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Member States of the International Centre for Settlement of Investment Disputes (ICSID) recently green-lighted long-awaited updates to the ICSID Regulations and Rules. These are the first amendments since 2006 that will apply to investor-state arbitrations initiated on or after July 1, 2022.
Any corporation doing business globally could potentially be involved in an investor-state dispute. According to the OECD, approximately 2,500 treaties are in force today, including investment provisions found in trade agreements. The ICSID Rules are the most popular procedural rules in investor-state dispute settlement proceedings.
The updated ICSID Rules are generally in line with the recent revisions to numerous institutional arbitration rules that, among others, explicitly recognise and address certain issues arising from third-party funding. The purpose of the amendments to the ICSID Rules is to enhance transparency and offer clearer guidance to arbitrators, arbitration counsel and arbitration users on important issues such as: cost allocation; security for costs; third-party funding – to name a few.
In a bid to increase transparency and detect potential conflicts of interest as early as possible, Amended Rule 14 of the ICSID Arbitration Rules requires parties to submit a written notice disclosing the identity of “any non-party from which the party, directly or indirectly, has received funds for the pursuit or defence of the proceeding through a donation or grant, or in return for remuneration dependent on the outcome of the proceeding.”
If the arbitration funder is a legal (“juridical”) person, the funded party must include information about the entities that own and control the funder. Tribunals also have the discretion to order disclosure of further information regarding the funder and the funding agreement itself.
Although the existing Arbitration Rule 28 and Article 61(2) of the ICSID Convention provides tribunals with broad discretion to award arbitration costs as they see fit, they offer no guidance as to the manner such discretion may be exercised.
The new Rule 52 deals with this by setting out a non-exhaustive list of circumstances that Tribunals shall consider, such as the outcome of the proceedings or part thereof, parties’ conduct et cetera.
Until now, ICSID tribunals have ordered security for costs under existing Rule 39 (in tandem with Article 47 of the ICSID Convention), i.e. as a provisional measure. They have generally done so in exceptional and rare circumstances. However, the new Rule 53, a standalone set of provisions on the issue of security for costs, addresses this by providing much-needed guidance when a request is made that any party bringing a claim or counterclaim provides security. Among others, tribunals shall consider relevant factors and pertinently adduced evidence upon determining whether to make such orders. One of those factors is the existence of third-party funding.
The key takeaways for users and providers of funding
- Parties will now have to reveal the identity of their funder to the tribunal and their opponents. The definition of a “funder” is broad under the Rules (at present, it is not clear whether it encompasses after-the-event insurance for adverse costs). Parties should make sure, in collaboration with their preferred funders, they carefully consider the information they need to disclose and stay current on those disclosures, with best efforts to avoid conflicts of interest or risky and lengthy procedural challenges.
- Third-party funding companies will have to disclose information about the entities that own and control them. This should be rather straightforward for publicly traded entities; however, the vast majority of funders – with often complex, corporate structures largely undisclosed to the public – will need to be prepared to do so.
- Tribunals will now have the power to order disclosure of additional information regarding the funding arrangements. It is expected that funded parties and funders will always seek to protect privileged and commercially sensitive information (which could among others offer an unfair strategic advantage to opponents), but it will be interesting to see how tribunals and respondents react in each case.
- The existence of third-party funding will soon be one of the relevant factors, when tribunals deliberate whether to make a security for costs order, especially in terms of how it would affect a party’s ability to advance its claims. It is currently unclear whether parties will invariably avoid having to post security by taking out after-the-event insurance (possibly in tandem with a deed of indemnity from the insurer).
- Although tribunals have taken into account the relative success of parties on all aspects of the dispute so far (including their overall procedural conduct and the existence of fraudulent claims or novel issues) when awarding costs, the amended Rules have not gone so far as to establish an overarching principle that losing parties will pay the costs of the successful parties. Nonetheless, the new provisions clarify that tribunals shall consider all relevant circumstances when engaging in a cost allocation exercise, which likely supports tribunals’ practice (which has been fairly consistent in the last two decades) of awarding costs on the basis of “costs follow the event pro rata”. In light of this, there should be no doubt in parties’ (and funders’) minds that being held liable for at least a portion of the other side’s costs is a very “real” scenario.
For all questions regarding the topics raised in this blog, please contact Athanasios or a member of our team of litigation funding experts.