As in so many aspects of life and law, Covid-19 changed the way claimants pursued arbitration in 2020—but arbitral centers nonetheless reported record-breaking numbers of filings. But key decisions, impending legislation and a renewed interest in funding alternatives may impact arbitration in the months ahead.
2020 trends
International arbitration and Covid-19
It would be difficult, if not impossible, to describe the year in international arbitration without considering the impact of the Covid-19 pandemic, both on newly filed as well as pending arbitrations. Although arbitral institutions do not officially report figures until 2021, initial indications show that the filing of new cases (electronically post-Covid) in 2020 has not slowed down at the world’s leading international investment and commercial arbitral institutions. For instance, ICSID reported that it registered 58 new ICSID Convention and Additional Facility arbitrations in 2020, the highest number it has ever registered. Likewise, SIAC reported it too had a record year, registering 1,005 cases (the first time SIAC’s caseload has crossed 1,000). Turning to pending arbitrations, counsel, arbitrators and arbitral institutions have transitioned effectively to remote technology during the pandemic, but not without delays and challenges. Although remote technologies have proven effective (with the help of guidance notes and protocols issued by arbitral institutions) and are likely here to stay for first sessions, procedural meetings and hearings on discrete issues, the situation is less clear for merits hearings involving multiple fact witnesses and experts, various languages and numerous localities with varying levels of connectivity. And not all parties to arbitrations have accepted a transition away from physical hearings, with challenges filed against tribunals (albeit so far unsuccessfully) in the wake of procedural orders scheduling virtual hearings. One unmistakable trend across both new and pending arbitrations in 2020, however, has been the increased interest from claimants in exploring monetizations of commercial and investor-state awards to address corporate liquidity concerns. That is reflected in the record interest Burford received for monetizations for international arbitration disputes.
Intra-EU Termination Treaty and Achmea
In May, 23 EU member states signed the agreement for the termination of intra-EU bilateral investment treaties, including any sunset provisions (the Termination Treaty). The Termination Treaty implemented the 6 March 2018 Achmea v. Slovak Republic Court of Justice for the European Union judgment. In that decision, the Court held that investor-state arbitration provisions in BITs between EU member states are incompatible with the EU treaties. That said, arbitral tribunals have unanimously rejected intra-EU objections to jurisdiction, finding no contradiction between the substantive provisions of EU law and the provisions of intra-EU BITs. What is more, as the Magyar v. Hungary ICSID tribunal has explained: “While the Contracting States remain the masters of their treaty, their control is limited by the general principles of legal certainty and res inter alios acta, aliis nec nocet nec prodest” such that “even where the Contracting Parties terminate the treaty on mutual consent, they acknowledge that long-term interests of investors who have invested in the host State in reliance on the treaty guarantees must be respected.”[1] Importantly, the Termination Treaty does not apply to claims under the Energy Charter Treaty, a multilateral investment treaty that established a legal framework for energy, trade, transit and investment between member states. While EU member states form the majority of the ECT’s contracting parties, several countries from outside the EU are also members. Therefore, unlike intra-EU BITs, the EU and its member states are unlikely to be able to terminate the ECT and its sunset provisions without the consent of all other contracting parties.
RCEP Agreement
In November 2020, following almost eight years and 30 rounds of negotiations, 15 states in the Asia Pacific region (including China, Japan, South Korea, Australia and New Zealand, as well as the ten ASEAN member states) signed the Regional Comprehensive Economic Partnership (RCEP), the world’s largest trade agreement. The numbers speak for themselves: The parties to the RCEP together account for close to 30% of global GDP and approximately 30% of the global population. Unlike most other global treaties of its kind, however, the RCEP does not currently provide for investor-state arbitration. The agreement does, however, require parties to enter into discussions about such provisions within two years of the RCEP’s entry into force. In the meantime, six RCEP parties (Australia, Brunei, Japan, Malaysia, Singapore and Vietnam) are also signatories to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and have agreed to arbitrate investor-state disputes under that 2018 “next-generation” trade agreement, not to mention the significant number of other bilateral treaties to which these states are also parties. With the November 2020 signing of the RCEP, and a new administration set to take office in the US in 2021, it remains to be seen whether or not the Biden administration will now revisit participation in the CPTPP, either through a renegotiation or joining it as is.
What to expect in 2021
New ICC Rules of Arbitration
In January 2021, the new ICC Rules of Arbitration go into effect, including the new Article 11(7) requiring the disclosure of the identity of any third-party funder to avoid potential conflicts of interest. The ICC remains the world’s most preferred arbitral institution, particularly in Europe and Asia and the Pacific, which together comprised 70% of the parties in 2019 ICC arbitrations. The new ICC disclosure reflects existing ICC practice (as set out in the 1 January 2019 ICC Note to Parties and Arbitral Tribunals) and the fact that many parties already disclose the fact of external financing voluntarily. But the disclosure of arbitration finance may be misused by respondents to create expensive and time-wasting frolics and detours. For instance, although security for costs applications have been rare in ICC arbitrations (a recent ICC Bulletin survey earlier this year noted only 23 applications filed since 1993, 83% of which were unsuccessful), the introduction of Article 11(7) may lead to an increase in frivolous applications. With that in mind, ICC tribunals may become more willing under Article 38(5) of the 2021 Arbitration Rules to take into account such applications in making decisions on costs against respondents. What is more, since respondents will now be cognizant of the use of arbitration finance (or not) very early on in an ICC arbitration owing to new Article 11(7), ICC tribunals may be more likely to permit successful claimants to recover the costs of funding as “other costs” under Article 38(1).
The ICC was not, however, alone in updating its arbitral rules in 2020. The second most preferred arbitral institution, the LCIA, updated its rules earlier this year after the result of a periodic review with input from a large number of users and a working group to ensure that the rules continue to reflect best practice. The updated LCIA Arbitration Rules, effective as of 1 October 2020, do not include any provision requiring the disclosure of the use of arbitration finance.
ICSID Rule Amendments
ICSID, the world’s leading institution devoted to investment disputes (having administered over 70% of all known disputes), is likely to present the final version of its proposed amendments to states for a vote (either in person or by correspondence) in 2021. The outstanding work for the rule amendment project has narrowed considerably since ICSID’s first working paper in 2018, with ICSID set to issue one final fifth working paper in the spring of 2021. ICSID, like the ICC, has been clear about the rationale for its proposed amendment requiring disclosure in funded arbitrations: to avoid conflicts of interest with a potential arbitrator. This is not surprising, as it is consistent with what many ICSID and UNCITRAL tribunals have held concerning the important “access to justice” issues implicated by third-party funding, and how claimants may seek such funding for “risk management and validation by a more objective third party of the merits of the claim”.[2] A more sweeping UNCITRAL Working Group III investor-state arbitration reform project remains underway—with arbitration finance one of many issues under consideration—but it appears unlikely to result in any concrete reforms in 2021.
Modernization of the Energy Charter Treaty
In February and March of 2021, the 56 member states to the Energy Charter Treaty will participate in a fourth round of negotiations on the modernization process. The first three negotiation rounds were held virtually in 2020 (6-9 July; 8-11 September; 3-6 November 2020) and addressed issues of investment protection and dispute settlement. One of the dispute settlement issues discussed was the use of arbitration finance and may involve the introduction of a provision like that proposed by ICSID as part of its rule amendment process, requiring the disclosure of the identity of a funder to avoid any purported conflicts of interest. To be sure, arbitration finance has not just been limited to the funding of ECT claims in investor-state arbitrations, as claimants have increasingly considered monetizing their claims/awards. In the words of one claimant who launched a competitive process for the monetization of its billion-euro ECT claim, there is “increasing interest shown by the market in this type of transaction”. Finally, although the ECT is not impacted by the Intra-EU Termination Treaty, we may see a decision from the Court of Justice of the European Union in 2021 regarding whether or not the investor-state mechanism in any modernized ECT complies with EU law, arising from a request filed by Belgium in December 2020.
Key takeaway
While the voluntary disclosure of external finance providers has been common practice in international arbitration for some time, it remains to be seen to what extent the major arbitral centers will formally require it going forward. But as costs of pursuing arbitration claims rise (and the ongoing economic downturn puts financial pressure on potential claimants), funding will continue to be a necessary tool for claimants and alternative methods of securing capital, such as monetization, will gain traction in the year ahead.
[1] Magyar Farming Company Ltd, Kintyre Kft and Inicia Zrt v. Hungary (ICSID Case No. ARB/17/27), Award of the Tribunal, 13 November 2019.
[2] Bacilio Amorrortu v. Peru, PCA Case No. 2020-11, Procedural Order No. 2, 19 October 2020 (Binnie, Hanotiau, Landau).
