Increase in international arbitrations filed points to greater demand for litigation funding

Arbitrations Bldg

The number of investment treaty arbitrations filed in 2018 continued to grow. As more parties seek to file meritorious claims, demand for third-party funding for these arbitration claims will also continue to rise.

The International Centre for Settlement of Investment Disputes (ICSID) - which administers investment treaty arbitrations across the globe - recently published its 2018 caseload statistics. The report shows that more investor-state arbitrations were filed last year than in any previous year, continuing the growth trend dating back to the 1990s. Overall, 58 investor-state arbitrations were filed with ICSID in 2018.

As noted in a recent American Lawyer article, the increasing use of third-party dispute funding may be part of the reason for this growth. Dispute funding can allow investors to advance meritorious treaty claims where they would otherwise have lacked the capital to do so. The claimant is often undercapitalised precisely because of the respondent’s conduct, which is often an expropriation of the claimant’s investment. This scenario is particularly common in natural resource, energy and infrastructure cases, where the project at issue is the claimant’s only source of revenue. Indeed, of the 58 cases filed in 2018, 21% were disputes in the oil, gas and mining sectors, 20% concerned energy disputes, and 14% were construction disputes. Funding can be particularly valuable because it can cover not only the cost of pursing the arbitration, but funders can also provide working capital to enable claimants to maintain their day-to-day corporate operations as the claim proceeds.

Increasingly, however, well-capitalised entities and investors with financial strength are also seeking litigation funding for arbitration claims, as this funding allows them to move litigation costs and risk off of their balance sheets, and enables them to use their capital for new projects or business operations at the core of their businesses.

Investment treaty arbitrations can yield significant returns, but can also be risky.  ICSID’s statistics show that outcomes are balanced between states and investors: “Half of the thirty-six cases that were concluded in 2018 were settled or otherwise discontinued. Of the remaining 18 cases, the tribunal partly or fully upheld claims in 50% of cases, dismissed all claims in 33% of cases, and declined jurisdiction in 17% of cases.”

Even if a claimant is successful in establishing liability, quantifying the loss is challenging in this sphere. Claimants with expropriated projects often seek damages representing their lost profits. Succeeding on this point will, however, depend on whether the project was truly viable, and its stage of development. A recent award under a NAFTA tribunal illustrates this challenge. In Clayton & Bilcon v. Canada, the claimants succeeded in establishing that Canada had breached NAFTA when it denied approval to the claimants’ quarry project. During the damages phase of the hearing, which lasted three years, the claimants sought lost profits of US $443 million. The tribunal ultimately limited the loss to their sunk costs of US $7 million, as there was not a high degree of certainty that the quarry project would have been approved.  While a US $7 million award is still a significant achievement, it would be unlikely to match the considerable costs of pursuing an investor-state arbitration through to completion.

When assessing likely damages, IMF Bentham can assist clients and counsel by providing seed funding for early expert opinions, and working with the legal team to ensure meritorious claims are advanced with the strongest evidentiary record possible.