Legal finance trends: International arbitration

Outside financing is an ever-expanding reality of international arbitration, and it will continue to be essential in the year to come. As one of the world’s most respected global law firms put it in 2016, arbitration finance is “here to stay, and not just for small or cash-strapped claimants.” By 2017, the same firm was calling arbitration finance fully “mainstream” and predicting its continued acceptance as an expected component of dispute resolution.^[1]

Arbitration filings and costs continue to rise

Growing use of outside financing is occurring alongside overall increases in international arbitration. Available data shows that international investors are continuing to use arbitration to resolve disputes at record levels and that both treaty-based and contract arbitrations are on the rise. To cite just two sources, both ICSID and UNCTAD data reveal dramatic growth in the last decade, with the three years with the most filings in history all occurring in the last four years (2013, 2015 and 2016). ^[2]

Available data also points to increases in expense and risk faced by claimants and respondents—both of which highlight the value of outside finance to arbitration. A 2016 survey of 55 ICSID arbitrations concluded between 2011 and 2015 for which claimant cost data was available showed that the average claimant cost for legal fees and expenses was US $5.6 million, in addition to tribunal costs of on average $882,668. Average respondent costs in 56 ICSID arbitrations concluded between 2011 and 2015 for which claimant cost data was available was US $4.9 million, in addition to similar tribunal costs.^[3] A survey of 495 concluded ISDS proceedings filed between 1987 and 2016 showed that about a third of were decided in favor of the state, a quarter were decided in favor of the investor, a quarter of cases settled, and the remainder were discontinued or resulted in no monetary compensation. On average, successful claimants were awarded about 40 percent of the amounts they claimed.^[4]

Arbitration finance has entered the mainstream

Although the legal trade press—just as eager for drama as their peers—tend to accentuate the events or rulings that may superficially appear to pose barriers to arbitration finance, there is no question that outside capital is accepted as an expected practice and is, truly, a non-issue in the vast majority of arbitral contexts.

Tribunals that have considered outside funding have accepted it. To name just a few examples, in July 2017, an ICSID arbitration tribunal ruled in favor of a claim by Teinver SA, a Spanish investment group that owned an airline expropriated by Argentina—having rejected the respondent’s 2015 assertion that the bankrupt airlines' agreement with Burford to pay for ICSID proceedings in exchange for a portion of the award violated the law. In South American Silver v Bolivia in January 2016, the claimant was ordered to disclose the existence and identity of its funder, but the UNCITRAL tribunal stopped short of ordering disclosure of the funding agreement itself—and strongly asserted that the existence of a funder is not evidence of insolvency or inability to pay costs, and is therefore not a basis for security for costs applications. In Essar Oilfield Services v Norscot Rig Management in 2016, the High Court of England and Wales refused to set aside an ICC award in which a claimant had been awarded as part of its arbitration costs the fee it had paid to its funder—a decision clearly reinforcing the place of arbitration finance.

Among the most salient events in 2017 were the expansion of arbitration finance to Singapore and Hong Kong, as is addressed elsewhere in this issue. Additionally, the long-anticipated ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration draft report was published. Although the report suffers from an imprecise and occasionally contradictory definition of “third-party funding,” it assumes the centrality of outside capital to arbitration today and recommends a sensibly light touch on costs issues—advocating, for example, that applications for security for costs be determined irrespective of the presence of funding.

Economic forces continue to make finance an important tool for law firms and clients

Looking ahead to 2018, it is safe to assume that continued strong economic activity in foreign investments and international trade will lead to inevitable disputes, particularly where there has been some volatility in commodities prices, ongoing political instability or economic challenges in developing countries. A portion of those disputes will find their way to dispute resolution—particularly matters related to investments in construction, electric power and energy, and oil, gas and mining, which are respectively the sectors most frequently represented in new ICSID cases filed as of mid-2017.^[5]

For law firms, the growth in arbitration filings does not automatically translate to more opportunity—instead, it requires firms to be ready to compete. Based on Burford’s experience in talking to hundreds of arbitration specialists, more firms are moving into the space and competition for the best matters is on the rise. Not surprisingly, then, we’re seeing increased demand from law firms for portfolio arrangements that enable them to approach clients with funding in place as a competitive edge.

[1] Freshfields Bruckhaus Deringer, “International arbitration: 10 Trends in 2016”. Available at www.freshfields.com/uploadedFiles/SiteWide/ Campaigns/Arbitration/Arbitration%20Insights%202016.pdf, and “International arbitration: 10 Trends in 2017”, available at http://knowledge.freshfields.com/h/Global/r/1810/international_arbitration__10_trends_in_2017.

[2] The ICSID Caseload—Statistics (Issue 2017-2). Available at https://icsid.worldbank.org/en/Pages/resources/ICSID%20NewsLetter/2017-Issue3/New-Issue-of-the-ICSID-Caseload-Statistics-(2017-2).aspx. The ICSID caseload—Statistics. Investor-State Dispute Settlement: Review of Developments in 2016. UNCTAD IIA Issues Note, available at http://investmentpolicyhub.unctad.org/Publications/Details/172.

[3] “How much does an ICSID arbitration cost? A snapshot of the last five years”, Kluwer Arbitration Blog, 29 Feb. 2016. Available at http://arbitrationblog.kluwerarbitration.com/2016/02/29/how-much-does-an-icsid-arbitration-cost-a-snapshot-of-the-last-five-years/.

[4] Investor-State Dispute Settlement: Review of Developments in 2016. UNCTAD IIA Issues Note, available at http://investmentpolicyhub.unctad.org/Publications/Details/172.

[5] The ICSID caseload—Statistics (Issue 2017-2).