Access to arbitration for insolvent parties can be addressed through Third-Party Funding (“TPF”). TPF, however, has several implications, namely, its impact on: (i) the confidentiality of arbitral proceedings; (ii) conflicts of interests; and (iii) orders for security for costs. These considerations will be discussed in the following sections.

Third-Party Funding: General Considerations

TPF can be a practical tool for economically disadvantaged parties in arbitration proceedings. In essence, it is a financing mechanism where a third party covers the arbitration costs for one of the parties to a dispute. In return, the funder receives an agreed amount, e.g., the awarded compensation if a claim is successful (the percentage will vary depending on the agreement). The TPF industry includes specialized litigation firms, insurance companies, investment banks, and hedge funds.

During an arbitration, a TPF agreement might give the funder some control over the case and/or the client. However, if the funded party loses, the funder receives no compensation and bears the responsibility for any expenses incurred, such as lawyer fees.

The percentage the TPF receives can vary, and is typically based on (i) the initial investment multiplied by a certain factor once the award is issued (predetermined or adjusted depending on factors such as the duration of the case, the amount recovered, and the level of risk assumed by the funder); (ii) a percentage of the final award, usually ranging from 15% to 50% of the recovery; or (iii) a combination of these two options.

Before signing a funding agreement, funders usually assess elements such as: (a) the merits of the case; (b) the likelihood of successfully enforcing the award against the respondent; (c) the potential value of the compensation; and (d) the adverse costs they could face if the claim is unsuccessful.

Some examples of TPF include:

• Litigation Financing: Through this arrangement, a funder agrees to bear the costs of pursuing a case on behalf of one of the parties, in exchange for a portion of any recovery after a settlement or judgment.
• Success-Based Legal Fee Arrangements: This structure—typical in most jurisdictions—has lawyers investing their own services in the case, with compensation depending on the outcome. If the award is unfavorable, the lawyer doesn’t get paid or only receives a reduced fee. If the case is won, the lawyer might receive a percentage of the award or an increased fee.
• Loan Agreements: Loans from financial institutions also serve as a common financing tool for liquidity to initiate or defend a claim. Unlike other forms of TPF, the sum loaned plus interest must be repaid regardless of the case outcome. However, lenders may negotiate additional returns, such as a success-based premium, if the claim is successful.

Additionally, there’s a growing trend of non-profit funders funding arbitration proceedings, motivated by goals such as setting a favorable precedent for future claims or supporting or opposing a particular industry.

The Impact of TPF on Arbitration

TPF impacts international arbitration in several ways:

• Independence and Impartiality of Arbitrators: Is Disclosure Required?

It is reasonable to think that the existence of a funder necessitates disclosing any relationship the funder has with the arbitrator. A common example would be an arbitration where a lawyer represents a client and a third-party funds the costs. In such a case, the lawyer frequently interacts with the funder in the course of managing the case, whether through reporting on progress, coordinating strategy, or negotiating funding terms. If that lawyer later acts as an arbitrator in another dispute involving the same funder, the opposing party may want to know the details of this relationship, as it could affect the arbitrator’s independence and impartiality. It is not uncommon for an arbitrator, who has acted as an advisor to a funder on other matters, to sit on a tribunal hearing a matter that the same funder is funding.

Fortunately, arbitration rules worldwide have addressed this issue. For instance, the 2021 Arbitration Rules (Article 11(7)) of the International Chamber of Commerce (“ICC”) provide:

“In order to assist prospective arbitrators and arbitrators in complying with their duties under Articles 11(2) and 11(3), each party must promptly inform the Secretariat, the arbitral tribunal and the other parties, of the existence and identity of any non-party which has entered into an arrangement for the funding of claims or defences and under which it has an economic interest in the outcome of the arbitration.”

This provision contributes to preventing conflicts of interest between the tribunal and the parties (or any related parties, including funders).

• Cost Orders

Costs that are included in international arbitration awards typically include lawyer fees and other expenses related to presenting or defending a claim, like arbitrator fees, witness costs, translators, travel expenses, paperwork, etc. The question arises: Are financing costs included within this category?

Financing costs are different from other expenses in that they’re not inherent to the arbitration process but rather result from a third party’s decision to fund the dispute. While it’s widely agreed that including these costs could significantly increase the amount the losing party would pay, some arbitrators have awarded these costs to the funded party, arguing that the other party, before the arbitration, may have applied commercial pressure knowing the opponent couldn’t afford the arbitration.

Another debated point is whether, if the funded party loses the arbitration, the prevailing party can recover its costs from the funder. The debate hinges on whether the funder should be considered a party to the arbitration (a matter that remains controversial) and on the nature of the financing agreement between the claimant and the funder.

• Funders as Non-Signatories to the Arbitration Agreement

TPF also raises issues about non-signatories. A funder is typically a non-signatory to the arbitration agreement and generally has no direct connection to the parties or the dispute until it arises. The funder cannot be validly joined to the arbitration as it did not consent to it

However, the funder has an economic interest in the outcome of the dispute, which often gives it some control over the funded party (e.g., choosing the arbitrator and legal team, and getting involved in the case strategy). As a result, some authorities consider the funder a party to the arbitration. While I am not aware of any case where TPF has been considered a party to the arbitration, it could potentially be under the same non-signatory theories that some arbitral tribunals have used to bind third parties to arbitration,

The idea that tribunals should have jurisdiction over funders for reasons of equity, efficiency, certainty, and flexibility, based on a principle that goes beyond the core principle of arbitration—consent—seems problematic.

The Relationship Between TPF and Security for Costs

TPF has also opened the door for discussions on the funded party’s financial ability to comply an award on costs at the end of an arbitration. Security for costs orders, when issued, require a claimant to provide a partial guarantee before proceeding with the claim—that guarantee would cover a potential adverse cost award.

There is ongoing debate over whether tribunals have the power to grant security for costs orders. In principle, this could be expressly allowed in the arbitration agreement, except where restrictions are imposed by mandatory provisions of any of the applicable arbitration laws. Most international rules of arbitral institutions and domestic laws are silent on the matter. Nevertheless, general provisions granting tribunals the power to issue interim measures have been invoked as a basis for ordering security for costs.

Perhaps the most debated issue is: Does the mere existence of TPF justify an order for security for costs to protect the economic interests of the non-funded party? If a respondent prevails and is awarded costs, it may struggle to enforce that award against a claimant with no assets or against a funder who is not a party to the proceedings. Therefore, requiring claimants to provide security for costs could prevent this scenario.

Tribunals, institutions, and scholars have developed widely accepted criteria for assessing security for costs requests. Tribunals have consistently stated that it would be appropriate for arbitrators to exercise their discretion to issue a security for costs order if the respondent, who requested such an order, can demonstrate: (a) that the factual situation is substantially different from the one existing when the parties entered into their arbitration agreement, and (b) that the current situation is such that it would be very unfair to require the respondent to conduct the arbitration without such security.[i]

A report by the ICCA-Queen Mary Task Force on TPF concluded that four main factors should be considered. First, should TPF affect the recoverability of legal costs by the successful claimant? Second, should financing costs be recoverable? Third, can a third-party funder be ordered to contribute to the costs of the successful respondent? Fourth, how should TPF impact the order for security for costs?[ii]

Some scholars argue that TPF should not be considered a relevant factor when deciding on a security for costs order for three main reasons: First, since final cost awards against unsuccessful claimants have ruled that TPF is not a factor in their assessment, it logically follows that TPF should not be a factor in the earlier stage of determining security for costs. Second, if TPF agreements became a factor, it would encourage respondents to systematically request security, thereby delaying the proceedings and increasing the risk of stifling legitimate claims. Third, claimants benefiting from TPF would be in a worse position than parties using other financing arrangements, which would be inequitable.[iii]

The Tribunal in the Unionmatex[iv] case highlighted some of the reasons against ordering security for costs due to the mere existence of a TPF:

• It presupposes that the respondent will secure both a favorable award on the merits and a costs award.
• It risks the claimant’s access to justice if it lacks the resources to cover the security for costs order.
• Claimant’s financial struggles may have been caused by the respondent.

The few cases where tribunals have issued orders of security for costs were based on “exceptional circumstances.” In their considerations, they have noted that: (i) the mere reliance on TPF does not constitute “exceptional circumstances” (actually, a solvent claimant could strategically rely on a TPF); (ii) however, “exceptional circumstances” may arise due to a claimant’s bad faith tactics or misconduct, or a funding agreement that explicitly shields the funder from liability for an adverse costs award; (iii) procedural misconduct or bad faith maneuvers to avoid liability for costs may justify a security for costs order, as was the case in RSM v. Saint Lucia,[v] due to the claimant’s track record of ignoring costs award in the past—examples of behaviors of said nature include, also, the fraudulent concealment of assets; and (iv) the terms of the funding agreement are pivotal: if the funder does not assume responsibility for an adverse costs award, this may constitute an exceptional circumstance, as emphasized in the Garcia Armas v. Venezuela case.[vi] Even if these elements are present, a tribunal would be unlikely to order security for costs if it is objectively assured that the claimant will comply with a future costs award—however, the standard of what constitutes “objective assurance” remains unclear.

Conclusion

In essence, TPF has reshaped the landscape of arbitration, introducing new challenges and opportunities. As funding becomes more common, it will continue to raise important questions around fairness, impartiality, and procedural efficiency. As arbitration practitioners, it’s essential to stay aware of these evolving dynamics to navigate them effectively.

[i] ICC Case No. 10032, Procedural Order of 9 November 1999 (Nov. 9, 1999), ¶ 45.

[ii] International Council for Commercial Arbitration, The ICCA Reports No. 4: ICCA-Queen Mary Task Force Report on Third-Party Funding in International Arbitration (Apr., 2018), p. 236.

[iii] Kirtley, W., Wietrzykowski, K., “Should an Arbitral Tribunal Order Security for Costs When an Impecunious Claimant Is Relying upon Third-Party Funding?” Journal of International Arbitration, Volume 30, Issue 1, Wolters Kluwer (2013), pp. 21-22.

[iv] Unionmatex Industrieanlagen GmbH v. Turkmenistan, ICSID Case No. ARB/18/35, Decision on the Respondent’s Request for Security for Costs and the Claimant’s Request for Security for Claim (Jan. 27, 2020), ¶¶ 50, 64, 66.

[v] RSM Prod. Corp. v. Saint Lucia, ICSID Case No. ARB/12/10, Decision on Saint Lucia’s Request for Security for Costs (Aug. 13, 2014), ¶ 81.

[vi] García Armas v. Républica Bolivariana de Venezuela, Case No. 2016-08, Orden Procesal No. 9 (Perm. Ct. Arb. June 20, 2018), ¶¶ 225-227.