Over the past decade, the use of Investor-State Dispute Settlement (“ISDS”) mechanisms to challenge public policies has been a topic of attention and pressure from Non-Governmental Organizations and States to reform ISDS has increased. This has led to proposals for amendment of the ICSID Rules. Working Paper #3, containing the latest proposals, may be found here.
Third-party funding is one concern today regarding ISDS. Third-party funding was defined by the ICCA-Queen Mary Task Force as “an agreement by an entity that is not a party to the dispute to provide a party, an affiliate of that party or a law firm representing that party,
- a) funds or other material support in order to finance part or all of the cost of the proceedings, either individually or as part of a specific range of cases, and
- b) such support or financing is either provided in exchange for remuneration or reimbursement that is wholly or partially dependent on the outcome of the dispute, or provided through a grant or in return for a premium payment”.
Traditionally, third-party funding was banned, for instance by the doctrines of champerty and maintenance. Today, it is a widely-accepted mechanism to promote access to justice, which is available in most jurisdictions.
Many Claimants are willing to consider funding, especially in ICSID arbitration, due to its high administrative costs and significant arbitrators’ fees. However, introducing an additional player to the dispute can affect the arbitral process. States highlight the risk of frivolous claims and conflicts of interests between third-party funders and members of arbitral tribunals (although the truth of the matter is that obtaining third-party funding for investor-State disputes is possible for only a small number of very strong claims, and third-party funders generally shy away from investor-State arbitrations).
In this context, the International Centre for Settlement of Investment dispute (“ICSID”) decided to modernize and simplify its rules in order to improve transparency and efficiency of its dispute settlement mechanism. The Centre launched the amendment process in 2016.
First Proposals for Amendment of the ICSID Rules
Although an obligation to disclose third-party funding has been required by several arbitral tribunals, under the current ICSID Arbitration Rules, no article is devoted to it. In its first Proposals for Amendment of the ICSID rules (3 August 2018), one of the changes was the inclusion of an “Obligation to Disclose Third-Party Funding”.
Proposed Rule 21 was drafted as follow:
“(1) ‘Third-party funding’ is the provision of funds or other material support for the pursuit or defense of a proceeding, by a natural or juridical person that is not a party to the dispute (“third-party funder”), to a party to the proceeding, an affiliate of that party, or a law firm representing that party. Such funds or material support may be provided:
(a) through a donation or grant; or
(b) in return for a premium or in exchange for remuneration or reimbursement wholly or partially dependent on the outcome of the proceeding.
(2) A party shall file a written notice disclosing that it has third-party funding and the name of the third-party funder. Such notice shall be sent to the Secretariat immediately upon registration of the Request for arbitration, or upon concluding a third-party funding arrangement after registration.
(3) Each party shall have a continuing obligation to disclose any changes to the information referred to in paragraph (2) occurring after the initial disclosure, including termination of the funding arrangement”.
The wording of the rule reflects concerns raised by States regarding the risk of undisclosed conflicts of interest between the members of the arbitral tribunal and the funder. Upon registration of their request for arbitration, parties have an immediate obligation to disclose a funder. In order to avoid any conflict of interests, the name of the funders must be communicated to the potential arbitrators prior their appointment.
From 3 August 2018 until 15 March 2019, Member States and the Public had an opportunity to submit comments on the first proposals for Amendment of the ICSID Rules.
According to the European Union and its Member States, the proposed rule on “Obligation to Disclose Third-Party Funding” would contribute to transparency. While recognising that knowledge of third-party funding could be useful for respondent States to request security for costs, the latter shall not be ordered automatically but on a case-by-case basis “in particular when the claimant is a natural person or a small or medium-sized enterprise“.
In its comments, Singapore showed strong support for the proposed rule.
China also welcomed the new provision but requested a clearer definition of the notion of “Third-Party funding” to ensure the effectiveness of the disclosure process.
Second Proposals for Amendment of the ICSID Rules
Taking into account Member States’ comments, in March 2019, the Centre then submitted its second Proposals for Amendment of the ICSID Rules. Proposed Rule 21 became Rule 13 and its title changed from “Disclosure of Third-Party Funding” to “Notice of Third-party Funding”:
“(1) For purposes of completing the arbitrator declaration required by Rule 18(3)(b), a party shall file a written notice disclosing the name of any non-party from which the party, its affiliate or its representative has received funds or equivalent support for the pursuit or defense of the proceeding (‘third-party funding’).
(2) A non-party referred to in paragraph (1) does not include a representative of a party.
(3) A party shall send the notice referred to in paragraph (1) to the Secretary-General upon registration of the Request for arbitration, or immediately upon concluding a third-party funding arrangement after registration. The party shall immediately notify the Secretary-General of any changes to the information in the notice.”
Under this version, the Centre tried to simplify the definition of third-party funding and a direct link to the declaration of impartiality and independence of arbitrators was added.
Again, Member States and the Public were allowed to give their comments on the new proposals until 28 June 2019. Canada insisted on the fact that disclosure of third-party funding was not only necessary to avoid conflicts of interest but also for determining whether an order for security for costs was appropriate.
The European Union proposed to add that “failure to comply with disclosure obligations regarding third party funding [could] be a factor for Tribunals to consider in determining and allocating the costs of proceedings”.
States considered that disclosure of third-party funding would ensure the absence of conflict of interest but more largely transparency in the arbitration procedure.
Third Proposals for Amendment of the ICSID Rules
Based on comments received by Member States and the Public, the Centre presented its last amendments of the rules governing arbitration under ICSID Convention in August 2019. Under the new Proposed Rule 14:
“(1) A party shall file a written notice disclosing the name of any non-party from which the party, its affiliate or its representative has received funds for the pursuit or defense of the proceeding through a donation or grant, or in return for remuneration dependent on the outcome of the dispute (‘third-party funding’).
(2) A non-party referred to in paragraph (1) does not include a representative of a party.
(3) A party shall file the notice referred to in paragraph (1) with the Secretary-General upon registration of the Request for arbitration, or immediately upon concluding a third-party funding arrangement after registration. The party shall immediately notify the Secretary-General of any changes to the information in the notice.
(4) The Secretary-General shall transmit the notice of third-party funding and any changes to such notice to the parties and to any arbitrator proposed for appointment or appointed in a proceeding for purposes of completing the arbitrator declaration required by Rule 19(3)(b)”.
The Centre recognized that third-party funding could be beneficial “by enhancing access to arbitration for small and medium enterprises” but “at the same time, some States remain concerned about the existence and potential impact” of third-party funding.
The Centre refused to add to the text an obligation to disclose information other than the existence of third-party funding and the name of the funder. If other information is necessary, arbitral tribunals have the power to order the production of documents. Proposed Rule 14 reflects a compromise between States and investors’ interests.
A meeting was held from 11 November 2019 to 15 November 2019 between the Centre and Member States. The Centre hopes this will constitute the last consultation in the long-running process before the Administrative Council takes a vote on the amended ICSID Rules.
- Anne-Sophie Partaix, Aceris Law LLC
 Report of Working Group III (Investor-State Dispute Settlement Reform) on the work of its thirty-fifth session (New York, 23-27 April 2018).
 Report of the ICCA-Queen Mary Task Force on third-party funding in international arbitration, April 2018, p.50.
 Third-party funding in arbitration – the funders’ perspective, A Q&A with Woodsford Litigation funding, Harbour Litigation Funding and Burdford Capital, September 2016, p. 50.
 Backgrounder on Proposals for Amendment of the ICSID Rules.
 For example, EuroGas Inc. and Belmont Resources Inc. v. Slovak Republic, ICSID case n°ARB/14/14, award, August 18, 2017, para. 108.
 Comments to the first proposed amendments to the ICSID Rules submitted on behalf of the European Union and its Member States, p. 4, §13.
 Comments on the first Proposed Amendments to the ICSID Rules Submitted by Singapore, p. 12.
 Comments on the first Proposed Amendments to the ICSID Rules Submitted by China, pp. 3-4.
 Comments to the second proposed Amendments to the ICSID Rules submitted on behalf of Canada, 28 June 2019, p. 8.
 Comments to the second Proposed Amendments to the ICSID Rules submitted on behalf of the European Union and its Member States, 28 June 2019, p. 2.