On 12 June 2015, the arbitral tribunal – composed of Professors Julian Lew, Laurence Boisson de Chazournes, and Bernard Hanotiau – in Muhammet Çap & Sehil Inşaat Endustri ve Ticaret Ltd. Sti v. Turkmenistan [ICSID Case No. ARB/12/6] issued its landmark Procedural Order No. 3, ordering the claimant-investors therein to confirm:
“whether its claims in this arbitration are being funded by a third-party funder, and if so, shall advise Respondent [Turkmenistan] and the Tribunal of the name or names and details of the third-party funder(s), and the nature of the arrangements concluded with the third-party funder(s), including whether and to what extent it/they shall share in any successes that Claimants may achieve in this arbitration.” (Tribunal’s Decision in Order, para. 13.)
Ticaret Procedural Order No. 3 is the first such order issued in the ICSID (International Centre for Settlement of Investment Disputes) system that directly compels parties to disclose third-party funding arrangements in investor-State arbitration. Most importantly, it is the first publicly known arbitral order to confer (tacit) recognition to the critical role of third-party funders as part of the complex spectrum of interested parties in an investor-State arbitration. Apart from host States and investors, tribunals have thus far accepted that assignments of interest may be made by investor-claimants, without jeopardizing their standing in the dispute. In Ceskoslovenska Obchodni Banka, A.S. (CSOB) v. Slovak Republic [ICSID Case No. ARB/97/4, Decision on Jurisdiction, 24 May 1999, para. 32], held that, even in cases of assignments or subrogations of interest by investor-claimants, the “absence of beneficial ownership by a claimant in a claim or the transfer of the economic risk in the outcome of a dispute should not and has not been deemed to affect the standing of a claimant in an ICSID proceeding, regardless of whether or not the beneficial owner is a State Party or a private party.” The Ticaret Procedural Order No. 3 is the first instance that an investor-State tribunal openly conceded that a third-party funder’s financing arrangements with an investor-claimant could have a significant bearing on the substantive outcomes and procedural fairness of the arbitration.
The Ticaret arbitral tribunal anchored its decision to compel disclosure on four factors: 1) “the importance of ensuring the integrity of the proceedings and to determine whether any of the arbitrators are affected by the existence of a third-party funder…transparency as to the existence of a third-party funder is important in cases like this” (Order, para. 9); 2) after the host State “indicated that it will be making an application for security for costs”, it would be unclear what the basis would be for that application, “e.g. Claimants’ inability to pay Respondent’s costs and/or the existence of a third-party funder” (Order, para. 10); 3) the fact that the claimants “have not denied that there is a third-party funder for the claims in this arbitration. It would have been straightforward to do so, just as they denied having assigned any of their rights to another party” (Order, para. 11); and 4) the host State’s allegation that the order for costs in its favor made in another case by another tribunal has not been paid even though the claimant in the present case had “funded [those] annulment proceedings” (Order, para. 11). The Ticaret tribunal declared that it was thus “sympathetic to Respondent’s concern that if it is successful in this arbitration and a costs order is made in its favour, Claimants will be unable to meet these costs and the third-party funder will have disappeared as it is not a party to this arbitration.” (Order, para. 12). This declaration echoed concerns articulated by another tribunal in RSM Production Corporation v. Saint Lucia [ICSID Case No. ARB/12/10, 13 August 2014, para. 83], where the RSM tribunal took the position that where there already was an admission of third party funding for the Claimant, there was basis to be concerned that “Claimant will not comply with a costs award rendered against it, since, in the absence of security or guarantees being offered, it is doubtful whether the third party will assume the responsibility for honoring such an award…it [is] unjustified to burden Respondent with the risk emanating from the uncertainty as to whether or not the unknown third party will be willing to comply with a potential costs award in Respondent’s favor.” In substance, the Ticaret tribunal fundamentally ordered good faith disclosure of any third-party funding arrangements to ensure that neither party to the investor-State arbitration – especially the claimants – would ever deliberately or inadvertently contribute to, or countenance any violation of, international law by thwarting the purposes, processes, and procedures of the parties’ chosen international dispute settlement mechanism. This reasoning could be likened to the recent third State obligation theory articulated by Lea Brilmayer and Isaias Yemane Tesfalidet that “non-parties…are under a legal obligation not to contribute to another State’s violation of international law.”
Because third-party funding arrangements do not have a publicly known contractual template, it may well assume protean characteristics affirming its illegality or legality. On the one hand, it may be argued that third party financing for the initiation of an investor claim against a host State – in consideration of receiving a part or all of the proceeds from any compensation recovered by the claimant-investor against the State – analogously triggers the ancient legal prohibition against “champerty” in common law jurisdictions. Bluebird Partners LP v. First Fidelity Bank N.A. [94 N.Y.2d 726, 733 (2000)] declared that champerty “is a venerable doctrine developed hundreds of years ago to prevent or curtail commercialization of or trading in litigation. It is currently codified in New York as Judiciary Law § 489.” Blackstone defined champerty as “the purchasing of a suit, or right of suing: a practice so much abhorred by our law, that it is the main reason why a chose in action…is not assignable at common law, because no man should purchase any pretence to sue in another’s right.” [Sir William Blackstone, Commentaries on the Laws of England: in Four Books, Vol. II, Book III & IV, (J.B. Lippincott & Co., Philadelphia, 1861), at p. 97]. On the other hand, third-party funding has also been argued as having similarities to “insurance contracts (where the insurer pays for the costs of the lawsuit, including, in certain cases the opposing party’s costs) and contingency fee arrangements (where the lawyer carries the cost of litigation in exchange for an interest in the proceeds of the case)”.
The robust debate over the practice of third-party funding in international arbitration is hardly new. There are some that favorably endorse this practice because it enables better access to justice for claimants otherwise unable to seek redress, while others are more critical of its undisclosed impact on the public-interest laden dispute with sovereign States, leading to sustained financial incentives for potentially frivolous suits to be initiated against sovereign States that have to incur sunk costs to defend against each and every claim. Notwithstanding policy arguments for and against third-party funding, there is, at the very least, some general consensus that there is no international mechanism to date for regulating the emerging market for cross-border financing of private investor claims against sovereign States.
Before Ticaret, tribunals have been fairly agnostic about the legal effects of third-party funding on the nature of parties’ interests in international investment arbitration. In KT Asia Investment Group v. Kazakhstan [ICSID Case No. ARB/09/8, Award, 17 October 2013, para. 50], the Tribunal stated “it would take no action in respect of the provenance of funds used to finance the arbitration”. In Teinver SA and ors v. Argentina [ICSID Case No. ARB/09/1, Decision on jurisdiction, 21 December 2012, paras. 254-259), the tribunal declined to find that there was any illegality ipso facto in the investor’s third-party funding arrangement. The tribunal in Giovanni Alemanni and others v. Argentina [ICSID Case No. ARB/07/8, Decision on jurisdiction and admissibility, 17 November 2014, para. 278] was likewise dismissive of any legal effects of a third-party funding arrangement on the arbitration: “Individual views may differ as to whether third-party funding is or is not desirable or beneficial, either at the national or at the international level, but the practice is by now so well established both within many national jurisdictions and within international investment arbitration that it offers no grounds in itself for objection to the admissibility of a request to arbitrate.” (Italics added.)
Ticaret may not necessarily have created a mandatory legal ground for denying jurisdiction or for finding inadmissibility of requests to arbitrate. However, it more importantly signals to the international community that third-party funders cannot be seen as mere ‘neutral’ market players (e.g. insurance agents) or supposed arms’-length unrelated parties to an investor-State arbitration. Apart from third party funders’ potential accountability for costs awards issued in favor of respondent host States, third-party funders’ financial interest and relationship with the claimant can also affect crucial issues in the arbitration, such as arbitrator selection, arbitrator impartiality and detecting potential conflicts of interest; the disputing parties’ agreed scope of fact-finding, discovery of evidence and document production; the possibility of settlement between the disputing parties during the mandatory cooling-off period before the arbitration, as well as the conduct of other parallel negotiations between the parties while the arbitration is pending; the funded party’s strategic conduct throughout the arbitration towards the adverse party, as well as its interactions and communications with the arbitral tribunal; the claimant/funded party’s mode of pursuing the assets of the Respondent and any provisional measures taken during the arbitration. These are more than sufficient to suggest that third-party funders indeed have “interests of a legal nature which may be affected by the decision in the case”, that would, ordinarily, have given a right of intervention to non-party third States in contentious cases before the International Court of Justice. [Art. 62 of the Statute of the ICJ] Because third-party funders have a financial interest in the conduct and outcome of the investor-State arbitration, it behooves arbitral tribunals to remove the cloak of secrecy in these arrangements to reveal the full nature of the legal and financial interests of the active disputing parties, and thereby ensure that parties do not resort to the international dispute settlement mechanism in international investment agreements in bad faith, and without abuse of right or abuse of process. To this end, Ticaret Procedural Order No. 3’s compelled disclosure of third-party funding arrangements should be seen as an example of how an arbitral tribunal exercised its discretion and authority to uphold newly crystallized treaty-based principles in investor-State arbitration, such as the “public interest in transparency in treaty-based investor-State arbitration and in the particular arbitral proceedings” and “the disputing parties’ interest in a fair and efficient resolution of their dispute.” [2014 UNCITRAL Rules on Transparency in Treaty-Based Investor-State Arbitration, Rules 4(a) and 4(b), as adopted in the 2015 United Nations Convention on Transparency in Treaty-Based Investor-State Arbitration, Art. 2.].