Third Party Funding in International Arbitration – Rising Interest, Rising Protections for Funded Parties

Third party funding of international arbitration disputes has been a hot topic for some time and we increasingly see its globalization take hold.   Third party funding and international arbitration are a natural fit because of the great risks, high costs, and large amounts at stake in these disputes.  Third party funding allows those costs and risks to be mitigated by the funder in exchange for a share of the potential award.  In the past year, we have seen a noticeable uptick in the number of claimants seeking funding for international arbitration claims.  (Lake Whillans funds U.S. and Canadian litigation as well as domestic and international arbitration).

What is driving that uptick? Certainly, the changes to the law in Singapore and Asia as we discussed in January, which now permit third party funding of international arbitrations seated there, have opened up the Asian market to claimants and funders.  (Since our last update, Hong Kong completed the legislative process to allow funding).  And the attention paid to the legal developments in Asia has certainly normalized third party funding globally.

What may also drive the increase is recent arbitral awards that have favored claimants and removed some of the uncertainty around how the presence of a funder would influence the arbitral in awarding costs or requiring security for costs.

For example, as we discussed last fall, in Essar Oilfield Services vs. Norscot Rig Management, the UK Hight Court affirmed a cost award from an ICC arbitration that included its fees plus the amounts the funded party (Norscot) owed to the funder on the theory that Norscot was forced to seek capital from a funder to pursue it claims by the Essar’s wrongful conduct, which drove Norscot’s into financial straits.   The potential for a claimant to be made entirely whole upon success is certainly an attractive possibility, and some practitioners have suggested that costs of funding have should be pled as an element of damages, though it remains if such a strategy will become regularly successful.

Recently, an ICSID decision addressed a question that I’ve heard many practitioners and academics ask: whether funded parties should be ordered to provide security for costs on the theory that the use of funding implies a shortfall of resources and the inability to pay a potential costs award.

In a pending ICSID arbitration, Eskosol s.p.a. has asserted a claim under the Energy Charter Treaty and ICSID Convention against Italy.   Early in the proceedings, Italy, suspecting that Eskosol (which is in liquidation) obtained third party funding to finance the arbitration, requested that Eskosol confirm the existence and details of its funding source and that Eskosol be ordered to either (i) post security in the amount of $250,000 or (ii) provide a guarantee from the third party funder to pay any potential cost order.  The tribunal denied the request on various grounds, particularly because Eskosol had obtained ATE insurance for €1 million mitigating the risk of non-payment for adverse costs that Italy warned.  The general reluctance of ICSID tribunals to order security for costs was likely also a factor.

However, the tribunal was apparently persuaded in part by Eskosol’s arguments that imposing the additional financial burden of a security for costs order would be unfair and would effectively reward Italy for the misconduct which was alleged to have driven Eskosol into the financial distress that necessitated the need for third party funding.  This argument seems to echo the sentiments from Esser.   If there is a common thread to be taken away from these decisions, it is that tribunals are increasingly wary of causing prejudice to a party merely because it is funded, particularly where the funding was necessitated by the dispute giving rise to the claim.  We expect to see that this principle will continue to drive outcomes, eliminate uncertainties, and further encourage third party funding in international arbitration (and elsewhere).

If you would like to discuss an issue related to third party funding in international arbitration or speak to us about funding options, please contact us.