Increasing obligations regarding third-party funding

As is well-known, investment arbitration disputes are costly for claimants. The high costs are a serious obstacle for SMEs to initiate and pursue disputes until the end. Consequently, third-party funding has been increasingly made available and used by claimants in order to gain access to justice and receive compensation for damages suffered through illegal governmental measures.

But despite third-party funding becoming increasingly, respondents in investment arbitration disputes have recently successfully convinced arbitral tribunals that these third-party funders are somehow dodgy.

The perception created is that in return for funding the arbitration claim, the third-party funders not only receives a certain percentage of any compensation awarded to the claimant, but also that they have an unacceptable influence in the way the claimants argues his case. As a consequence thereof, two questions need to be addressed: (i) what kind of information should be disclosed about third party financing and (ii) what are the consequences of such disclosure?
Regarding the information that the claimant must provide, the recent trend points towards full disclosure. This was the case in Muhammet Çap & Sehil Inşaat Endustri ve Ticaret Ltd. Sti. v. Turkmenistan (ICSID Case No. ARB/12/6) and in Eurogas Inc., Belmont Resources Inc. v Slovak Republic , when the arbitral tribunal decided that the claimant should disclose the identity of the third-party funder.

So, while there is growing consensus to impose full identification and disclosure of  third-party funders, there is less consensus concerning the conclusions to be drawn from disclosure or the existence of a third-party funder.

Some take for granted that third-party funders may not be ordered to pay the costs of the arbitration should the claim collapse. However, there is already case-law supporting the view that third party funders must bear the costs, if they hold a sufficient degree of economic interest and control in relation to the claim.

Regarding the consequences of the existence of a third-party funder, the question has arisen whether for the purposes of deciding security for costs, must a third-party funded claimant  be presumed penniless merely because the funding comes from a third-party?

In the Eurogas v Slovakia case cited above, the arbitral tribunal expressly denied such assumption. However, Gavan Griffith’s assenting reasons to the decision on St. Lucia’s Request for Security for Costs of 13 August 2014 was clearly of different view. He stated that “once it appears that there is third-party funding of an investor’s claims, the onus is cast on the claimant to disclose all relevant factors and to make a case why security for costs orders should not be made”.

Conclusions

Investors who decide to initiate investment arbitration proceedings should be aware of the additional obligations, which are connected with third-party funders.It seems that full disclosure of the identity and role of any third-party funder is now generally imposed. Also, third-party funders may be called upon to bear the costs if a claim collapses and may be required to pay security of costs in order to continue the proceedings. Such additional obligations make it more difficult for SMEs to obtain third-party funding and be able to pursue an investment arbitration claim. It also requires claimants to pay closer attention to the arrangements, which he makes with a third-party funder.

The GIP team is at your disposal to advice you on these issues and thus be able to make effective use of third-party funding.