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.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
