Originally from Handbook on Third-Party Funding in International Arbitration, Second Edition

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I. Introduction

Third-party funding is defined earlier in this book, but the reader may be less familiar with investment arbitration. A full exploration of the complexities of investment arbitration is beyond the scope of this chapter.  Instead, this chapter  provides a simplified, working definition of investment arbitration, and explains some of the concerns surrounding third-party funding in investment arbitration and some of the ideas that have been proposed as solutions. Next, this chapter explains significant regulatory efforts that address third-party funding in investment arbitration. The reader should note that rules and regulations addressing third-party funding in international commercial arbitration or litigation may affect third-party funding in investment arbitration. Finally, the chapter concludes with recommendations to enhance the concepts examined here.

II. What Is Investment Arbitration?

What is investment arbitration? In a sentence, investment arbitration is arbitration between a host state (or, in some cases, a state-owned corporate entity) and a foreign investor about an investment in the host state's territory.  The foreign investor claimant must be a national of another state (not the host state) and is usually a corporation or, occasionally, an individual. In most investment arbitrations, the foreign investor is the claimant, and the host state is the respondent, although exceptions exist. The treaty or contract containing the arbitration provision defines what qualifies as an investment, and the jurisdictional parameters of investment arbitration require strict adherence to this definition of investment.

Investment arbitration is unique because the host state agrees to waive its sovereign immunity and consents to arbitration with any foreign investor that meets the nationality and jurisdictional requirements in the treaty or contract to attract foreign direct investment. Foreign direct investment is another complex topic; a simple definition of this term is investment by a foreign national of resources such as money, expertise, and technology in the host state’s territory for purposes such as extracting or refining natural resources or building infrastructure.  

In classic investment arbitration, the host state’s consent  to arbitrate is contained in a bilateral (two-state) treaty or a multilateral (multi-state) treaty signed by the host state and the foreign investor’s home state. In this treaty, the host state provides an open invitation to arbitrate to any foreign investor covered by the definition of nationality and jurisdictional requirements in the treaty. Since the foreign investor is not a party to the treaty, it accepts the host state’s offer and consents to arbitrate by filing an arbitration claim under Article 25 or a conciliation claim under Article 28 of the ICSID Convention or under provisions of the applicable bilateral or multilateral investment treaty.  In this way, the arbitration agreement between the foreign investor and the host state is incomplete until the investor files an arbitration claim against the host state.