Third-Party Financing in International Investment Arbitration
67 Pages Posted: 23 Mar 2012 Last revised: 25 Apr 2012
Date Written: December 31, 2011
This paper examines the role of third-party funding (TPF) in international investment arbitration. This can take many shapes and forms but basically, the TPF funder is an investor in a monetary claim lodged before a court or arbitral tribunal. By involving a TPF funder, a claimant may attract the necessary resources and expertise in litigating or arbitrating the claim. In return, the TPF funder is promised a part of the proceeds if the claim is successful. If the claim fails, the TPF funder, rather than the claimant, bears the expenses involved in the litigation or arbitration.
There is little clarity on the legal aspects of TPF in litigation and arbitration. The position of TPF funders in investment arbitration is even less clear. Therefore, this paper aims to take stock of what is actually known about TPF practice and the response of the legal environment in which TPF funders operate. It presents a comparative overview of how certain legal systems address third-party funding of claims in their domestic jurisdictions. Moreover, it focuses on how the issue of TPF is currently addressed and how it could be improved.
This paper argues that TPF involvement is beneficial to investment arbitration. Hence, TPF should not be banned, but negative externalities avoided and excesses curbed. Against this background, this paper argues that cost-shifting rules in investment arbitration could be made more predictable by introducing standardization in the assessment of such costs and a system of advance deposits for potential cost orders.
This standardization could also remedy other complications such as the issue of TPF funders’ duties to the tribunal. Although there is no general need for TPF funders to be held under any duty to the tribunal, TPF involvement should not detriment the arbitral proceedings and/or the respondent’s position. Therefore, claimant duty to disclose TPF could be introduced in order to avoid looming conflicts of interest with the arbitrator’s duty to act independently and impartially. In return, TPFs could be shielded from direct duties to the tribunal, apart from instances of deliberate wrongdoing.
Keywords: third party funding, cost-shifting, arbitrator independence
JEL Classification: K12, K20, K41
Suggested Citation: Suggested Citation