Investment treaty arbitrations: the evolution of third party funding
In August 2018, the International Centre for Settlement of Investment Disputes (“ICSID”), the body that administers most investment treaty arbitrations, published a set of proposed changes to its rules for resolving disputes between foreign investors and states (the “ICSID Rules”). The amendments, which have been in the works since 2016, are aimed at modernizing and streamlining the Rules. As part of its modernization efforts, ICSID has addressed issues surrounding third party funding, including disclosure of funding and security for costs, that have been the subject of some debate within investment treaty arbitration jurisprudence.
Disclosure of Funding
First, the ICSID Rules amendments introduce an obligation by the parties to disclose whether they have obtained third party funding, and if so, the name of the funder. The name of the funder would also be provided to potential arbitrators prior to appointment to avoid any conflicts of interest. The obligation would apply throughout the proceeding. For instance, if a party were initially self-funded but obtained third party funding on the eve of the hearing, the party would be under an obligation to disclose the existence of the funding at that stage.
The proposed amendment is consistent with recent decisions of some ICSID tribunals to require disclosure of third party funding (Muhammet Çap & Sehil Inşaat Endustri ve Ticaret Ltd Sti v. Turkmenistan, EuroGas Inc. and Belmont Resources Inc. v. Slovak Republic and South American Silver v. Bolivia). The primary concern driving mandatory disclosure is the early identification of any potential arbitrator conflicts of interest – for instance, arbitrators may have consulting roles with funders, may have acted as counsel on cases funded by that funder, or may have been appointed by the funder in the past.
The proposed amendment regarding disclosure is also consistent with the recent recommendations from the ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration. The Queen Mary Report, released in April 2018, adopted as principles that a party should disclose the existence of a third-party funding arrangement and identity of the funder to the arbitrators at first appearance or as soon as practicable for the purposes of assessing arbitrator conflict, and that arbitrators and arbitral institutions should have the authority to expressly request that the parties disclose whether they are being funded, and the identity of the funder. Both the Queen Mary Report and the proposed ICSID Rules amendments are consistent with the earlier IBA Guidelines on Conflict of Interest in International Arbitration, which identify the involvement of third party funders as a potential source of arbitrator conflicts. The proposed amendments would also bring the ICSID Rules in line with recent China International Economic and Trade Arbitration Commission (“CIETAC”) rule amendments requiring positive disclosure of funding. Recent or proposed amendments to the rules of the ICC, Singapore International Arbitration Centre (“SIAC”) and Hong Kong International Arbitration Centre (“HKIAC”) also all contemplate that third party funding may be disclosed either voluntarily or by order of the tribunal. However, unlike the proposed ICSID Rules and the new CIETAC rules, they stop short of creating a positive obligation on parties to disclose funding.
Opposition has been raised to mandatory disclosure on the basis that the terms of a litigation funding arrangement are privileged and/or confidential. The proposed ICSID Rule amendments, however, along with the Queen Mary and IBA recommendations, do not call for the disclosure of terms of the agreements, other than as necessary for security for costs purposes.
Security for Costs
Second, the ICSID Rule amendments for the first time address security for costs. While it has been open to an ICSID tribunal to order security for costs, it has been done only twice, and only in “exceptional circumstances” (see RSM Production Corporation v. Saint Lucia and Manuel García Armas and others v. Venezuela). While in both cases the claimant was funded by a third party, ICSID tribunals have held that the presence of third party funding did not, of itself, constitute exceptional circumstances that would justify ordering security for costs (EuroGas Inc. and Belmont Resources Inc. v. Slovak Republic). Rather, RSM and Armas were based on unique facts. In RSM the claimant disclosed that it was funded by a third party. The tribunal ordered security for costs, on the basis of the claimant’s failure to comply with costs orders in both the proceeding at bar and a previous arbitration.
Armas is an example of the disclosure and security for costs issues intersecting. In that case the claimants disclosed the existence of a third party funding agreement. The tribunal ordered the claimants to produce the agreement itself. As the agreement did not provide for the funder to cover any costs award, the tribunal ordered the claimants to show that they had the ability to pay a costs award, effectively reversing the usual burden of proof lying with the moving party. The tribunal found that the claimants did not meet this burden, and ordered them to pay security for costs.
The proposed ICSID Rule amendments introduce a new stand-alone rule that would allow a tribunal to order security for costs. Instead of adopting the “exceptional circumstances” standard from the cases above, however, the proposed amendments state that the tribunal must consider the party’s ability to comply with an adverse decision on costs, and any other relevant circumstances.
This proposed amendment addresses a situation wherein a state is forced to respond to a claim from a party claimant who may not be financially capable, but has received third party funding for the arbitration. In such circumstances, it is possible that a costs award will be made against the claimant that it cannot satisfy, and the respondent is left without redress against anyone within the tribunal’s jurisdiction. It may therefore be understandable for a tribunal to order disclosure of the particular terms of a funding agreement that address costs awards, though the remaining commercial terms should remain privileged and confidential.
The proposed ICSID Rules, in combination with the decisions in RSM and Armas, raise concerns that funded parties may be required to set out evidence that they can satisfy a costs award, or be faced with a security for costs order. However, these cases were decided on very particular facts and remain exceptions to the general investment treaty arbitration practice of not awarding security for costs. More recently, an unpublished October 2018 decision by an ICSID tribunal in a matter under the Germany-Lebanon BIT followed the traditional practice of not awarding security for costs. The tribunal found that Lebanon had not submitted sufficient proof of the claimant’s impecuniosity, or established the urgency and necessity of the request, in a situation where a final ruling had been issued, and the request for security for costs focused on already-incurred costs. The tribunal also refused to order the disclosure of the financing agreement between the claimant and its counsel. The tribunal noted that “the mere fact that Claimant’s claims in the arbitration are funded […] by a third party, does not establish Claimant’s impecuniosity.”
While RSM and Armas are unlikely to result in any rule of general application, parties and funders should be aware of the trend towards disclosure of funding agreements, the potential for disclosure of funding agreement terms concerning costs obligations, and the possibility that a tribunal may order security for costs where there is no provision for adverse costs in the funding agreement.
Bentham deals with this issue in a unique fashion by filing a deed poll (a form of undertaking) submitting to the arbitral tribunal’s jurisdiction on questions of costs. This is usually a complete answer to any question of security for costs, given Bentham’s transparent financial position as a listed company on the ASX and the general enforceability of an arbitral award against it.
Bentham’s Litigation Funding Agreement, including the Undertaking to satisfy any adverse costs, was recently approved by a Canadian court in the context of a class proceeding. In approving the LFA, the court considered the ability of Bentham to satisfy the undertaking, noting that Bentham is an amply capitalized substantial financial entity whose financial statements are a matter of public record as a reporting issuer.
ICSID has invited member states and the public to submit written comments on the proposed amendments by December 28, 2018. The proposed amendments will then go to ICSID’s Administrative Council for a vote in either 2019 or 2020.