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Columbia FDI Perspectives

Perspectives on topical foreign direct investment issues
No. 287  September 21, 2020

Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Riccardo Loschi ([log in to unmask])
The practice of third-party funding (TPF) of investment arbitration is the subject of heated debate. Proponents argue that TPF increases “access to justice” in the form of investor-state dispute settlement (ISDS). Detractors worry, among other things, about the increase in (frivolous or marginal) claims. What much of the current debate lacks is an empirical analysis of the factors driving the development of this practice and shaping its outcomes. Examining what has contributed to the rise of TPF allows us better to understand how it affects arbitration and how it may develop in the future.
What explains the rise of TPF in investment arbitration? One necessary, if not sufficient, condition is the legality of the practice in certain domestic jurisdictions that are important centers of international arbitration. Historically, common law systems prohibited the funding of legal claims by third parties, but legal changes in the UK eased these restrictions.[1] This was necessary for the growth of the industry, and its spread to other jurisdictions, including the US, Hong Kong (China) and Singapore. While some of these changes centered on the legality of funding domestic claims, they also ensure the enforceability of contracts and awards associated with ISDS, which funders told us gives them greater confidence when funding treaty and contract claims. However, these changes alone do not explain the rapid growth and development of the industry.
Proponents claim that TPF’s emergence can be explained as a response to a widely recognized problem¬: the high costs of arbitration. TPF is thus framed as a way to increase “access to justice” for claimants, including by the UK’s Ministry of Justice in 2009. However, in practice, funders of ISDS claims actively and successfully promote TPF to non-financially distressed claimants, and one funder told us “I don’t think any funder is in the business of providing access to justice.” 
With the rise of TPF, investment arbitration has gone through a process of “financialization,” referring to the increasing role of financial markets, actors and institutions in domestic and international economies. TPF thus reflects broader trends toward a finance-led economic growth regime that has increased the amount of capital that institutional investors such as pension funds and insurance companies and their asset managers control, hold and seek to deploy. TPF became an attractive investment outlet because it yields high returns and is an uncorrelated asset class. As a result, money has poured into the TPF industry, which has now billions of dollars available to it.
Our interviews suggest that this “financialization” of investment arbitration has several observable indicators, including:
  • A growing acceptance and more frequent consideration of TPF by arbitration lawyers, despite initial distrust and concerns about the legality of the practice.
  • An institutionalization of relationships between law firms and funders. As one funder described it, firms are “linking up with funders and becoming a partner.”
  • An alignment of the interests of law firms whose clients need funding and financial actors who feel pressured to deploy capital.
  • The reliance on financial logics to determine which cases receive funding. As the funders we spoke to explained, they routinely rule out funding cases they consider legally meritorious if the size of the potential return is too low and if not funded as part of a portfolio of claims.   
These findings are relevant for important debates regarding TPF. First, the increasing closeness of funders and law firms suggests a need for greater transparency to avoid conflicts of interest, such as funders encouraging lawyers not to settle under specific amounts. However, an open question is whether, if the TPF industry continues to grow, the pressure to deploy capital will result in an increase in less meritorious or more marginal claims funded. Already, a situation has emerged in which funders are, in the words of one lawyer, “all fighting for the same cases”—and hence may be tempted to settle for marginal claims.
Second, rather than worry about an increase in frivolous claims, as some observers do, we should focus on the ways in which funding might skew the system in favor of large investors. As expected, returns determine which cases receive funding, smaller investors may not be able to acquire TPF, which undermines the access-to-justice narrative of TPF proponents. Of course, TPF also increases resources available to investors making use of ISDS while doing nothing to address the concerns of states with the system.
TPF has been a focus in the ongoing UNCITRAL meetings on ISDS reform. Along with some states involved in this process, we argue that, as a first step, there should be a push for greater transparency regarding the use of TPF in ISDS. While this would not address all concerns associated with the practice, greater transparency would both reduce potential conflicts of interest and allow researchers, states and other interested parties better to understand how TPF affects arbitration proceedings and outcomes.
* 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 series.
** Florence Dafe ([log in to unmask]) is a political economist at the Chair of European and Global Governance of the Hochschule für Politik/TUM School of Governance at the Technical University of Munich; Zoe Williams ([log in to unmask]) is an associate at the International Institute for Sustainable Development and managing editor of Investment Treaty News. This Perspective is based on a research project that takes a political economy approach to the practice, examining several factors that have facilitated the rise of TPF of investment arbitration. The research relied on interviews carried out with 20 funders and lawyers in the US, UK, EU, and Singapore. Interviews provide an invaluable source of information about an industry that lacks transparency; the quotes in the Perspective are from these interviews. The authors wish to thank Stavros Brekoulakis, Brooke Güven and Federico Ortino for their helpful peer reviews.
[1] Milestones were, for instance, the 2005 Court of Appeal ruling in Arkin v Borchard Lines Ltd. [EWCA] Civ 655, and the UK Ministry of Justice’s Justice Rupert Jackson, Review of Civil Litigation Costs: Final Report (2009).
The material in this Perspective may be reprinted if accompanied by the following acknowledgment: “Florence Dafe and Zoe Williams, ‘Explaining the rise of third-party funding in investment arbitration,’ Columbia FDI Perspectives, No. 287, September 21, 2020. 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].
For further information, including information regarding submission to the Perspectives, please contact: Columbia Center on Sustainable Investment, Riccardo Loschi, [log in to unmask].
Most recent Columbia FDI Perspectives   
  • No. 286, George A. Bermann, N. Jansen Calamita, Manjiao Chi, and Karl P. Sauvant, ‘Insulating a WTO Investment Facilitation Framework from ISDS,’ September 7, 2020
  • No. 285, Sarah Atkinson and Jessica Hanson, ‘Corporate inversions and FDI in the United States,’ August 24, 2020
  • No. 284, Jens Velten, ‘FDI screening regulation and the recent EU guidance: What options do member states have?,’ August 7, 2020
All previous FDI Perspectives are available at

Other relevant CCSI news and announcements
  • On September 22, 2020, CCSI, in collaboration with the Barilla Center for Food and Nutrition, the UN Sustainable Development Solutions Network, and the Santa Chiara Lab – University of Siena, will host a cross-sector dialogue to present the new Fixing the Business of Food report and to discuss solutions for aligning the corporate food sector with the Sustainable Development Goals. More details, including registration link, can be found on our website.
  • On October 15, 2020, CCSI, the Responsible Mining Foundation (RMF), Pact, University of Delaware, and UN Sustainable Development Solutions Network (SDSN) are hosting a web panel on mining and the SDGs. For more information, and to register, please visit our website.
  • CCSI and partners call for ISDS moratorium during COVID-19 crisis and response. Those who are interested in adding their names to this sign-on can express their interest in doing so here.
Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
(212) 854-0689
Fax: (212) 854-7946
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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
p(212) 854 0689 | cell: (646) 724 5600 e: [log in to unmask] | t: @CCSI_Columbia

"Insulating a WTO Investment Facilitation Framework from ISDS", "A G20 Facility to Rekindle FDI Flows", "Enabling the Full Participation of Developing Countries in Negotiating a WTO Investment Facilitation Framework", "Concrete Measures for a Framework on Investment Facilitation for Development", "Making FDI more Sustainable", "Facilitating Sustainable FDI by...", "An International Framework to Discipline Outward FDI Incentives?", "The Case for an Advisory Centre on International Investment Law", "An Advisory Centre on International Investment Law: Key Features",  "Incentivizing Sustainable FDI: The Authorized Sustainable Investor", "The Potential Value-added of a Multilateral Framework on Investment Facilitation for Development",  "International Investment Facilitation: By Whom and for What?", "Towards an Investment Facilitation Framework: Why? What? When?" are available at .

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