Policy Implications of Third-Party Funding in ISDS

In this working paper, CCSI analyzes underexplored yet critical policy issues surrounding the use of third-party funding in ISDS. It considers the costs and benefits of the practice, asks whether it is desirable or undesirable that third-parties be permitted to invest in ISDS claims, and if so, under what circumstances and in order to achieve what objectives, and overviews policy responses, including a total or partial ban and various regulatory responses, that may be appropriate to manage identified impacts. A shorter version of the Working Paper, Third-Party Funding and the Objectives of Investment Treaties: Friends or Foes, appeared in Investment Treaty News.

A 2017 PowerPoint presentation concerning Third-Party Funding: Advancing or Undermining the Object and Purpose of Investment Treaties? is also available via the Download Resources button.

Increasingly, investors suing governments in treaty-based investor-state arbitration (ISDS) are turning to third parties to finance their litigation. In many cases, in exchange for investing in the arbitral proceeding, the “third-party funder” will be entitled to a return or other financial interest in the outcome of the dispute, which may take the form of a share of the award. Some funders may also have contractual rights to remain involved in, and potentially even control, certain aspects of how the case is managed by the investor-claimant.

Litigation financing services can be attractive to claimants because they permit the monetization of potential assets embedded in specific, pre-award claims that are not easily accounted for or securitized. Of course, granting a third-party an interest in an illiquid asset in exchange for its financial investment requires pursuing the claim in order to realize the liquid asset. In some cases, these claims may otherwise be cost prohibitive or outside of allocated budgetary constraints of corporate (or in some cases, individual) claimants to pursue, and in others, financing a claim in this way may simply be the most efficient allocation of financial resources available to the claimant.

The increased use of third-party funding in ISDS raises various policy issues, many of which are unique to this specific context in which claimants are permitted to sue states in ad hoc arbitration(as distinct from the use of third-party funding in litigation or arbitration between private parties under domestic law or contract). Several initiatives have been advanced to identify and analyze some of these concerns, looking for example at implications for conflicts of interests, confidentiality, control of litigation strategy and settlement decisions, and the state’s ability to recover costs. Some treaties, arbitration rules, and domestic laws have implemented or are considering solutions to attempt to address some of these issues.

While these initiatives have helped to shed light on the practice and inform the debate surrounding the role and implications of third-party funding in ISDS, many fundamental policy issues have not yet been adequately addressed, but are nonetheless critical to inform any comprehensive analysis of the impacts and implications of third-party funding in the ISDS context.

This policy paper is intended to provide an overview of issues that are paramount to states and other stakeholders regarding the use and public policy implications of third-party funding in ISDS, which in this context is unique from other dispute resolution systems in critical ways explored below. It analyzes arguments for and against third-party funding in ISDS and takes a step back to assess certain fundamental questions: What are the objectives of third-party funding in ISDS? What are its costs? What are its benefits? How do the objectives, costs and benefits vary by stakeholder? Is third-party funding desirable as a matter of public policy? If so, under what circumstances? More fundamentally, what are the criteria against which we should be evaluating its desirability? What information do we need that we do not currently have in order to answer these questions? Where information is lacking, what assumptions should be made?