Turkey: Third Party Funding In International Investment Arbitration

Last Updated: 9 September 2014
Article by Egemen Egemenoglu

Third-party funding has become one of the "hot topics" in investor-state arbitration. Parties, whether or not they are in financial distress, choose using funders to provide the financing to pay for their international arbitration proceedings. Financing includes the payment of some or all costs of the arbitral proceedings for one of the parties to the dispute. In return for this financial liability the funders receive a certain percentage of the finally awarded compensation or a certain multiple of their overall investment in the case.

Growing number of professional funders actively advertise and market their services for funding international arbitration proceedings. So how come the funders start to play an active role on this game? What are the primary reasons behind the recent advent of funding?

The first and most obvious reason of this rapid increase of third party funding lies in the heavy costs associated with the c generally lengthy proceedings in international investment arbitration. Claimants are often reluctant to engage in such proceedings without financing, as they are unwilling to invest with their own finances in an international proceeding that they are not familiar with. Adverse costs also have to be taken into account in case of a possible negative result on the proceedings. A claimant 'losing' the arbitral proceeding, with the possible additional obligation to pay for the opposing party's costs, may have a tremendous impact on the future economic and financial viability and stability of the company. Third party financing shifts the liability for the costs to the funder, thereby giving more companies the opportunity to bring their claims against states.

Secondly, since the cost of arbitration can be substantial, the funder usually carries out a thorough due diligence of the case and the chances of success, before the financing takes place. This investigation can be considered as an extra examination of the possibility of success in the future proceeding. It is therefore extremely unlikely for the third party funders to invest their resources in manifestly unmeritorious claims.

So what type of due diligence do the funders rely on? How do they conduct their preliminary investigation? It is clear that due diligence requires extensive information and material provided by the claimant and its counsel. In most cases seeking funding, claimants are requested to provide an initial package of information so as to allow for the identification of key elements, such as the parties, initial costs, the theory for damages and the likelihood of recovery. This review may take up to 4-6 weeks days, after which period the funder will revert to the claimant with its view on the financial terms and a ''conditional litigation funding agreement''. This funding agreement grants exclusivity for a limited period of time depending on the agreement, which may be up to 60 to 90 days in complicated cases. The funder will then conduct due diligence and which, depending on the stage of the case, may be comprised of several rounds.

If the funder finds that the case is viable after the due diligence process, o and anticipates a high likelihood of success for the outcome of the case, parties begin the negotiations on the commercial terms of the funding agreement. If there is an agreement reached,, virtually all funding agreements will contain a confidentiality clause and the claimant is generally not required to disclose the funding agreement before the tribunal.

Third party funding is a fast growing industry and will undoubtedly continue to play an extensive role in investment arbitration cases in the future. Claimants will need or want to outsource the financial risks involved with investment arbitrations. The claimant needs the third party funder to initiate the proceeding, but at the same time is likely to lose some of its decision-making power to the funder. Although this may be be considered as "losing of the decision-making power" from one ambit, consolidated knowledge on finance and litigation management of a third-party funder adds tremendous value to the pre-existing legal position and provides the claimants with a more equal position with respect to the State.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Egemen Egemenoglu
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