than insist on an arbitration win. However, this makes claimants extremely vulnerable to the underlying motivations that have TP funder. The funding agreements should outline the return – that is how much the funder will do if he wins), the priority – who gets the money first, and the risk – who bears the risk of increased costs and fees. All of these components are useful in determining whether the funder assumes the appropriate risk in the claim and in which cases there are incentives for the claimant and funders.

Expansive disclosure of the funding agreements could solve many problems for both the respondent and the claimant.

It could address concerns that late or accidental disclosure would result in a reversal of the award or an injustice for the claimant and the respondent.
The increased transparency of funding agreements is well in line with the overall institutional trend towards transparency and highlights the provisions of funding agreements that create perverse incentives.
Broad disclosure will provide much-needed information for future research on pros and cons associated with TPF and provide better regulation in the future.

Conclusion

This essay was intended to make contributions to the UNCITRAL Working Group III discussion on the ISDS reform and to offer some proposals to modify the existing TPF framework for better regulation.

In the Part I “Definition and legal framework of TPF” I provided definitions of for-profit funders and non-for-profit funders and compared TPF with other forms financial involvement – corporate financing, contingency fee arrangements and insurance. In relation to TPF models, it can be structured around a single claim, where funding is applied to individual cases (claimant and respondent funding), or a portfolio of claims. Then, I reviewed legal framework discussing different definitions of TPF given in national legislations, investment treaties and arbitration rules.

In the Part II, the focus was on the main concerns raised by the UNCITRAL Working Group III – conflict of interests and disclosure third-party control and influence, confidentiality and legal privilege, costs and security for costs, frivolous claims.

Then, the Part III covered the measures that could be done by the UNCITRAL to better regulate TPF. The following provisions can be implemented in the UNCITRAL Arbitration rules by expanding or modifying them:.

Make the rules on reallocation of costs in investment arbitration more predictable.
Burden the claimants in the investment arbitration procedures limited duty to disclose information about the involvement of the TP funder in order to avoid conflict of interests.
Ensure that TPF participation does not prejudice the arbitration and the position of the respondent.
Clearly identify the incorrect behavior of TP funder, which can cause negative external effects and cannot be effectively restrained indirectly by attracting to the claimant liability for such offenses.
Provide mandatory and extensive disclosure of TPF agreements not only about the existence and the identity of TP funders, but the overall structure of funding agreements, the financial position of a funder, the expected return of the investment as well as provisions on the control, priority and alignment of risks.

Discussions in the UNCITRAL Working Group III are still at an early stage and it is expected that some contour of the ISDS reform will become visible at the 38th session of the Working Group⁷⁷.

In the light of third-party concerns, it is essential to fully examine the actual and potential, positive and negative, intentional and unintended as well as discrete and sys

ematic effects of TPF on the ISDS. While initiative such as the ICSID have so far failed to address this problem, the current process within the UNCITRAL Working Group III on ISDS reform appears to be aimed at addressing a much wider range of issues in a more comprehensive manner, and its results may be appropriately broad for consideration.

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Derric Yeoh “TPF in International Arbitration: A slippery slope or levelling the playing field? (2016), Journal of International Arbitration, p. 115, 118
Niccolo Landi “The Arbitrator and the Arbitration Procedure: TPF in international commercial arbitration – an overview”, Austrian Yearbook on International Arbitration (2012), p. 99
Oxus Gold plc v. Republic of Uzbekistan, UNCITRAL, Final reward (2015)
Legal privileges are professional duties of confidentiality and professional secrecy
Andrew Tweeddale “Arbitration of commercial disputes: international and English law and practice”, Oxford University Press (2007), p. 350
Susanna Khouri, Kate Hurford, Clive Bowman “TPF in International Commercial and Treaty Arbitration. A discussion of the risks and benefits of TPF”, Journal of International Arbitration (2011), n. 12
Jonas von Goeler “TPF in International Arbitration and its impact on procedure, Kluwer Law International (2016), p. 74
The HKIAC Administered Arbitration Rules 2018, Art. 45.3
The UNCITRAL Arbitration Rules (2010), Art. 41
The Essar v. Norscot Case: A final argument for the full-disclosure wingers of TPF in international arbitration (2016), Kluwer Arbitration Blog
The SIAC Arbitration Rules (2017), available at http://www. siac.org.sg/our-rules/rules/siac-ia-rules-2017
The Law Reform Commission of Hong Kong Report on TPF for Arbitration (2016), available at http://www.hkreform.gov.hk/en/docs/rtpf_e.pdf
Eurogas v. Slovakia, Procedural Order N 3, 23 June 2015, para. 123
South American Silver v. Bolivia, PCA Case N 2013-15, Procedural Order N 10 (11 January 2016), para. 76
Eskosol v. Italy, ICSID case N ARB/15/50, Procedural Order N 3, 12 April 2017, para. 37-38
RSM v. Saint Lucia, ICSID case N ARB/12/10, 13 August 2014, para. 87
Garcia Armas v. Venezuela, UNCITRAL, PCA Case N 2016-08, Procedural Order N 9, para 250-251, 261
The SIAC Arbitration Rules (2017), available at http://www. siac.org.sg/our-rules/rules/siac-ia-rules-2017
Iran-Slovakia BIT (2016), Art. 21
Nadia Darwazeh, Adrien Leleu “Disclosure and security for costs or how to address imbalances created by TPF, Journal of International Arbitration (2016) 33 (2) Kluwer Law International, p. 132
Carolyn Lamm, Eckhard Hellbeck “TPF in Investor-State Arbitration: Introduction and Overview” in ICC Institute of World Business law and others (eds), TPF in International Arbitration (ICC 2013), p. 106
M. Bernando “Third-party litigation funding. Investing in arbitration” (2011), Transnational Dispute Management, pp. 25ff
CETA, Canada-EU (2016), Art. 8.26
The SIAC Arbitration Rules (2017), available at http://www. siac.org.sg/our-rules/rules/siac-ia-rules-2017
Report of the UNCITRAL Working Group III (Investor-State Dispute Settlement Reform) on the work of its thirty-eight session (Vienna, 29 October-2 November 2019), A/CN.9/WG.III/WP.964

References

Case Law

South American Silver v. Bolivia, PCA Case N 2013-15, Procedural Order N 10 (11 January 2016), para. 79.
Garcia Armas v. Venezuela, UNCITRAL, PCA Case N 2016-08, Procedural Order N 9, para 2-3.
Eurogas v. Slovakia, Procedural Order N 3, 23 June 2015, para. 123.
South American Silver v. Bolivia, PCA Case N 2013-15, Procedural Order N 10 (11 January 2016), para. 76.
Eskosol v. Italy, ICSID case N ARB/15/50, Procedural Order N 3, 12 April 2017, para. 37-38
RSM v. Saint Lucia, ICSID case N ARB/12/10, 13 August 2014, para. 87.
Garcia Armas v. Venezuela, UNCITRAL, PCA Case N 2016-08, Procedural Order N 9, para 250-251, 261.

Literature

M. Scherer, A. Goldsmith and C. Flechnet “TPF in International Arbitration in Europe: Part 1 – Funders’ Perspectives, available at https://www.transnationaldispute-management.com/news/20120312.pdf.
L. B. Nieuwveld, V. Shannon “Third-party funding in international arbitration”, Kluwer Law (2012).
Marco de Morpurgo “A comparative legal and economic approach to third-party litigation funding”, Cardozo Journal of International and Comparative Law, Vol. 19, pp. 343 (2011).
Peysner, Nurse “Litigation funding: status and issues research report”, p. 28 (2008).
Coester, D. Nitzsche “Alternative ways to finance a lawsuit, p. 87-88 (2005).
Todd Allee, Clint Peinhart “Contingent Credibility: The impact of investment treaty violations on foreign direct investment” (2011).
David Chriki “Investment Arbitration Liability Insurance: A possible solution for concerns of a regulatory chill? (2018).
Daniel Behn, Ana Maria Daza “The defense burden in international investment arbitration” (2017).
Lisa Bench Nieuwveld, Victoria Shannon Sahani “TPF in international arbitration”, p. 43.
A. Henderson. D. Waldek “Singapore Arbitration update: TPF and new SIAC Rules 2016, Herbert Smith Freehills Arbitration Notes (2016), available at https://hsfnotes.com/arbitration/2016/07/01/singapore-arbitration-updatethird-party-funding-and-new-siac-rules-2016/.
C. A. Rogers “Ethnics in international arbitration”, Oxford University Press (2014), p. 194.
A. Goldmith and L. Melchionda “The ICC’s Guidance Note on disclosure and TPF: A step in the right direction”, Kluwer Arbitration Blog (2016), available at http://kluwerarbitrationblog.com/2016/03/14/the-iccsguidance-note-on-disclosure-and-third-party-funding-a-step-in-the-right-direction/.
Khouri, Hurford, Bowman “Third-party funding in international commercial and treaty arbitration – a panacea or a plague? A discussion of the risks and benefits of third-party funding (2011).
Derric Yeoh “TPF in International Arbitration: A slippery slope or levelling the playing field? (2016), Journal of International Arbitration.
Niccolo Landi “The Arbitrator and the Arbitration Procedure: TPF in international commercial arbitration – an overview” (2012).
Andrew Tweeddale “Arbitration of commercial disputes: international and English law and practice” (2007), Oxford University Press.
Susanna Khouri, Kate Hurford, Clive Bowman “TPF in International Commercial and Treaty Arbitration. A discussion of the risks and benefits of TPF” (2011).
Jonas von Goeler “TPF in International Arbitration and its impact on procedure (2016), Kluwer Law International.
The Essar v. Norscot Case: A final argument for the full-disclosure wingers of TPF in international arbitration (2016), Kluwer Arbitration Blog.
Nadia Darwazeh, Adrien Leleu “Disclosure and security for costs or how to address imbalances created by TPF (2016), Journal of International Arbitration
Carolyn Lamm, Eckhard Hellbeck “TPF in Investor-State Arbitration: Introduction and Overview” (2013)
M. Bernando “Third-party litigation funding. Investing in arbitration” (2011).

Other Resources

The UNCITRAL Arbitration Rules (2010) available at https://www.uncitral.org/
Comprehensive Economic and Trade Agreement (CETA), Canada-EU (2016), available at https://ec.europa.eu
EU-Vietnam Free Trade Agreement (2018), available at http://trade.ec.europa.eu
Proposals for Amendment of the ICSID Rules (2018), available at https://icsid.worldbank.org
Hague Rules on Business and Human Rights Arbitration prepared by the Drafting Team of the Hague Rules on Business and Human Rights Arbitration, available at https://www.cilc.nl
Report of the ICCA-Queen Mary Task Force on the TPF in international arbitration (2018), available at https://www.arbitration-icca.org
Report of the UNCITRAL Working Group III (Investor-State Dispute Settlement Reform) on the work of its thirty-fourth session (Vienna, 27 November – 1 December 2017), available at http://www.uncitral.org/pdf/english/workinggroups/wg_3/WGIII-34th-session/930_for_the_website.pdf.
Report of the UNCITRAL Working Group III (Investor-State Dispute Settlement Reform) on the work of its thirty-seventh session (New York, 1-5 April 2019), A/CN.9/WG.III/WP.157.
Report of the UNCITRAL Working Group III (Investor-State Dispute Settlement Reform) on the work of its thirty-fifth session (New York, 23-27 April 2018), A/CN.9/WG.III/WP.935.
Report of the UNCITRAL Working Group III (Investor-State Dispute Settlement Reform) on the work of its thirty-eight session (Vienna, 29 October-2 November 2019), A/CN.9/WG.III/WP.964.
Report of the ICC Commission on Arbitration “Decisions on Costs in International Arbitration” (2015).
Civil Law (Amendment) Act 2017 was passed by Parliament on 10 January 2017.
Civil Law Amendment Bill of 2016, Article 4 and Explanatory Statement of the Civil law Amendment Bill of 2016.
The Law Reform Commission of Hong Kong Final Report on TPF for Arbitration (October 2016), para. 1.6, available at http://www.hkreform.gov.hk
The European Union’s proposal for Investment Protection and Resolution of Investment Disputes (2015), Article 1 of Section 3, available at http://www.europarl.europa.eu
Draft French Model BIT (2006), available at https://www.italaw.com/documents/Model_Treaty_France2006.pdf.
Brazilian CAM-CCBC Administrative Resolution N 18 (2016), Article 1, available at http://www.ccbc.org.br/Materia/2890/resolucao-administrativa-182016/enUS.
Singapore International Arbitration Centre Investment Arbitration Rules (2017), available at http://www.siac.org.sg/our-rules/rules/siac-ia-rules-2017.
Singapore Institute of Arbitrators “Guidelines for TP funders”, available at http://siarb.org.sg
China International Economic and Trade Arbitration Commission Hong Kong Center “Guidelines for TPF in Arbitration” (2016), para. 1.2.
ICSID Rules Amendment Process (2016), available at https://icsid.worldbank.org/en.Pages/about/Amendment-of-ICSID-Rules-and-Regulations.aspx.
Proposals for Amendment of the ICSID Rules prepared by the ICSID Secretariat (2 August 2018), available at https://icsid.worldbank.org/en/Documents/Synopsis_English.pdf and https://icsid.worldbank.org/en/Documents/Amendments_Vol_Two.pdf.
The IBA Guidelines are available at http://www.ibanet.org/Publications/publications_IBA_guides_and_free_materials.aspx.
The ICC Note to parties and arbitral tribunals on the conduct of the arbitration under the ICC Rules of arbitration (2016) available at https://cdn.iccwbo.org

This article is written by Aastha Dhawan. The author can be contacted via email at aastha@bnblegal.com

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The Regulation of TPF with a view to the UNCITRAL Investor-State Dispute Settlement Reform

Introduction

1. Definition and legal framework of TPF

1.1. Scope of TPF

Non-for-profit funders

TPF compared with other forms of financial involvement

1. Corporate (equity) financing.

2. Contingency fee arrangements (non-recourse funding).

3. Insurance

TPF Models

1. Claimant funding

2. Respondent Funding

3. Portfolio Funding

1.2. Legal Framework

1. National legislation

2. Investment Treaties

3. Arbitration Rules

2. Main issues

2.1. Conflicts of interest and disclosure

2.2. Third-party control and influence

2.3. Confidentiality and legal privilege⁵⁶

2.4. Costs and security for costs

Costs issues

Security for costs

2.5. Speculative, Marginal and Frivolous Claims

3. The UNCITRAL regulation of TPF

Conclusion

References

Case Law

Literature

Other Resources

Search

Categories

The Regulation of TPF with a view to the UNCITRAL Investor-State Dispute Settlement Reform

Introduction

1. Definition and legal framework of TPF

1.1. Scope of TPF

Non-for-profit funders

TPF compared with other forms of financial involvement

1. Corporate (equity) financing.

2. Contingency fee arrangements (non-recourse funding).

3. Insurance

TPF Models

1. Claimant funding

2. Respondent Funding

3. Portfolio Funding

1.2. Legal Framework

1. National legislation

2. Investment Treaties

3. Arbitration Rules

2. Main issues

2.1. Conflicts of interest and disclosure

2.2. Third-party control and influence

2.3. Confidentiality and legal privilege56

2.4. Costs and security for costs

Costs issues

Security for costs

2.5. Speculative, Marginal and Frivolous Claims

3. The UNCITRAL regulation of TPF

Conclusion

References

Case Law

Literature

Other Resources

Search

Categories

2.3. Confidentiality and legal privilege⁵⁶