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*Columbia FDI Perspectives*
Perspectives on topical foreign direct investment issues
No. 130 September 15, 2014
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Shawn Lim ([log in to unmask])
*Good governance of third party funding*
by
Catherine Kessedjian* <#1487a90a59af9e1d__edn1>
An OECD study shows that arbitration costs in investment disputes average
US$ 8 million; in one case involving mass claims, the parties spent almost
US$ 40 million in legal fees just to reach the decision on jurisdiction.[1]
<#1487a90a59af9e1d__edn2> Under these circumstances, it is no wonder that
third party funding has become the talk of the town.
Third party funding, *strictu sensu*, presents characteristics different
from previously known forms of litigation funding (such as contingency fees
or insurance): funders are often pure players; they invest in disputes for
profit, although some may do it for a public interest purpose;[2]
<#1487a90a59af9e1d__edn3> they are not necessarily attorneys themselves,
although they employ attorneys to audit the disputes and evaluate the
chances of winning the case;[3] <#1487a90a59af9e1d__edn4> they often
intervene at the outset of disputes and if cases go to arbitration, they
sometimes participate directly in the nomination of the arbitral tribunal.
However, they remain, legally speaking, third parties to the arbitration.[4]
<#1487a90a59af9e1d__edn5>
Many call for regulation of this practice. I am of the opinion that
regulation is not the way to go forward. Instead, arbitral institutions
should adopt guidelines for arbitral tribunals.[5] <#1487a90a59af9e1d__edn6>
Regulation is unnecessary for many reasons.[6] <#1487a90a59af9e1d__edn7>
There are many different kinds of funders, and it is difficult to capture
all forms taken by actors in the market in a single regulation. If there is
to be regulation, it must not be at the national level but at the
international level, particularly when funders intervene in international
arbitrations. However, the likelihood of such international regulation
being successfully negotiated in a reasonable period of time is close to
zero. Even if one considers that such an international instrument might be
adopted, it risks being outstripped by a fast moving practice and would
soon be outdated. Governance administered by arbitration institutions would
be the best tool to address third party funding.
Some of the best practices for arbitral tribunals confronted with third
party financing could include the following:
- Financing by third parties must be disclosed for arbitration
proceedings to be conducted appropriately.[7] <#1487a90a59af9e1d__edn8>
Whether financing contracts themselves must be disclosed is left to the
tribunals’ discretion.
- Depending on the extent of funders’ control of the proceedings,
tribunals may characterize funders as true parties.
- Funders should be obliged to follow the same confidentiality rules
that apply to all parties in the arbitration.
- Funded parties must retain their own independent counsel.
- Funders must not cause, directly or indirectly, the funded parties’
counsel to act in breach of their professional duties, nor take control of
decisions to be made by counsel.
- Funders must not withdraw support during proceedings, unless under
circumstances clearly provided for in the contract or if the funded party
has acted in breach of the financing agreement.
- Tribunals may take into consideration third party financing when
deciding on requests for security for costs.
- In decisions for cost allocation,[8] <#1487a90a59af9e1d__edn9>
tribunals may take into consideration the fees and costs incurred by
funders if the relevant information was made available in the course of the
proceedings. However, “investment premiums” should be financed out of the
proceeds of awards and not be awarded in addition to the winning parties’
compensation.
The ICC France Guide cited above was expected to take the lead in proposing
these guidelines. Instead, it focused on the financing agreement only. A
missed opportunity or a future challenge for ICC France?
------------------------------
* <#1487a90a59af9e1d__ednref1> Catherine Kessedjian (
[log in to unmask]) is Professor at the University
Panthéon-Assas Paris II, an arbitrator and mediator. The author is grateful
to Eric de Brabandere, Anna Joubin-Bret and Selvyn Seidel for their helpful
peer reviews. *The views expressed by the author of this Perspective do not
necessarily reflect the opinions of Columbia University or its partners and
supporters. Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed
series.*
[1] <#1487a90a59af9e1d__ednref2> OECD, “Government perspectives on
investor-state dispute settlement: A progress report,” Freedom of
Investment Roundtable, December 14, 2012,
http://www.oecd.org/daf/inv/investment-policy/ISDSprogressreport.pdf
<http://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=b1e2544715&e=6f8fc3f180>.
Statistics for commercial arbitration are not as readily available, but
cost is also a major concern for companies in commercial arbitration.
[2] <#1487a90a59af9e1d__ednref3> Two investment cases are known to have
been financed by charities: *Bernardus Henricus Funnekotter and others v.
Republic of Zimbabwe*, ICSID ARB/05/6 and *Philip Morris Brand Sàrl and
others v. Uruguay*, ICSID ARB/10/7.
[3] <#1487a90a59af9e1d__ednref4> 5 to 10% of the potential cases are said
to be funded (ICC France Guide, *Le financement des arbitrages par des
tiers financeurs*, §31). The guide was launched in May 2014 in Paris.
[4] <#1487a90a59af9e1d__ednref5> Even though some respondents have claimed
that funders were the real claimant instead of the nominal claimant.
*See* *Teinver
S.A. and others v. The Argentine Republic*, ICSID ARB/09/1, *Rosinvest v.
Russian Federation*, SCC Case No. 079/2005 and *Quasar de Valores SICAV
S.A. and others v. The Russian Federation*, SCC Case No. 24/2007.
[5] <#1487a90a59af9e1d__ednref6> I am aware of the fact that this leaves
out ad hoc arbitration, for which governance may have to be taken up by
courts on a case-to-case basis.
[6] <#1487a90a59af9e1d__ednref7> By regulation, I mean a set of rules
adopted by public authorities binding on funders. I do not consider
self-regulation by funders as regulation, but a form of governance.
[7] <#1487a90a59af9e1d__ednref8> The involvement of funders bears directly
on, *inter alia*, the admissibility of claims and a potential conflict of
interest.
[8] <#1487a90a59af9e1d__ednref9> *See* *Kardassopoulos v. Georgia*, ICSID
ARB/05/18.
*The material in this Perspective may be reprinted if accompanied by
the following acknowledgment: “Catherine Kessedjian, ‘Good governance of
third party funding,’ Columbia FDI Perspectives, No. 130, September 15,
2014. Reprinted with permission from the Columbia Center on Sustainable
Investment (www.ccsi.columbia.edu <http://www.ccsi.columbia.edu>).” A copy
should kindly be sent to the Columbia Center on Sustainable Investment at
[log in to unmask] <[log in to unmask]>.*
For further information, including information regarding submission to the
*Perspectives*, please contact: Columbia Center on Sustainable Investment,
Adrian Torres, [log in to unmask] or [log in to unmask]
*Most recent Columbia FDI Perspectives*
<http://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=09de74f070&e=6f8fc3f180>
- No. 129, Armand de Mestral, “The Canada-China BIT 2012: Perspectives
and implications,” September 2, 2014.
- No. 128, Wenhua Shan and Lu Wang, “The China-EU BIT: The emerging
‘Global BIT 2.0’?,” August 18, 2014.
- No. 127, Alexandra Guisinger and Alisha Anderson, “ICSID, public
opinion and the effect of (hypothetical) elite messaging,” August 4, 2014.
*All previous FDI Perspectives are available at
**http://ccsi.columbia.edu/publications/columbia-fdi-perspectives/
<http://ccsi.columbia.edu/publications/columbia-fdi-perspectives/>**. *
*Other relevant CCSI news and announcements:*
· On *September 22, 2014 *from 12:10pm - 1:00pm, CCSI and the Sabin Center
for Climate Change Law
<http://columbia.us6.list-manage2.com/track/click?u=ab15cc1d53&id=47a4b9a5b5&e=6f8fc3f180>
will
co-host a talk and discussion with *Matthew Rimmer* on “Intellectual
Property and Global Warming: Fossil Fuels and Climate Justice
<http://columbia.us6.list-manage1.com/track/click?u=ab15cc1d53&id=efa5318303&e=6f8fc3f180>,”
at Columbia
Law School, Jerome Greene Hall, Room 107. Dr. Rimmer will present on
conflicts over intellectual property and climate change in three key
arenas: climate law; trade law; and intellectual property law. Lunch will
be provided.
· On *November 12-13, 2014*, CCSI will host its Ninth Annual Columbia
International Investment Conference, entitled* “Raising the Bar: Home
Country Efforts to Regulate Foreign Investment for Sustainable
Development” *at *Columbia University.* More information about the
Conference, including the current program, information about logistics, and
the registration link, is available at:
http://ccsi.columbia.edu/2014/01/01/raising-the-bar-home-country-efforts-to-regulate-foreign-investment-for-sustainable-development/.
Registration for the conference is *free, but required*.
· On *December 5, 2014*, CCSI is offering a one day workshop with CLE
credit on investment arbitration and human rights
<http://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=7e1db61fc3&e=6f8fc3f180>.
This workshop will examine which human rights issues may be implicated in
investment disputes, as well as how and to what extent the issues have been
handled by parties and arbitrators. *Philippe Sands* (Barrister in the
Matrix Chambers, Professor of International Law at University College
London; and frequent arbitrator in investor-State disputes) will deliver
the Keynote.
Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
Ph: (212) 854-0689
Fax: (212) 854-7946
*Copyright (C) 2014 Columbia Center on Sustainable Investment
(CCSI), All rights reserved.*
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