By Dr Can Eken and Peilin Chen

Investment arbitration is expensive, and third-party funding now forms part of ISDS practice. Funding, however, comes at a price. When a funded claimant succeeds, it will usually owe its funder a success-based funding fee, which can be substantial.

In commercial arbitration, tribunals have already permitted such fees to be recovered from the losing party, most notably in Essar v Norscot and Tenke v Katanga. In investment arbitration, by contrast, tribunals have so far avoided addressing the issue directly.

That gap leaves open a practical question. Can a respondent State be ordered to pay not only legal costs, but also the claimant’s funding fee? This post argues that recovery may be justified in certain circumstances and that clearer guidance is needed.

How Tribunals Approach Funding Fees

The starting point is whether investment tribunals have jurisdiction to consider funding fees at all. Most modern arbitration rules give tribunals wide discretion over costs. As reflected in Article 61(2) of the ICSID Convention and Article 42 of the UNCITRAL Arbitration Rules, tribunals enjoy broad discretion to determine and allocate the costs of arbitration. That language is open-textured enough to potentially encompass expenses incurred in financing the arbitration.

Some argue that funding fees arise from a private financing arrangement rather than the arbitral process and therefore fall outside the tribunal’s remit. However, existing case law suggests a restrictive approach to recovery rather than a denial of competence.

In South American Silver v Bolivia, the tribunal declined to treat funder remuneration as recoverable costs. In Bahgat v Egypt, the tribunal likewise stated that funding fees are not themselves recoverable, although it accepted that the existence of third-party funding may be considered when allocating costs. Importantly, these tribunals did not deny their authority to examine funding fees but exercised it to exclude them on the merits.

The more difficult question, therefore, is not whether tribunals can consider funding fees, but when they should. The following sections examine two situations in which the case for recovery may be strongest.

When a State’s Procedural Conduct Drives the Need for Funding

Recovery may be justified where the respondent State’s procedural conduct effectively forces the claimant to turn to TPF. If a State engages in dilatory tactics, excessive motions or other forms of procedural abuse that drive up costs, a claimant may be left with little choice but to seek external financing to keep its case alive. In those circumstances, it is not obvious why the financial consequences of that conduct should fall solely on the claimant.

Allowing recovery in such cases would support access to justice and promote procedural discipline by discouraging cost-escalation strategies. Concerns about shifting private commercial costs onto States are real, but targeted disclosure of how a funding premium is calculated could allow tribunals to assess reasonableness while preserving confidentiality.

Difficult questions remain, particularly around causation. How should a tribunal determine whether it was the State’s conduct, rather than the claimant’s own financial position, that made funding necessary? Developing workable evidentiary standards will therefore be essential. Useful guidance may be drawn from comparative principles of international procedural law.

Procedural Symmetry After Security for Costs

Another case for recovering funding fees arises where a tribunal has already relied on the existence of third-party funding when ordering security for costs (SfC). In ISDS practice, the presence of TPF is often treated as an indicator that a claimant may have difficulty satisfying an adverse costs order, a logic reflected in cases such as RSM v Saint Lucia and Unionmatex v Turkmenistan.

If a tribunal considers funding relevant at the interim stage, basic procedural symmetry suggests that the same factual reality should also matter at the final costs stage. Where a funded position places a claimant at a material disadvantage when SfC is ordered, fairness suggests that, if the funded claimant ultimately prevails, the respondent State should bear the cost consequences of the claimant’s need to obtain funding, including the funding fee.

Concerns remain, including the risk of strategic funding and the potential for opportunistic behavior. Further guidance will be needed to help the system balance those concerns against the value of procedural consistency.

That task will not be straightforward. However, States and investors could at least reduce uncertainty by addressing the implications of third-party funding and related cost matters expressly in their treaties and contracts, rather than leaving these issues to tribunal discretion.

Conclusion

The recoverability of funding fees remains controversial, but it is no longer a purely theoretical problem. As third-party funding becomes more widely used in investment arbitration, claims for the reimbursement of funding premiums are likely to increase.

The current silence risks producing unpredictability. Clearer guidance is needed, whether through arbitral rules, treaties or institutional practice. While the flexibility of third-party funding is often seen as one of its main attractions, at least a minimum framework should be developed enough to enable parties to budget with a reasonable understanding of how funding-related costs may ultimately be allocated.