Third-Party Funding in ISDS
Third-party funding (TPF) is changing the landscape of international arbitration, especially in Investor-State Dispute Settlement (ISDS). This practice, where outside investors finance legal actions in exchange for a share of any successful outcome, has ignited a fierce debate. While TPF undeniably opens the door to justice for claimants who might otherwise be unable to afford it, its largely unregulated status raises serious questions about the fairness and transparency of the ISDS framework.
TPF as a Tool for Justice – A Deeper Dive
One of the most significant benefits of TPF is that it expands access to arbitration. It provides a financial lifeline for investors and developing nations that lack the resources to pursue legitimate claims against powerful state entities. By covering the high costs of legal proceedings, TPF helps create a more level playing field, turning abstract legal entitlements into concrete claims.
Beyond just access, TPF can also improve the quality of the arbitration process itself. Because funders are motivated by profit, they only support cases with a strong chance of success. This rigorous vetting process helps weed out weak or baseless claims, which can streamline proceedings and prevent unnecessary legal actions.
TPF also allows a broader range of claimants to bring cases, which ultimately enriches legal interpretation and helps shape international investment law. This influx of diverse cases contributes to a more robust body of jurisprudence.
The Challenges to Integrity – The Dark Side of TPF
TPF also poses significant challenges to the integrity and fairness of ISDS. The most pressing concerns include:
Conflicts of Interest
Profit-driven funders may try to influence legal strategy, which can undermine a claimant’s autonomy. This “claim hijacking” can lead to settlements that prioritize the funder’s financial return over the claimant’s best interests.
Lack of Transparency
Undisclosed relationships between funders and arbitrators can compromise the impartiality of proceedings. The lack of clear disclosure rules makes it difficult to uncover these hidden ties, eroding trust in the arbitration process.
Financial Burdens
TPF can impose unrecoverable costs on states, particularly when dealing with failed claims. Furthermore, funders often take a substantial share of any award, significantly reducing the compensation the claimant actually receives.
Ethical Dilemmas
Lawyers involved in TPF cases may face conflicting loyalties, a problem made worse by the absence of a global ethical code. This ambiguity can blur the lines of who the lawyer is truly serving – the client or the funder.
Ensuring Fairness Through Regulation
To leverage the benefits of TPF without compromising integrity, robust regulations are essential. Key measures include:
Mandatory Disclosure
Funders should be required to disclose their identity, financial terms, and any influence they have on legal strategy. This allows tribunals to identify potential conflicts and ensure there is adequate coverage for costs.
Security for Costs
Clear rules are needed to protect respondents by requiring funded litigants to provide security for costs. This measure helps ensure that states and other respondents are not left with unrecoverable expenses in the event of a failed claim.
Supervisory Oversight
TPF entities should be registered, demonstrate solvency, and adhere to a strict set of ethical standards. This would introduce a layer of accountability and prevent unscrupulous actors from participating in the market.
Professional Ethics
Legal professional bodies must establish clear ethical guidelines for lawyers working on TPF-supported cases to ensure conflicts are managed and a lawyer’s duty to their client remains paramount. The Chartered Institute of Arbitrators has already published guidelines, but many scholars argue these lack effective enforcement mechanisms.
Academic Perspectives on TPF – What Scholars Are Saying
Recent academic research (2023–2024) on TPF highlights key concerns and solutions. Scholars like Wehland, Gomez, and Puig advocate for uniform disclosure rules and robust regulation. The UNCTAD’s model law supports mandatory funder disclosure and ethical obligations, with Ranjan & Anand emphasizing the need for tailored regulations to protect developing countries from power imbalances.
Mounting concerns persist over the risk of “claim hijacking,” where a funder’s profit motive could dictate settlement decisions. Critics like Sornarajah also warn that TPF could turn ISDS into a speculative, economically-driven market, while Schreuer & Reinisch question whether it erodes the parity between investors and states. Recommendations from scholars include mandatory bonding to address funders’ limited liability and developing enforceable ethical guidelines.
Conclusion – The Future of TPF
TPF presents a complex dilemma. While it undeniably expands access to justice, its lack of transparency and the profit-driven nature of funders raise serious concerns about fairness and potential conflicts of interest. Without comprehensive, globally enforceable regulations, there’s a significant risk that TPF could turn dispute resolution into a realm of speculative finance, eroding the very purpose of international investment arbitration.
Clear guidelines are essential to ensure that TPF is applied responsibly and ethically. The call is clear: the integrity of the arbitration system must not be sacrificed for the sake of financial innovation.
