SIAC’s new Investment Arbitration Rules – another step forward for funding in Asia

SIAC’s new Investment Arbitration Rules

On 1 January 2017, the Singapore International Arbitration Centre (SIAC) introduced the first edition of its Investment Arbitration Rules. Amongst the innovations, the Rules recognise that Third Party Funding (TPF) arrangements exist and confirm that Tribunals have the power to obtain information concerning such arrangements. We believe this is a global first for any set of institutional arbitration rules. In this post, Susanna Khouri, Oliver Gayner and Nathan Landis of IMF Bentham share their perspectives on the developments.

SUSANNA KHOURI: To understand the value of these new Rules, they need to be viewed in context. Investment arbitrations are often financed by TPF. There are a number of reasons why. The claims are often of high value but cost a lot of time and money to pursue to resolution. By way of illustration, the average claim size of an ICSID arbitration is reported to be US$492m, the average duration is 3 years 8 months, and the average cost for claimants is US$4.4m. Defendant states are typically well resourced, whereas claimant entities are often struggling for cash flow – in many cases the claim arises because the value of their business has been lost or damaged by expropriation or otherwise undermined by the state’s actions.

OLIVER GAYNER: The Rules of Arbitration promulgated by the ICSID Convention, which are the most widely used by some margin, are silent on the use of TPF. If the issue arises, it typically does so in relation to security for costs. The ICSID Rules confer a wide discretion on tribunals to award "preliminary measures", but the general trend has been not to order security unless exceptional circumstances exist, such as those in RSM v St Lucia (ISCSID ARB/12/10). In the latter case, Gavan Griffith QC highlighted the issue that funders, as non-parties to the proceedings, could receive the benefit of awards but avoid the burden of paying costs. Many commentators felt his "determinative proposition […] 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 for why security for costs orders should not be made" went too far, but the ensuing debate at least brought the issues surrounding TPF into the light.

NATHAN LANDIS: In litigation that principle tends to work the other way round. In Australia for example, IMF’s presence as funder is routinely disclosed to defendants, precisely so that parties can avoid the need for satellite hearings around security for costs. IMF will usually lodge a "Deed Poll" with the court confirming IMF’s obligation to meet any adverse costs orders made against the funded claimant. Further, as a listed entity, IMF’s financial position can be easily seen due to its periodic reports to the Australian Securities Exchange. That is generally a good answer to any request for security, so the parties save themselves the time and cost of arguing over a side issue which has no relevance to the resolution of their dispute. Such an instrument could be easily adapted in the context of arbitration by the funder agreeing to submit to the Tribunal’s jurisdiction in relation to costs.

SUSANNA KHOURI: The new SIAC Rules address disclosure of TPF arrangements head on. Rule 24(L) grants Tribunals the additional power to:

order the disclosure of the existence of a Party’s third-party funding arrangements and/or the identity of the third-party funder and, where appropriate, details of the third-party funder’s interest in the outcome of the proceedings, and/or whether or not the third-party funder has committed to undertake adverse costs liability.

In accordance with General Standard 7(a) of the IBA’s Guidelines on Conflicts of Interest in International Arbitration, a party must disclose a TPF arrangement to enable the arbitrators to determine any conflict of interest before their nominations can be accepted. Rule 24(L) appears to take disclosure a further step forward by giving the Tribunal power to not only require disclosure of the existence of TPF arrangements but also certain of its commercial terms ("details" of the funder’s "interest"). This raises an important concern. Disclosure of funding terms to a Tribunal on a confidential basis is not objectionable, but disclosing such terms to opposing parties is because it may confer a tactical advantage. For example, why should a respondent be entitled to see the claimant’s legal budget, or commercial terms which may reflect aspects of the funder’s risk assessment? It my view, it is very important that Tribunals adopt a consistent approach here: any disclosure inter partes must be strictly limited to two points only - who the funder is, and whether they have undertaken adverse costs liability.

OLIVER GAYNER: The other key provision around funding in the new Rules is the Tribunal’s power to "take into account any third-party funding arrangements" when apportioning the costs of the arbitration (Rule 33.1) and when making an Award of costs (Rule 35). "Award" includes interim awards, so this makes good sense in relation to security for costs. It may also, in some circumstances, permit a Tribunal to include the funder’s commission within the ambit of recoverable costs. SIAC’s Rules, in common with the ICC’s Rules, permit a successful party to recover from a losing party its "legal and other costs". In a recent and well publicised English decision, Essar v Norscot [2016] WLR(D) 576, the English High Court upheld an ICC Tribunal award of indemnity costs, including the funder’s success fee, against a defendant that was found to have forced the claimant into impecuniosity.

SUSANNA KHOURI: At the moment, the Investment Arbitration Rules have not been carried across to SIAC’s Rules for Commercial Arbitration, but hopefully that will change soon. Simple, clear and consistent criteria are very much an advantage from a party and an investment perspective. Parties choosing any arbitral process seated in Singapore should also be aware of the changes being enacted by the Civil Law (Amendment) Bill 38/2016 which provides that arbitration funding is not contrary to public policy provided the "qualifying" conditions are met by a funder – in brief, the funder has to have sufficient capital to fund the proceedings. Parties seeking funding would be well advised to do careful due diligence before selecting their finance partners: transparency and track record will be key.

NATHAN LANDIS: I think all users of the investment arbitration process will also appreciate SIAC’s attempts to reduce arbitral costs. Compared to ICSID arbitration, the administration costs of the SIAC process are lower: the filing fee is S$2,000 (ICSID: US$25,000), and both administration fees and arbitrators’ fees will be charged on a one off basis according to the value of the dispute (ICSID: US$35,000 annually, and US$3,000 per day respectively). It’s another good example of the bold innovations we are seeing in the Asia disputes market right now. For claimants based in Asia, the benefits of being able to conduct investment arbitrations in Singapore may be significant, though only time will tell whether commercial parties and states adopt the new Rules and SIAC succeeds in attracting a significant caseload away from ICSID.