On 3 August 2018, the International Centre for Settlement of Investment Disputes (ICSID) published its working paper on potential rule amendments, citing its desire to incorporate the case experience gained and lessons learnt from over 650 ICSID cases into the rules. One of the key new proposed rules requires compulsory disclosure (or notice) of third-party funding. ICSID justified the inclusion of this rule by claiming that it would guard against conflicts of interest between third-party funders and arbitrators.
ICSID sought comments from the public and the states after it released the first working paper. It considered the comments garnered prior to the publication of the second working paper in mid-March 2019.
In the second working paper, ICSID chose to keep the requirement to disclose the existence of third-party funding to the secretariat or the tribunal, despite several third-party funders asking ICSID to reconsider its inclusion. The changes that ICSID made to the drafting of the rule in the second working paper did not change its ultimate effect. ICSID’s decision to keep the requirement, despite requests to the contrary, could create problems during the arbitration proceedings to the detriment of a claimant and third-party funder.
Stirrings of change
ICSID first asked for preliminary comments on 25 January 2017 before any provisional drafts were available to the public. Only one third-party funder provided a response to the initial press release who noted that the current ICSID Rules were silent with respect to the involvement of third-party funders and wrote that regulation of third-party funding in the context of investor-state arbitration was unnecessary.
First round: August 2018
The first draft of the proposed amendments introduced a rule that required disclosure of third-party funding into all rules and regulations. The rules defined third-party funding and required a party to file a written notice disclosing that it had third-party funding and the name of the third-party funder, either at the time of registration of a request for arbitration, or once a third-party funding arrangement has been put in place (if after the registration).
The states that did comment on this rule were all in favour of its inclusion in the new rules; some states, such as Argentina, said that the rule did not go far enough. Argentina provided an amended draft of the rule that demanded the disclosure of terms and conditions of the third-party funding agreement.
Not everyone was in favour of this rule. It also attracted comments from three third-party funders who took a stance against the disclosure requirement and advocated for tribunals to decide questions relating to third-party funding on a case-by-case basis. The three third-party funders agreed that they did not have any issue with their names being disclosed to the tribunals. Instead, they submitted objections from the point of view of their current and potential clients, on the basis that disclosure of third-party funding could have substantially negative consequences, such as increased costs of complying with the requirement itself.
The third-party funders suggested several plausible effects of the proposed disclosure rule. They each anticipated that such disclosure would inevitably lead to respondent states filing security for costs applications, which are rarely successful but increase the cost of funding for both sides. One third-party funder identified a possibility of states commencing satellite disputes purely for purposes of disrupting third-party funding.
The three third-party funders also pointed out that ICSID’s justification for the rule is not supported by facts. There is no evidence that conflicts of interest between third-party funders and arbitrators have plagued ICSID proceedings: the third-party funders noted that not only is there is no evidence that an arbitrator has been disqualified for a third-party funder-related conflict of interest, there have been no reported ICSID decisions that have warranted challenges on this conflict of interest basis in the first place.
The third-party funders advocated for the removal of the new disclosure requirement and keeping the status quo. One third-party funder urged ICSID to simply include in writing the existing (and unwritten) position that the tribunal has the power to order a party to disclose whether it is being funded.
Round two: March 2019
Despite the comments from the third-party funders urging ICSID not to include the mandated disclosure requirement in the next draft of the rules, ICSID chose to keep it. ICSID disregarded the suggestion made by one of the third-party funders that a compulsory disclosure requirement should be accompanied by an express statement in the body of the text itself that the existence of third-party funding is not, in and of itself, enough to justify an adverse security for costs order against a claimant. Instead, the latest draft just broadened the scope of the definition of “third-party funding” and replaced “disclosure” with “notice”.
In the light of this development (or, to be more precise, lack thereof), what could the future look like for claimants using funding as a means to pursue their claims under ICSID arbitrations?
A third-party funder perspective
Mark King, Senior Director of Litigation Funding at Harbour Litigation Funding says that it is encouraging that leading arbitral institutions, such as ICSID, are recognising the importance and growth of claimants’ use of third-party funding in investment treaty and commercial arbitrations. However, he adds that if an institution is developing its rules to cater for claimants using funding, it is incumbent upon them to ensure that claimants’ ability effectively to resolve their claims through arbitration are not prejudiced.
“The risk of conflicts arising is limited, particularly where arbitrators appointed are already required to declare any conflict that may exist before accepting an appointment and reputable funders will perform their own conflicts check before considering a case for funding,” he comments. “However, Harbour recognises in some circumstances, disclosure of the fact the claimant is using funding and who the funder is may help further reduce any potential conflict.
Requiring the claimant to go further by providing details of its arrangement with a funder presents a real risk of fettering the effective resolution of the dispute through arbitration and prejudicing the claimants’ claim,” he continues. “It should therefore be avoided. In the absence of any compelling reason for more detailed disclosure, institutions and tribunals should confine providing new roads in which Respondents could seek to derail the proceedings.”