José Antonio Rivas Managing Director

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VANNIN CAPITALTHE TREATY MAKING POWER IN THIRD PARTY FUNDING

Currently, there are at least 3340 international investment agreements (IIAs or Investment Treaties)—comprising bilateral investment treaties (BITs) and investment chapters of free trade agreements (FTAs).1 The vast majority of those IIAs, which include old generation, modern, and recently negotiated treaties,2 make no reference to third party funding. A few new IIAs recently signed by European, Asian and North American and Latin American States – altogether comprising 33 countries – recognise third party funding as a means to finance investment arbitrations and also provide limited rules for disputing parties and arbitrators in cases where the claimant’s or the respondent’s case is financed by a funder. This article explores the effect under public international law and international investment arbitration of having the two aforementioned sets of treaties – i.e., those that impose no regulation concerning third party funding (TPF), and those that set out limited obligations for disputing parties and arbitrators.

Section I discusses how, under the auspices of investment treaties free of regulation on TPF, disputing parties including investors and States have relied on TPF to finance their arbitrations, and tribunals have addressed issues of conflict of interest, disclosure and security for costs. Section II discusses the comments from States and stakeholders provided during ICSID’s process of amendment to its rules, and the views provided within the UNCITRAL Working Group III tasked with examining the possible reform of the investor-State dispute settlement (ISDS) system. Section III identifies the treaty provisions on third party funding that a number of States have incorporated into their latest investment treaties, and discusses the resulting status of third party funding under those treaties. To conclude, Section IV analyses the effect under public international law of the current regime of treaties comprised by a vast majority of IIAs free from regulations on TPF, and a few new IIAs with certain limited provisions on TPF.

THE TREATY MAKING POWER IN THIRD PARTY FUNDING

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The rule set out in case law that the identity of the funder be disclosed, and even the exceptional orders by tribunals to claimants for disclosure of the nature of the funding agreement,11 and disclosure of the agreement,12 all have taken place in an investment treaty environment free from regulations on TPF. Thus, tribunals are currently equipped to address matters involving legitimate interests of the disputing parties and therefore treaty provisions on third party funding do not appear to be strictly necessary.

Investment Arbitration Tribunals on Security for Costs When There Is TPF

Investment arbitration tribunals – including EuroGas, South American Silver, Eskosol v. Italy, RSM v. Saint Lucia, and Garcia Armas – have consistently ruled that the existence of TPF in an arbitration does not constitute by itself a sufficient factor to justify an order of security for costs. In EuroGas the tribunal denied the request for security for costs considering that claimants had not defaulted on their payment obligations. The tribunal explained that “financial difficulties and third party-funding . . . do not necessarily constitute per se exceptional circumstances justifying that the Respondent be granted an order of security for costs.”13

Similarly, in denying a request for security for costs the South American Silver tribunal reasoned that “[t]he existence of [a] third-party funder alone does not evidence the impossibility of payment or insolvency. It is possible to obtain financing for other reasons. The fact of having financing alone does not imply risk of non-payment”.14

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1. The Vast Majority of Investment Treaties on Third Party Funding

The vast majority of treaties do not address TPF in any way. Under those treaties the use of TPF has grown significantly in the last five years. International and regional arbitral institutions have recognised this trend even though arbitral institutions lack statistics on TPF. As recognised by the tribunal in Giovanni Alemanni v. Argentina, the practice of third party funding is “well established both within many national jurisdictions and within international investment arbitration”.3

Under these treaties free of regulation on TPF, disputing parties have obtained financing for their cases, and tribunals have recognised that it is a growing practice, albeit analysing TPF on issues of disclosure and security for costs.

Investment Arbitration Tribunals on Disclosure of TPF

Disclosure of the identity of the funder has been ordered in a few cases. In South American Silver v. Bolivia, “for purposes of transparency”, and considering that claimant had not opposed disclosing the name of the funder, the tribunal ordered such disclosure by claimant.4 The tribunal nevertheless refused to order disclosure of the funding agreement.5 Similarly, in EuroGas v. Slovakia the tribunal ordered that claimant disclose the identity of the funder who, as noted by the tribunal “[had] the normal obligations of confidentiality”.6

In Muhammet v. Turkmenistan the tribunal ordered that claimant disclose the identity of the funder, “and the nature of the arrangements concluded with the funder, including whether and to what extent [the funder would] share in any successes” of claimant in the arbitration.7 By ordering such disclosure, the tribunal sought to ensure “the integrity of the proceedings and to determine whether any of the arbitrators [were] affected by the existence of a third party funder”.8 The extent of the order for disclosure also responded to the tribunal’s view that if Turkmenistan received a favourable award, including costs, claimant would be unable to comply with such award and the funder could “disappear” from the arbitration as it was not a disputing party.9

In contrast with the aforementioned cases, in García Armas v. Venezuela the tribunal went beyond ordering disclosure of the identify of the funder. After an in camera review of a redacted version of the funding agreement, the tribunal decided that such redacted version would be provided to respondent to protect its legitimate interest in the event of a favourable award on costs, while protecting claimants’ legitimate interest to keep confidential certain information.10

Generally, disclosure of the existence of third party funding and the identity of the funder has been perceived by tribunals as a transparency requirement to protect the integrity of the arbitration and avoid conflicts of interest.

Disclosure of the funding agreement, by contrast, is a completely different matter as the agreement may include confidential information, information reflecting claimant’s counsel conceived legal strategy and views about the case, and information which if disclosed could prejudge the tribunal’s views of the case. Most tribunals have not ordered disclosure of the funding agreement, and those that have considered exceptional circumstances justifying the disclosure.

TRIBUNALS ARE CURRENTLY EQUIPPED TO ADDRESS MATTERS INVOLVING LEGITIMATE INTERESTS OF THE DISPUTING PARTIES AND THEREFORE TREATY PROVISIONS ON THIRD PARTY FUNDING DO NOT APPEAR TO BE STRICTLY NECESSARY.

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In Eskosol – in which claimant was in bankruptcy and a third party funded the claim – the tribunal denied respondent’s request for security for costs because claimant had obtained after the event (“ATE”) insurance as protection against the risk of potential adverse costs. Under such circumstances the tribunal refused to issue an order that would “impede access to justice”. 15

In RSM, the tribunal applied the same aforementioned rule, but concluded that the following “exceptional circumstances as required by ICSID jurisprudence [justified] ordering Claimant to provide security for costs”:16 “[The] proven history where Claimant did not comply with cost orders”, the fact that claimant lacked sufficient financial resources, and the fact that it was uncertain whether the funder would have warranted a cost award adverse to claimant.17

Similar to RSM, recently in Garcia Armas the tribunal agreed with prior tribunals that TPF was not in itself sufficient to order security for costs, but additional exceptional circumstances were required. As in that case there were two exceptional circumstances – namely, that pursuant to the funding agreement the funder was under no obligation to pay for any adverse costs, and that claimants were unable to convince the tribunal of their economic solvency – the tribunal saw no “remedy” other than ordering security for costs.18

Ultimately, the lack of treaty provisions on third party funding has in no way prevented tribunals from concluding that the existence of TPF of an arbitration claim is not in itself sufficient to order security for costs, and that exceptional additional circumstances would be required to request such an order. The existing powers of tribunals to address issues of security for costs, and the fact that circumstances vary from case to case are arguments in favor of not following an overly regulatory approach in treaties.

2. Views from States and Stakeholders on Third Party Funding

Proposals for amendment of the ICSID Rules and commentaries by stakeholders on third party funding

The Proposals for Amendment of the ICSID Rules come about after a thorough consultation process with stakeholders of investment arbitration including States, practitioners, users, arbitrators and academics. As explained by its Secretariat, “ICSID received a diverse set of comments from stakeholders on third party funding, ranging from those who did not support any regulation to those who wanted to prohibit its use entirely”.19

The resulting proposed Arbitration Rule 21 and Additional Facility Rule 32 address TPF from the perspective of avoiding conflicts of interest between the parties and the arbitrators selected for the case.20

The proposed rules require that the funded party – which could be the investor or the State – disclose that it has TPF and the name of the funder. These proposed rules are supplemented with the revised declaration of arbitrator in Schedule 2 “which requires arbitrators to confirm that they have no conflict with any third-party funder disclosed by the disputing parties. The revised declaration requires that at the outset of the arbitration each arbitrator declare that he or she is “required to disclose the professional, business and other significant relationships, within the past five years with (i) the parties; (ii) counsel for the parties; (iii) other members of the Tribunal (presently known); and (iv) any third-party funder disclosed [by the disputing parties]”.21

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THE LACK OF TREATY PROVISIONS ON THIRD PARTY FUNDING HAS IN NO WAY PREVENTED TRIBUNALS FROM CONCLUDING THAT THE EXISTENCE OF TPF OF AN ARBITRATION CLAIM IS NOT IN ITSELF SUFFICIENT TO ORDER SECURITY FOR COSTS, AND THAT EXCEPTIONAL ADDITIONAL CIRCUMSTANCES WOULD BE REQUIRED TO REQUEST SUCH AN ORDER.

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As noted by ICSID, the proposed ICSID rules on TPF do not require disclosure of the actual funding agreement or the terms of funding because such disclosure is “not needed to avoid conflict of interest”.22 If a party requests disclosure of a funding agreement it will be within the tribunal’s discretion to address such request.23

Similarly, if a party requests security for costs on the basis that a third party is funding the case of opposing party, the tribunal is already well equipped to assess the request without any need to add additional rules to the ICSID rules on security for costs.

UNCITRAL discussions on third party funding

The UNCITRAL Working Group III is examining the possible reform of ISDS, including the potential need for harmonised rules or regulation of TPF.24 In the discussions in UNCITRAL stakeholders have voiced varied and different views. On the one hand there is the perception – albeit not accurate considering Philip Morris v Uruguay,25 in which the State’s case was funded by a third party – that only private parties may resort to third party funding, and that it might be creating a “systemic imbalance”.26

On the other hand, as recognised by the UNCITRAL Working Group III, the costs of investment arbitration may be such that small and medium-sized enterprises may have difficulties accessing the investment arbitration system.27 The implication is that solutions are required to ensure access to justice by those companies, and TPF currently offers a solution.

It is worth noting that despite the stakeholders’ various views on TPF, in the discussions of possible reform of ISDS – cost and duration, the Working Group considered the “use of third-party funding for claimants and [the] explor[ation of] third-party funding for States” as one of the “Possible measures to address concerns about cost and duration”.28

3. Treaties signed by Argentina, Canada, Chile, the EU and its member States, Singapore, and Vietnam

The views and concerns voiced by stakeholders in the process of amendment to 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 of the newest investment treaties, the definition of third party funding is comprehensive, and the treaty provisions do not appear to be overly constraining.

Even though treaty provisions on TPF are not strictly necessary because the existing net of treaties, and powers of tribunals have enabled tribunals to address complex issues of disclosure and security for costs, it is not at all surprising to see investment treaties incorporating provisions on TPF. Public international law is naturally inclined to witness practice and often codify in international treaties what may have become a minimum common understanding for at least a few members of the international community and/or international stakeholders.

The end result is recognition of TPF in investment treaties signed by thirty three States in three continents, and the creation of obligations on disclosure that must be complied with by disputing parties in arbitrations carried out under the auspices of such treaties. As explained by the ICCA-Queen Mary Report on Third Party Funding, “most attention by states has not aimed to prohibit third-party funding of investment claims, but instead to expressly acknowledge it and require disclosure and greater transparency”.30

The treaty provisions on third party funding

Third party funding and financing by counsel through contingency fees have been operating in investment treaty arbitration without actual formal treaty recognition. Pragmatism and common sense has led disputing parties –mostly claimants, but also at least one respondent State in Philip Morris v. Uruguay – to resort to forms of financing that would facilitate advancing their claims. The lack of prohibitions against TPF has enabled access to investment arbitration by investors, and the possibility of a successful and robust defense for at least one State in the case of Uruguay. The aforementioned treaties now recognise TPF, provide a definition, and include limited regulations on disclosure and conflicts.

Definition

TPF means—according to the CETA,31 and similar definitions in the EU-Singapore FTA,32 the EU-Vietnam FTA,33 and the Argentina-Chile FTA34 –“funding of all or part of the cost of the proceeding by a non-disputing party who enters into an agreement with a disputing party, through donation or in return for remuneration, share or other interest in the proceeds dependant on the outcome of the dispute”.

THE UNCITRAL WORKING GROUP CONSIDERED THE “USE OF THIRD-PARTY FUNDING FOR CLAIMANTS AND [THE] EXPLOR[ATION OF] THIRD-PARTY FUNDING FOR STATES” AS ONE OF THE “POSSIBLE MEASURES TO ADDRESS CONCERNS ABOUT COST AND DURATION”.

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Disclosure

According to the CETA, and the EU-Singapore FTA, the disputing party being funded must promptly disclose the name and address of the funder to the other disputing party and to the tribunal (when the claim is filed or, in case such agreement is entered into after the claim is filed, as soon as it is concluded).35

In turn, the EU-Vietnam provides that the disputing party being funded must notify the Tribunal of the name and address of the funder, the existence of the funding agreement and its nature. The additional element provided by this treaty is the obligation to inform the tribunal of the “nature” of the funding agreement, which may refer to whether such agreement involves a grant, a donation, or a commitment for funds in exchange for remuneration dependent on the outcome of the case. As understood in Muhammet v. Turkmenistan, it may also refer to disclosing whether and to what extent the funder would “share in any successes” that claimant may receive in the arbitration.36

Security for Costs

Another distinctive element of the EU-Vietnam FTA is the provision prescribing that on security for costs “the Tribunal shall take into account whether there is third-party funding”.37 This language does not, of course, create a presumption that when there is TPF security for costs should be ordered by the Tribunal, but only provides that third-party funding should be taken into consideration. And it makes sense, because the fact that TPF is relied upon by a disputing party does not mean that such party is financially insolvent. A party may very well use third party funding because instead of investing on a US$ 3 or 4 million dollar arbitration, it may opt to implement its long term business plan by building a factory or launching a new product, and may want to leave the financing of its arbitration to a specialised entity such as a third party funder.

4. Conclusion

The current investment treaty arbitration regime comprised of a vast number of treaties that are free of regulations on TPF, and by the recently signed treaties analysed above reflects a framework of treaties that has permitted the development of third party funding as means to facilitate access to justice by disputing parties in international arbitration. This regime is evolving by codifying a few limited rules on disclosure (such as the obligation to disclose that there is TPF and the identity of the funder), and by expressly recognising TPF as an international lawful reality.

1 See UNCTAD’s Investment Policy Hub (https://investmentpolicyhub.unctad.org/IIA) (9 December 2018).

2 See for example, the Canada-United States-Mexico Agreement (CUSMA) (30 November 2018).

3 Giovanni Alemanni and others v. Argentine Republic, ICSID Case No. ARB/07/8, Decision on Jurisdiction and Admissibility (17 November 2014), para. 278.

4 South American Silver Limited v. Plurinational State of Bolivia (“South American Silver v. Bolivia”), PCA Case No. 2013-15, Procedural Order No. 10, 11 January 2016, para. 79.

5 South American Silver v. Bolivia, para. 79, 85.6 EuroGas Inc and Belmont Resources Inc v. Slovak Republic

(“EuroGas v. Slovakia”) (ICSID Case No. ARB/14/14), Transcript of the First Session and Hearing on Provisional Measures (17 March 2015) p. 145.

7 See Muhammet Çap & Sehil Inşaat Endustri ve Ticaret Ltd Sti v. Turkmenistan (ICSID Case No. ARB/12/6) (“Muhammet v. Turkmenistan”), Procedural Order No. 3 (12 June 2015), para. 13.

8 Muhammet v. Turkmenistan, para. 9.9 Muhammet v. Turkmenistan, para. 9.10 Manuel Garcia Armas et al v Bolivarian Republic of

Venezuela (“Garcia Armas v Venezuela”), UNCITRAL, PCA Case No. 2016-08, Procedural Order No 9 (Decision on Request for Provisional Measures) (original in Spanish), para. 2-3.

11 See Muhammet v. Turkmenistan.12 See Garcia Armas v Venezuela.13 EuroGas v. Slovakia, Procedural Order No. 3 - Decision on

Requests for Provisional Measures, 23 June 2015, para. 123.14 South American Silver v. Bolivia, para. 76.15 Eskosol S.p.A. in liquidazione v. Italian Republic (“Eskosol v.

Italy”), ICSID Case No. ARB/15/50, Procedural Order No. 3 (Decision on Respondent Request on Provisional Measures), 12 April 2017, para. 37-38.

16 RSM Production Corporation v. Saint Lucia (“RSM v. Saint Lucia”), ICSID Case No. ARB/12/10, Decision on Saint Lucia’s Request for Security for Costs (Decision on Security for Costs), 13 August 2014, para. 87.

17 RSM v Saint Lucia, Decision on Security for Costs, para. 86; see, however, RSM Production Corporation v. Saint Lucia, ICSID Case No. ARB/12/10, Assenting Reasons of Gavan Griffith, 13 August 2014, para. 16 (proposing a rule on security for costs which deviates from the rule thus far adopted by ICSID tribunals. In the view of the minority assenting opinion, “unless there are particular reasons militating to the contrary, exceptional circumstances may be found to justify security of costs orders arising under BIT claims as against a third party funder, related or unrelated, which does not proffer adequate security for adverse cost orders”).

18 Garcia Armas v Venezuela, para. 250- 251, 261.19 ICSID Rule Amendment Video Series Part Five: Third-

Party Funding (“ICSID Rule Amendment Video Series Part Five: Third-Party Funding”) (https://www.youtube.com/watch?v=4NUug7cqEwY&feature=youtu.be) (1 November 2018).

20 Proposals for Amendment of the ICSID Rules, 2 August 2018, Arbitration Rule 21(2),(3) (Disclosure of Third-party Funding), and Additional Facility Rule 32(2),(3) (Disclosure of Third-party Funding) (providing that [a] party shall file a written notice disclosing that it has third-party funding and the name of the third-party funder . . . immediately upon registration of the Request for arbitration, or upon concluding a third-party funding arrangement after registration”, and mandating a continuing obligation to disclose any changes to the information that should have been or was initially disclosed).

21 ICSID Rule Amendment Video on Third-Party Funding.22 ICSID Rule Amendment Video on Third-Party Funding.23 See ICSID Rule Amendment Video Series Part Five: Third-

Party Funding.24 See http://www.uncitral.org/uncitral/en/commission/

working_groups/3Investor_State.html.25 See Philip Morris Brands Sàrl, Philip Morris Products S.A.

and Abal Hermanos S.A. v. Oriental Republic of Uruguay (“Philip Morris v. Uruguay”), ICSID Case No. ARB/10/7, ICSID Case No. ARB/10/7); see Bloomberg Philanthropies Press Release, “Bloomberg Philanthropies & The Bill & Melinda Gates Foundation Launch Anti-Tobacco Trade Litigation Fund” (18 March 2015) (https://www.bloomberg.org/press/releases/bloomberg-philanthropies-bill-melinda-gates-foundation-launch-anti-tobacco-trade-litigation-fund/) (9 December 2018).

26 UNCITRAL, A/CN.9/930/Rev.1 - Report of Working Group III (Investor-State Dispute Settlement Reform) on the work of its thirty-fourth session - Part I – 34th session, 27 November - 1 December 2017 (“UNCITRAL Working Group III, 34th Session”), Vienna (http://www.uncitral.org/uncitral/en/commission/working_groups/3Investor_State.html), paras. 57, 69.

27 UNCITRAL Working Group III, 34th Session”), paras. 64.28 UNCITRAL, A/CN.9/WG.III/WP.153 - Possible reform

of investor-State dispute settlement (ISDS) - cost and duration 36 th session, 29 October - 2 November 2018, Vienna (http://www.uncitral.org/uncitral/en/commission/working_groups/3Investor_State.html) (measures to address concerns about cost and duration measures to address concerns about cost and duration 31 August 2018), para. 101.

29 See the CETA between Canada and the European Union (EU), Belgium, Bulgaria, Czech Republic, Denmark, Germany, Estonia, Ireland, Greece, Spain, France, Croatia, Italy, Cyprus, Latvia, Lithuania, Luxembourg, Hungary, Malta, Netherlands, Austria, Poland, Portugal, Romania, Slovenia, Slovakia, Finland, Sweden, and the United Kingdom (14 January 2018); see the Singapore-EU FTA (2017); see the Vietnam-EU FTA (2017); see the Chile-Argentina BIT (2 November 2017).

30 Report of the ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration (“ICCA-Queen Mary Report on TPF”), (https://www.arbitration-icca.org/media/10/40280243154551/icca_reports_4_tpf_final_for_print_5_april.pdf) (3 December 2018), p. 219.

31 CETA, Art. 8.1.32 See EU-Singapore FTA, Art. 3.1.33 See EU-Vietnam FTA, Art. 3.28(i)34 See Chile-Argentina FTA, Art. 8.27(3).35 See CETA, Art. 8.26 ; see EU-Singapore FTA, Art. 3.836 See Muhammet v. Turkmenistan, para. 13.37 EU-Vietnam FTA, Art. 3.37(3).

THE CURRENT INVESTMENT TREATY ARBITRATION REGIME IS EVOLVING BY CODIFYING A FEW LIMITED RULES ON DISCLOSURE (SUCH AS THE OBLIGATION TO DISCLOSE THAT THERE IS TPF AND THE IDENTITY OF THE FUNDER), AND BY EXPRESSLY RECOGNISING TPF AS AN INTERNATIONAL LAWFUL REALITY.