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*Columbia FDI Perspectives*
Perspectives on topical foreign direct investment issues
No. 253  June 3, 2019
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Marion A. Creach ([log in to unmask])
*The case against third-party funding in investment arbitration
Frank J. Garcia and Kirrin Hough** <#m_-670040274997415321__edn2>

Third-party funding (TPF) of investment disputes is rapidly increasing, as
investors discover the high returns to be made by funding claimants in
investor-state dispute-settlement (ISDS) cases. In exchange for covering
related costs, funders stand to gain not only a significant share of the
award, but also some influence over case management by requiring progress
reports, monitoring fees, approving expenditures, seeking direct access to
clients’ attorneys, and influencing both the process of appointing the
claimants’ arbitrators and tailoring settlement decisions.*[1]*
<#m_-670040274997415321__edn3> However, irrespective of any benefit brought
by TPF in other dispute settings, TPF in ISDS differs in key respects and
should be regulated, if not banned outright.

First, the financial risks are unbalanced. Under the current ISDS regime,
governments generally cannot assert counter-claims offsetting an award.
Moreover, claims are paid or settled by states two-thirds of the time.[2]
<#m_-670040274997415321__edn4> Procedurally, claimants have a direct voice
in the selection of adjudicators, and there is no right of appeal. These
factors enable funders to make sizeable profits, which can reach as high as
a 700+% return on investment,[3] <#m_-670040274997415321__edn5> while
risking nothing but costs. This has led one arbitrator to characterize TPF
in the area of ISDS as a gambler’s paradise: “heads I win, tails I do not
lose.”[4] <#m_-670040274997415321__edn6>

Second, the funding opportunities are unbalanced. As states cannot win any
financial awards in ISDS cases, TPF generally funds only claimants.
Moreover, evidence suggests that TPF is contributing to a rise in
investment claims, facilitated by the increasingly common portfolio model
of dispute funding that may encourage claimants to bring more (and
potentially less meritorious) claims against states. Therefore, TPF
increases available resources for FDI investors while intensifying
budgetary pressures on states, thus skewing the system.

Finally, the source of the award differs fundamentally. In ISDS, TPF
profits come from respondent states and their citizens, not shareholders as
in commercial disputes, since host countries’ tax-payers—not
shareholders—are the residual risk-bearers in ISDS. Moreover, a substantial
portion of the award flows to TPF funders, who are neither stakeholders nor
beneficiaries of the system, but nevertheless are in a position to
influence case management and case law. From a fairness perspective, TPF
could be seen as effecting uncompensated wealth transfers through ISDS from
the public, often in developing countries, to speculative investors.[5]

Proponents argue that TPF promotes access to justice and filters out
unmeritorious cases. However, any social benefits in other dispute settings
are unlikely to occur in ISDS. ISDS TPF is not about capacity-building for
social justice but, as funders have acknowledged, about balance-sheet
management, allowing well-resourced claimants to minimize risks associated
with bringing claims.[6] <#m_-670040274997415321__edn8>

For all these reasons, TPF in its current form threatens to intensify the
investment regime’s legitimacy crisis and does not play a constructive role
in investment arbitration. States should at least regulate, if not ban, TPF
in investment agreements and in the arbitral rules of the International
Centre for Settlement of Investment Disputes and the United Nations
Commission on International Trade Law. Any access to justice concerns can
be covered by political risk insurance or non-contingent commercial dispute

As long as TPF remains in play, there should be mandatory, expansive
disclosure of TPF agreements and their terms, so that parties know who is
controlling the case and sharing in its proceeds, while empirical evidence
is generated for more comprehensive regulatory schemes. Mandatory security
for costs in TPF cases can also disincentivize funders from pursuing cases
with little merit only for settlement value or a possible pro-investor

It is critically important that investors, stakeholders, academics, and
civil society take a careful, sustained look at the risks that TPF poses to
the public and to the investment regime itself, while effective regulation
is still possible.

*** <#m_-670040274997415321__ednref1> *The Columbia FDI Perspectives are a
forum for public debate. The views expressed by the author(s) do not
reflect the opinions of CCSI or Columbia University or our partners and
supporters. Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed
** <#m_-670040274997415321__ednref2> Frank J. Garcia ([log in to unmask])
is Professor and Dean’s Distinguished Scholar at Boston College Law School;
Kirrin Hough ([log in to unmask]) is an attorney and member of the
Boston College Law School Working Group on Investment Reform. The authors
are grateful to Brooke S. Guven and Lise Johnson for their feedback and to
Daniel Behn, Stephan Schill and an anonymous peer reviewer for their
helpful comments.
*[1]* <#m_-670040274997415321__ednref3> International Council for
Commercial Arbitration, “Report of the ICCA-Queen Mary task force on
third-party funding in international arbitration” (2018), p. 28
[2] <#m_-670040274997415321__ednref4> Rachel Denae Thrasher, “The
regulation of third-party funding: Gathering data for future analysis and
reform,” *Boston College Law School Law and Justice in the Americas Working
Paper No. 9* (2018)
[3] <#m_-670040274997415321__ednref5> Returns generally average 30-50%; Willem
H. van Boom, “Third-party financing in international investment arbitration
(2011), p. 30
However, in *Teinver v. Argentina* (ICSID Case No. ARB/09/1), Burford
Capital realized a 736% return on its US$13 million investment against
Argentina; Burford Capital, Annual Report 2017 (2017), p. 23.
[4] <#m_-670040274997415321__ednref6> Gavan Griffith draws this analogy in *RSM
Production Corporation v. St. Lucia* (ICSID Case No. ARB/12/10).
[5] <#m_-670040274997415321__ednref7> Frank J. Garcia, “Third-party funding
as exploitation of the investment arbitration system,” Boston College Law
Review, vol. 59 (2018)
[6] <#m_-670040274997415321__ednref8> In the words of the Burford Capital
CEO, “it is increasingly the case that more complex arrangements are
becoming the norm, with companies using external capital out of choice, not
necessity.” Christopher P. Bogart, “Third-party financing of international
arbitration,” *Global Arbitration Review*, (Oct. 14, 2016). See generally Tara
Santosuosso and Randall Scarlett, “Third-party funding in investment
arbitration: misappropriation of access to justice rhetoric by global
speculative finance, *Boston College Law School Law and Justice in the
Americas Working Paper No. 8* (2018)
*The material in this Perspective may be reprinted if accompanied by the
following acknowledgment: “Frank J. Garcia and Kirrin Hough, ‘The case
against third-party funding in investment arbitration,’ Columbia FDI
Perspectives, No. 253, June 3, 2019. Reprinted with permission from the
Columbia Center on Sustainable Investment (***
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,
Alexa Busser, [log in to unmask] <[log in to unmask]>.

*Most recent Columbia FDI Perspectives*

   - No. 252, Adam Douglas, “Will the United States join the Trans-Pacific
   Partnership, the Comprehensive and Progressive Agreement for Trans-Pacific
   Partnership, or neither?,” May 20, 2019
   - No. 251, Karl P. Sauvant, “Promoting sustainable FDI through
   international investment agreements,” May 6, 2019
   - No. 250, Qianwen Zhang, “The next generation of Chinese investment
   treaties: A balanced paradigm in an era of change,” April 22, 2019

*All previous FDI Perspectives are available at *
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Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
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*Karl P. Sauvant, PhD*

*Resident Senior Fellow*
*Columbia Center on Sustainable Investment*
Columbia Law School - The Earth Institute, Columbia University
435 West 116th St., Rm. JGH 825, New York, NY 10027
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