- Posted by Prof. Krista Nadakavukaren Schefer
- On October 9, 2015
- investement trade policy, investor-state dispute settlement, investors, ISDS
The rise of third party funding of investor-state dispute settlement (ISDS) brings up all sorts of questions. There are questions of procedure specific to investment arbitration – questions which have already started being addressed by experts. There are questions on how the funder’s nationality might affect the consideration of the investor’s nationality for purposes of a tribunal’s jurisdiction and whether the compensation paid by a host must include sums owed by the investor to the funder. The foreseeability of the use of third party funding might be an issue in the latter case, while more fundamental questions of the relationship between individuals and states in international dispute settlement are at the heart of the former. There are questions of how funding decisions themselves will influence what is considered a “winning” claim – a decision that may not have as much to do with the substance of the claim as with the viability of the funder receiving a sufficient return on its investment (see The Impact of Third-Party Funders on the Parties They Decline to Finance). Third party funding, in short, opens up a whole sub-field of investment law and trade policy questions, the answers to which may re-shape international economic law in ways that go to the heart of system.
It is easy to see the danger of embracing third party funding fully: more arbitrations. The fear is that funders will spur investors to file complaints and that governments will have to expend substantial resources fending off such suits – more resources, perhaps, than if the case had to be funded by the investor alone, as the investor can now afford to engage in a longer or more complex procedure. More funded arbitrations will likely also lead to an increase in the number of settlements between investors and hosts – and with them, the costs to the government of policy changes, legitimate or not. At the same time, transparency will decline, as settlement negotiations will likely remain confidential.
On the other hand, promoting third parties’ funding of arbitrations could have the same benefits in the pursuit of international governance as contingency fees have in the pursuit of corporate accountability through tort law: enabling those who otherwise could not afford justice to have their claim aired. External pressure may be the most effective way to foster governmental accountability and force officials to attend more closely to what they promise and what they do. If external funds would enable companies or NGOs to require the host to enforce its environmental, labor, or social legislation, preventing such arrangements would be antithetical to the agenda put out in the Sustainable Development Goals.
How to ensure that third party funding’s potential benefits are maximized while minimizing the potential burdens is a challenge to all of us active in investment law and trade policy. Keeping in mind that reportedly a very small number of third party funding requests by investors are actually accepted by the funders, it is important to consider both what incentives are needed to ensure that small investors are empowered to join the campaign to promote good governance through heightened host state accountability and to determine what limits on arbitration funding are needed to keep both investors and host governments working for the common good.