Another investment tribunal grapples with disclosure of third-party funding information

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Summary: As we predicted in a post from August last year, the debate about disclosure of third-party funding information in international arbitration continues and its limits are still being tested.

On 11 January 2016, the tribunal in an investment arbitration brought under the UNCITRAL rules - South American Silver Limited (“SAS”) v. The Plurinational State of Bolivia (“Bolivia”) (PCA case No 2013-15) - ordered SAS to disclose its funder’s name but refused to order disclosure of the funding terms.

Background to Bolivia’s application

In October last year, Bolivia applied for (a) disclosure of information relating to the Claimant’s third-party funder and (b) security for costs in the sum of US$2.5 million, on the basis that SAS lack financial resources, justifying its arguments in part on the existence of third-party funding.

Reminiscent of procedural order no.3, in Sehil, Bolivia argued that such disclosure was warranted in order to verify the existence (or not) of arbitrator conflicts of interest and hence protect the integrity of the proceedings, invoking General Standards 6(b) and 7(a) of the 2014 IBA Guidelines on Conflicts of Interest in International Arbitration (“IBA Guidelines”). As for its security application, Bolivia relied heavily on the ICSID tribunal’s decision in RSM v St Lucia (“RSM”) to argue for a presumption in favour of granting security for costs. It contended that the existence of funding “confirmed SAS’s inability to bear the costs” of the arbitration and also contended that there was no evidence that the funder has assumed adverse costs liability.

In opposing the security application, SAS relied on the decisions in EuroGas and Rurelec to argue that the mere existence of third-party funding does not warrant an order for security for costs, regardless of the funder’s liability for adverse costs and it highlighted the exceptional facts in RSM, not present in this case, which cumulatively “satisfied the very high standard required to warrant security”.  SAS opposed disclosure of its funding terms on the basis that they were irrelevant to the issues in dispute, confidential and commercially sensitive, contending that such disclosure would be prejudicial to it and its funder. However, SAS did agree to disclose its funder’s name (if ordered) “in the interests of transparency”.

Key takeaways from the Tribunal’s decision

In refusing to grant security for costs and ordering disclosure of the funder’s name only, the three-member tribunal comprising of Prof. Francisco Orrego Vicuna, Mr. Osvaldo Cesar Guglielmino and Presiding Arbitrator, Eduardo Zuleta Jaramillo:

  • Reiterated and endorsed the “general position of investment tribunals in cases deciding security for costs” namely that “lack of assets, the impossibility to show available economic resources, or the existence of economic risk or difficulties that affect the finances of a company are not per se reasons…sufficient to warrant security.” Security will only be granted in extreme and exceptional circumstances, for example, where there is evidence of constant abuse or breach that may cause irreparable harm if the measure is not granted.  Bolivia, it held, did not meet this high standard.
  • Followed the approach in Rurelec and EuroGas in holding that the mere existence of a third-party funder is not an exceptional situation justifying security for costs.
  • Endorsed the decisions of investment tribunals that have awarded costs against claimants and affirmed that the existence of third-party funding should not, by itself, be a factor to take into account in the determination of costs. Considered that treating the presence of a funder as an exclusive factor to determine costs earlier in the case (in evaluating a security for costs request) would be inconsistent with those decisions.
  • Held that the “existence of the third-party funder alone does not evidence the impossibility of payment or insolvency”, appreciating that financing is often obtained for other reasons.
  • Acknowledged that, while third-party funding may be a factor to consider in deciding a security for costs application, if this alone was a determinative factor  “respondents could require and obtain the security on a systematic basis, including the risk of blocking potentially legitimate claims”.
  • Assessed the situation on its merits and held that (i) “for the purposes of transparency, and given the position of the Parties, it must accept Bolivia’s request for disclosure of the name of SAS’ funder” (ii) exceptional circumstances required to order security were not present and (iii) no additional circumstances had been proven which would warrant modification of the tribunal’s earlier decision to reject Bolivia’s request for disclosure of SAS’ funding agreement during the document production process.

Where are we now

1. Disclosure of the existence of third-party funding

This decision, and the decisions in Eurogas and Sehil, suggest that it is now generally accepted that funded parties will need to disclose the identity of a third party funder to allow arbitrators to satisfy themselves that there is no conflict of interest.  This is very much in line with the disclosure required by the IBA Guidelines and with the ICC’s Guidance Note on conflict disclosures by arbitrators issued in February 2016.

2. Disclosure of the terms of third-party funding

There is still a lot of uncertainty as to the circumstances in which additional funding information - beyond the funder’s identity - needs to be disclosed.  This reflects the need to balance the need for transparency around funding arrangements against the prejudice that may be caused to the funded party if the non-funded party gains insight into the funder’s assessment of the claim.

The procedural decision in SAS appears to endorse the view that disclosure should be limited to the identity of the funder unless the applicant show that there are additional factors that warrant the disclosure of the terms of the funding agreement.  This is in line with the views expressed by the majority of respondents to the Queen Mary and White & Case’s International Arbitration Survey (October 2015) who were in favour of disclosing the funder’s identity but against disclosure of funding terms, deeming them “irrelevant to the effective management of the arbitral process”.

However, the draft SIAC Investment Arbitration Rules (open for consultation until 29 February 2016) act as an interesting contrast since they provide for broader disclosure; they expressly empower tribunals to order disclosure of the identity of the funder as well as “the funder’s interest in the outcome of the proceedings; and whether or not the funder is committed to undertake adverse costs liability”.  It will be interesting to see whether this provision is adopted in the final version of the rules.

3. The impact of third-party funding on applications for security for costs

The tribunal in this case, and those in Rurelec and EuroGas, seem to be restoring the balance in international arbitration by leaving RSM as the exception rather than the rule.  Security for costs therefore remains difficult to obtain in international arbitration and the mere existence of a third-party funder is not an exceptional situation justifying security for costs. The tribunal in SAS reiterated that exceptional circumstances existed in RSM because “(i) there was a history of [RSM’s] failure to comply with its payment obligations (ii) [RSM] admitted its lack of financial capacity to pay the costs of the arbitration; and (iii) admitted, but did not disclose the existence of a third-party funder” (i.e. cumulative factors).

The decision is very much in line with the draft report of the ICCA-Queen Mary TPF Task Force on Security for Costs and Costs which noted that “nothing in the [RSM] decision supports the idea of ordering security payment whenever third party funding is present” and that “on its own [third-party funding] is no necessary indication that a claimant is impecunious. [It] is increasingly used by large, solvent, companies as a way to offset risk. The mere presence of a third-party funder is therefore, not, in itself, sufficient reason to grant security for costs.”

BLP Perspective

The ongoing debate about the disclosure of third-party funding in international arbitration highlights the tension between the potential impact of third party funding on the integrity of the arbitration process and the prejudice that may be created to the detriment of the funded party by the disclosure of a funding agreement.

In our view, this balance is best struck by limiting disclosure to the identity of a third-party funder (to ensure that arbitrators remain conflict free) unless there are clear and compelling additional factors that warrant further disclosure. With increasing calls for the regulation of disclosure of third party funding in international arbitration, it will be interesting to see whether arbitral institutions respond with the introduction of rules regulating the disclosure of third-party funding or whether tribunals will be left to decide these issues on a case-by-case basis.

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