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The Structural Challenge of Investment Arbitration Viewed through the Lens of Third-Party Funding

Stack of money

Fig: By FBI Buffalo Field Office (http://buffalo.fbi.gov/images/c3.jpg) [Public domain], via Wikimedia Commons

Third-party funding has been relatively well-received by the international commercial arbitration system, with the caveat that there are justifiable concerns about disclosure requirements, evidentiary privileges, and conflicts of interest that must be addressed through international rules, guidelines, and norms.  Many discussions about third-party funding address international commercial and investment arbitration together.  However, third-party funding may affect the investment arbitration differently than commercial arbitration due to structural differences in the investment arbitration system.

Most funding happens on the claim side in any dispute system – litigation, commercial arbitration, or investment arbitration – because claim-side funding is more financially attractive to most funders than respondent-side funding.  Respondent-side funding is only financially attractive if the funding arrangement is structured in a certain way, such as legal expenses insurance or after-the-event insurance.  This is because the bulk (if not all) of any third-party funder's eventual payout will come from the respondent in the case.  For example, if a funded claimant wins, then the funder is paid from the awarded amount collected from the respondent.  If a funded respondent wins (or, depending on the financing structure, even if the respondent loses), the respondent must pay the funder its "insurance" premium or a success fee.  In commercial arbitration, having the respondent always serve as the source of funds for the funder is tolerable, because corporations could just as easily be respondents as claimants.  Furthermore, respondents in commercial cases have the ability to bring counterclaims under the contract that funders may choose to fund. 

By contrast, in investment arbitration, the rigidity of the parties’ roles may create lopsided funding incentives.  When the investor and host state sign a separate contract, such as a concession agreement, they each have an equal opportunity to bring claims against each other according to their contractual dispute resolution method, which may be arbitration.  When there is no pre-dispute arbitration clause or contract between the investor and the host state, however, the consent to arbitrate must be found in the bilateral investment treaty between the host state and the investor’s home state.  The investor is not a party to the treaty, so the investor’s “written” consent is evidenced by the investor filing a claim under Articles 25 and 28 of the ICISD Convention or under provisions of the bilateral investment treaty.  The state is always the respondent, and it is extremely rare for investment treaties to provide express consent for host states to bring counterclaims.

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By Victoria Shannon, Assistant Professor of Law, Washington & Lee University School of Law

Browse cases relating to third party funding on Investment Claims here.

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