Do Funders Embrace Investment Arbitration?

Different funders hold opposing views as to the relative outcome predictability between investment and commercial arbitration. Many funders consider commercial arbitration more predictable than ISDS (ref 1) , but a small minority have expressed the opposite view to the author. Similarly, arbitration lawyers continue to hold different views as to the desirability of funding investment arbitration in the eyes of the funders: some lawyers almost instinctively believe that funders wish to fund big-ticket arbitration investment cases whereas others acknowledge their regret that an increasing number of funders are increasingly shying away from investment arbitration. What accounts for this gap in perception? Do funders have more reason to embrace or reject ISDS? The short article below attempts to give several avenues of thought, based on personal experience and without any pretention of exhaustiveness.

ISDS should appeal to funders because of: (i) quantum: the amounts at stake will tend to be very large (ref 2) ; (ii) the availability of information: higher levels of transparency in ISDS means greater access, knowledge and analysis of prior decisions, arbitrators and other key participants; (iii) the lawyering: funders tend to fund claimants represented by large law firms deservedly known for their expertise in the field, sizeable manpower, and familiarity with litigation funding; (iv) enforcement: if enforcement is deemed unnecessary because the award is believed to be easily (if not automatically) enforceable across most jurisdictions, then the duration risk for the funder decreases and the desirability of funding the dispute increases; if, on the other hand, post-award enforcement is seen as a major additional hurdle, then the need for funding increases, thereby again benefiting funders. 

The arbitration reality is, however, more nuanced, as can be seen by examining further points (i) and (ii) above.

Regarding quantum (i), the realistic claim value is not examined in isolation; the amount relative to the lawyers’ budget is important to the funder, and arguably more so in investment arbitration where the lawyers’ budgets are often considerably higher than in commercial arbitration. This is a source of misunderstanding or confusion among some lawyers and clients: a funder will not necessarily be impressed with a high estimated value of damages if the proposed or realistic budget is also very high; conversely, a much lower claim amount may attract the genuine interest of a funder if the relative realistic budget is considerably lower.

The costs element must not be forgotten: while the unavailability or legal impossibility of third-party costs orders in arbitration reduces the funder’s financial risk compared to what may happen here in domestic litigation, the potential higher adverse costs liability (because of the expensive nature of ISDS) and the arguably greater likelihood of security for costs applications (ref 3)  will continue to make ISDS a specifically risky field for funders.

Relating to quantum and costs is also the crucial time element in respect of which the funder will be more sensitive (and sometimes more knowledgeable) than the arbitration practitioner. In the author’s experience, some practitioners genuinely underestimate or voluntarily downplay the realistic total duration and costs; by way of example, the time it takes from the filing of an ICSID annulment request until a final decision is made is often close to two years, and not a mere couple of months as may be honestly but wrongly thought (ref 4) .

As to the public or easy availability of information in investment arbitration (ii), it bears noting that higher levels of information – however relevant and material – do not necessarily translate into easier or better outcome predictions for a funder. There are several reasons for this, including the present complexity and uncertainty of ISDS and the profile and work activities of the funder, especially if one assumes here that the funder is here operating on a merits-based rather than on a risk pricing model (ref 5).

In addition to undermining one of the key historically hoped-for benefits of international arbitration, the recurrent ISDS-related admissibility and jurisdictional objections present a predictably recurrent and serious legal risk for funders. Such objections are often based on allegations of bribery, corruption and illegality, creating in passing an added reputational risk for the funder that is not found to the same degree or frequency when it invests in commercial arbitration or domestic litigation.

The idea‘[r]esolve the facts, resolve what actually happened, and the law usually takes care of itself’ (ref 6)– which undoubtedly resonates more to a common law lawyer than to a continental jurist or non-lawyer – will arguably apply less forcefully in investment arbitration, where the funder cannot afford to ignore the highly technical objections, analyses, and awards that are routinely made and publicized. Admittedly, the funder’s tasks and difficulties are fuelled by the fact-intensive nature of certain key issues (including jurisdiction and quantum), the potentially early stage of the proceedings at which the funder is reviewing the case, and the wide degree of discretion afforded to the arbitrators, however concealed this power may be. In practice, these prediction difficulties are bound to translate into investment failures, and it would be interesting here to compare the funders’ relative success rates in investment and commercial arbitration.

There is another source of difficulty: investment arbitration is a highly specialised sub-field of international arbitration but the lawyer-funder is generally not an investment arbitration specialist, let alone a pure legal specialist. The nature of his work – perhaps even part of the reason why he became a funder in the first place – requires an expanded legal horizon and the will to become more of a generalist in the wide field of international dispute resolution. The funder pitches, negotiates deals, participates in auctions, buys and sell claims or awards, and enforces awards and judgments. Rarely will he spend most of his time working in investment arbitration, in stark contrast to certain arbitrators and arbitration counsel. And so the wide investment arbitration jurisprudence (both in the civil and common law sense of the word) may initially more confuse than illuminate, and repel rather than attract the funder.

Other than the current wave for regulation of TPF in ISDS and the visible hostility displayed by certain States and stakeholders (ref 7) , it may be added that most litigation funding companies and individual funders come from English-speaking common law jurisdictions (ref 8) , which may further reduce their ability and appetite to review and invest in investment arbitration where the language of the proceedings is, for instance, exclusively in French or Spanish.

All in all, it remains doubtful that most funders are actively embracing ISDS  (ref 9). Either way, the evolving state of affairs should become more visible with the possible expansion of funding-related disclosure obligations. Tracking the number and type of investment arbitration specialists who form part of (and actually work at) the funding companies may also provide a useful barometer for what will likely remain a minority position amongst lawyer-funders.

ref 1:ISDS (‘Investor-state dispute settlement’) or ‘investment arbitration’ are used interchangeably in this article.

ref 2: See McKenny I., The Evolution of the Third-Party Funder, in The Investment Treaty Arbitration Review, Chapter 11, 5th edition, 2020, available here p. 142 (footnotes deleted): “Third-party funding of disputes did not start with ISDS but it has become the fastest growing dispute forum for third-party funders. The reasons for this are both qualitative and quantitative: ISDS is expensive (US$6.1 million per side in claimants’ costs) and long (an average of 3.86 years to obtain an award, and an additional one to two years for post-award processes and enforcement).The ability to transfer the cost risk to a third party by sharing the upside in a potential award is obviously very attractive, but it was not obvious what the commercial terms of the funding agreement should be. ISDS was relatively untested at early stages of this post-industry age. As a result, what was typically seen in the industry was a reversion to pre-industry pricing revamped and referred to as risk pricing: this was merely a means by which a third-party funder could account for uncertainty by increasing profitability”.

ref 3: McKenny, ibid, pp. 143-144. See also the International Legal Finance Association’s comment of 30 July 2021, in, p. 93: “In what has become a frequent occurrence in investor-state arbitrations, however, upon learning of the existence of an arbitration finance arrangement, respondents proceed to file applications seeking security for costs”.

ref 4: See here, for instance,last accessed on 20 September 2021.

ref 5: On this distinction, see McKenny, ibid, pp. 146-149.

ref 6: Langbein J., The German Advantage in Civil Procedure, 52(4) University of Chicago Law Review, 1985, p. 847.

ref 7: See, last accessed on 2 October 2021.

ref 8:See, last accessed on 2 October 2021.

ref 9: The difficulty of obtaining third-party funding in ISDS is also documented. For two recent examples: the International Section of the American Bar Association wrote on 29 July 2021 that rather than promoting frivolous claims, “It has […] been the experience of members of our Section that it is very difficult to obtain third-party funding for ISDS cases”, and Mick Smith, on behalf of Calunius Capital LLP, who reported on 29 July 2021 that “Of the approximately 300 actual or potential investment treaty claims considered for funding by Calunius over an eight-year period (December 2010 – November 2018), Calunius reached an agreement to fund 10 of them, i.e. less than 4%. Of these 10 cases, 7 have already won on liability and 3 are ongoing pre-merits hearing”,, at pp. 70 and 121 respectively.

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Author Régis Bonnan is a member of Profile Investment’s Enforcement team.

If you have any questions, please do not hesitate to get in touch with Régis via email: