Burford Capital | 16 April 2020
Legal finance trends: International arbitration
by Jeffery Commission
The earliest and one of the largest funded ICSID arbitration awards upheld
In 2019, ICSID confirmed that arbitration finance has figured in at least 20 ICSID arbitrations, a figure that is consistent with the publicly known number of funded investor state arbitrations. One of the first of those ICSID cases was Teinver S.A., Transportes de Cercanías S.A. and Autobuses Urbanos del Sur S.A. v. Argentine Republic (ICSID Case No. ARB/09/1), a case registered by ICSID in January 2009 which resulted in a $320 million award in July 2017 in the claimants’ favor. In May 2019, an ICSID annulment committee dismissed Argentina’s application to annul the award in Teinver. In aggregate, the Teinver investment produced $107 million of proceeds to Burford as financier.
An unprecedented increase in award and claim monetizations
The ability to finance the pursuit of unpaid arbitration awards is perceived as the most significant benefit of arbitration finance to companies. This is unsurprising, given that when a claimant wins an arbitration award, that claimant may seek to monetize the value of the entire award or a portion of that award. Monetization allows a claimant to enjoy the financial benefit of the award early without the risk of set aside or annulment (usually lasting between 18-24 months) and enforcement proceedings across multiple jurisdictions (often lasting years). And with several of the largest arbitration awards recently rendered pending in set aside or enforcement proceedings through 2019 in courts in the US, UK, France, Sweden and The Hague, monetizations continued to present an increasingly attractive option for claimants with “arbitration fatigue” to unlock the value of those awards. And it is not only awards that are attractive for monetizations: Claims are also of interest to financiers, despite potential challenges and the need for careful planning. For example, in September 2019, a Spanish multinational was reported to have agreed to sell an interest in an ECT claim for an initial upfront payment as well as an undetermined percentage of any recoveries.
Increased scrutiny of outsourcing due diligence
Burford continues to be unique among arbitration financiers in conducting the entirety of our diligence and investment process in-house. Doing so avoids unnecessary and spurious challenges to arbitrators that advise other financiers on which arbitrations to fund. To take one example, in a 19 November 2019 decision, two members of the ICSID tribunal in Canepa Green Energy Opportunities I, S.á r.l. and Canepa Green Energy Opportunities II, S.á r.l. v. Kingdom of Spain (ICSID Case No. ARB/19/4) had to decide on a challenge against Peter Rees, owing to his undisclosed relationship with a litigation finance provider. Although the challenge against arbitrator Rees was ultimately dismissed, it is likely that further challenges will be launched against arbitrators moonlighting in roles on the investment committees of funders who outsource due diligence decisions.
Security for costs not a right in funded arbitrations
In what is now a frequent occurrence in ICSID arbitrations, upon learning of the existence of a third-party funding arrangement, respondents in 2019 continued to file applications seeking security for costs. That said, tribunals have continued to dismiss such spurious applications, which have a five percent success rate, among the lowest for any procedural application advanced in ICSID arbitrations. What is more, tribunals now regularly question whether or not a respondent has a procedural right worthy of preservation in seeking security for costs. For instance, in a 5 November 2019 decision in a funded ICSID arbitration – Jochem Bernard Buse v. Republic of Panama (ICSID Case No. ARB/17/12) – the tribunal denied Panama’s security for costs application. In so doing, the tribunal questioned whether a real right to recover costs existed since the idea that Panama would prevail and that the tribunal would order costs was entirely speculative at that stage.
What to expect in 2020
Modest rule amendments on arbitration finance in ICSID arbitrations
ICSID, the world’s leading institution devoted to international investment dispute settlement, continues to acknowledge the importance of arbitration finance in ensuring access to justice. Consistent with this, in August 2019, the ICSID Secretariat continued to advocate for a straightforward rule amendment to avoid inadvertent conflicts of interest by requiring disclosure by parties of third-party funding and by arbitrators of a relationship with a financier. Although there are complex issues that ICSID’s complete revisions do not navigate well and that are at risk of being outmoded in short order, ICSID’s proposed rule on disclosure represents a relatively modest revision consistent with current practice with ICSID arbitrations. It remains to be seen what, if any, rule revisions to the UNCITRAL Arbitration Rules (the second most utilized rule regime for investor-state disputes) will emerge from the continuing work of UNCITRAL WG III.
Increased funding in international commercial arbitrations
The International Court of Arbitration (ICC Court) of the International Chamber of Commerce (ICC)—confirmed by the most recent Queen Mary University London (QMUL) and White & Case Internal Arbitration Survey as the world’s most preferred arbitral institution—registered a total of 869 new cases in 2019, a record year in the ICC Court’s almost 100-year history. And as reported by the ICC in 2019, it appears likely that the ICC will soon supplement the data on the composition of ICC tribunals available on its website to include details about the sector of industry involved and the identity of counsel representing the parties. Given the increased transparency, the number of claimants in ICC arbitrations to encounter and consider arbitration finance will undoubtedly increase in 2020. Notably, these two leading arbitration institutions for the settlement of international commercial disputes—the ICC and the LCIA—continue not to include express disclosure requirements in their arbitration rules for users of arbitration finance.
Transparency on the payment and satisfaction of awards
Although there is now considerable transparency in the number of arbitrations filed each year and the value of those cases, there remains a lack of transparency as to the payment and satisfaction of arbitration awards. Indeed, as previously reported in a QMUL survey of arbitration users, arbitration institutions were asked whether they kept track of their awards after they have been rendered: 42 percent had no monitoring system in place, 29 percent did some form of regular monitoring and 29 percent kept track of awards only when challenged. Against this background, it is perhaps unsurprising that arbitration award holders regularly avail themselves of arbitration finance to either monetize an award or fund enforcement efforts, relying on the in-house expertise of finance providers who possess both experience in enforcement and arbitration analytics data otherwise unavailable.