On June 12, 2015 the ICSID tribunal in Muhammet Çap & Sehil Inşaat Endustri ve Ticaret Ltd. Sti. v. Turkmenistan has ordered the claimants, two Turkish construction companies, to disclose whether their claims in the arbitration are being funded by a third-party. If a funding agreement existed, the claimants were ordered to disclose the names and details of the third-party funder(s) and the terms of that funding.
Third-party funding has raised several concerns. Some argue that funding arrangements must be disclosed because such arrangements could impact the independence of arbitrators. Practitioners discuss that there might be a risk that arbitrators in one proceeding could serve as legal counsel in another proceeding, receiving money from the same third-party funder in that second proceeding. This would create a conflict of interest for the first proceeding.
Moreover, the knowledge of the fact that a party needs third-party funding may prompt an application for security for costs by the respondent state. A party who needs third-party funding might not to be able to cover the costs of the arbitration if ordered to do so. The respondent state might want to claim reimbursement of its legal fees from the third-party funder. However, an ICSID tribunal does not have jurisdiction over such party. Against this background, the ICSID tribunal in RSM Production Corporation v Saint Lucia (ICSID Case No. ARB/12/10), granted a respondent’s request to order security for costs. The objective of that decision was that funders should also bear a risk of adverse decisions on costs.
Both of the aforementioned concerns, the potential conflict of interest of the arbitrators and the need for security for costs were addressed by the ICSID tribunal in the present case. The tribunal justified its order to disclose with the following arguments:
- “The importance of ensuring the integrity of the proceedings and to determine whether any of the arbitrators are affected by the existence of a third-party funder.”
- “Respondent has indicated that it will be making an application for security for costs. It is unclear on what basis such application will be made, e.g. Claimants’ inability to pay Respondent’s costs and/or the existence of a third-party funder.”
- The claimants have not denied the involvement of a third-party funder and have not denied that they were involved in another ICSID case against Turkmenistan where they did not meet the cost order.
The tribunal’s reasoning demonstrates that third-party funding in arbitration proceedings will be under scrutiny. The arguments regarding conflict of interests of the arbitrators and security for costs might result in orders to disclose third-party funding on a regular basis. Claimants in ICSID proceedings who benefit from third-party funding should be aware of the risk that details of those funding arrangements might have to be disclosed. There is also a risk that ICSID tribunals – upon request by the respondent – order claimants to provide security for costs in cases where they find an objective risk that the claimant who’s case is funded by a third party will not meet a cost order.