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
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
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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