Stemming from common law jurisdictions, the third party funding industry has found a fertile ground to proliferate in investor-State arbitration because the right to access to justice of foreign investors easily meets the business interests of funders. Prospective claimant investors need funds to be able to access the expensive investor-State dispute settlement system in order to protect their legal interests. For funders investor-State arbitration represents a lucrative mechanism to obtain high returns on the damages awarded to successful claimant investors.
In practice, only claimant investors use third party funding, and, if the investor is successful in investor-State arbitration proceedings, the losing respondent State pays compensation to the investor (and the funders). The commercial logic of third party funding is, therefore, difficult to reconcile with the foundation of the investor-State protection regime.
International investment agreements are aimed at promoting and protecting foreign direct investment between a foreign investor and a host State. International investment treaty law is regulated by public international law. States’ sovereignty and public interest are its main drivers. Third party funders are clearly not part of this equation. Furthermore, the lack of rules regulating third party funding in international (investor-State) arbitration creates uncertainty because arbitral tribunals have come to different conclusions regarding key issues, such as conflicts of interest, disclosure of the funding agreement, and security for costs.