Increasingly, investors suing governments in treaty-based are turning to third-party funding (TPF): third parties finance their litigation in exchange for a return or other financial interest in the outcome of a dispute, often accompanied by a contractual right for the funder to remain involved in, and potentially even control, the management of the claim.
TPF of ISDS claims is largely unregulated at the treaty level as well as under applicable arbitration rules. As its use rapidly expands, it is increasingly drawing the attention of governments, arbitral tribunals, civil society, academics, counsel, investors and funders.
Multilateral regulation is currently being considered in the context of’s rule revision process as well as ’s Working Group III on ISDS reform. Key initiatives such as the ICSID rule revision process, however, are focusing only on certain narrow issues such as implications of TPF for confidentiality, conflicts of interest and the state’s ability to recover costs.
But as we recently argued in a working paper, it is crucial to explore the more fundamental questions of whether and to what extent TPF aligns (or not) with the objectives of modern investment treaty law and how different regulatory approaches may affect that alignment.
Is TPF in ISDS appropriate in light of relevant policy objectives?
ISDS is integrated in investment treaties purportedly as a mechanism to advance their overarching objectives of promoting investment and shaping governments’ treatment of it in order to foster sustainable development. These treaties are instrumentalist agreements: investor protections and ISDS claims are not the end goal but are justified as a means of achieving broader development objectives.
When evaluating TPF of ISDS cases it is therefore crucial to understand whether and how this particular financial structure and the incentives created by it affect the operation of ISDS and its role in advancing the object and purpose of investment treaties. In this context, it is useful to consider the impacts of TPF on three broad categories: (1) the conduct of investors; (2) the development of the law; and (3) the conduct of host states.
1. Impacts on investors’ decisions
TPF may increase the number of ISDS cases because it reduces the risk and cost of pursuing a claim. TPF allows claimants to monetize illiquid interests in the outcome of their claims and to transfer some or all litigation risk to the funder. This may tilt decision making in favour of arbitration and can result in investors pursuing claims that, absent such funding, they would have been unwilling or unable to pursue. Research suggests that litigation finance does in fact drive up the number of cases brought.
TPF may impact investors’ decisions to remain engaged in or exit the host state. Investment treaties are often justified as being tools to attract and retain  Even less is known about whether the availability of ISDS and associated remedies influence investment decisions to remain invested in the host country and project, or exit and seek to cash out when circumstances or relations begin to deteriorate.. However, evidence that investment treaties influence decisions to invest in a particular host country is unclear and disputed.
ISDS may have a negative impact on investor retention and long-term investor–state relationships. Powerful dispute settlement mechanisms and remedies, such as those offered through ISDS, risk crowding out cooperation by making exit and early payout more attractive, to the detriment of the long-term resilience of a project. While these effects can arise with ISDS alone, TPF may increase their likelihood because funders become an additional behind-the-scenes stakeholder attracted by the prospect of expectation damages, are less interested in non-monetary settlements that may enable the project to proceed, and reduce the cost and risk to the claimant of bringing a case, making ISDS even more attractive than it would be without TPF.
2. Impacts on the law and outcomes
TPF in ISDS may shift the development of investment law in a more funder- (and claimant-) friendly direction. Debates over the impact of TPF in ISDS often focus on whether TPF will result in more frivolous claims. However, given the infamously nebulous meaning of investment treaty standards, and structural disincentives to declare claims frivolous, it is useful to move beyond that label. Rather, the inquiry should be on whether TPF encourages marginal claims—those advancing arguments about investment law that seek to stretch its reach in unintended and potentially undesirable directions, such as to primarily challenge government conduct taken in good faith to advance legitimate public interest objectives.
It is also important to question whether funders are as averse to risky claims as is often professed. Analysis of TPF in the Australian domestic context, for instance, concluded that TPF led to the filing of more cases generally, and more novel and uncertain cases in particular. The novel or risky claims being pursued by funders can, if successful, push development of the law (in funder- or claimant-friendly directions). The research in Australia also notably found that third-party funded cases were particularly influential in developing the law, being reversed less and cited more than non-funded cases.
Similar outcomes may arise in the ISDS context. A claimant’s access to resources and sophisticated insider knowledge seems to be an important determinant of success in particular disputes. Funders can provide both types of advantages through direct contributions of insight and expertise, and via the retention of top law firms. Additionally, funders can strategically support disputes in order to push the law in directions that favour funders’ interests. Portfolio funding further facilitates this practice by enabling funders to bundle novel long-shot cases with favourable potential for rule change (even those with an anticipated value of less than would be financially viable as an individually-funded claim) together with less risky claims. It therefore seems reasonable to conclude that the presence of TPF will have an impact on the outcomes in particular decisions and contours of the law in a way that expands the potential for claims and host state liability beyond what is desired by states and other stakeholders.
As Burford, one ISDS funder stated, “Our capital can change outcomes in litigation matters, and in particular our capital can create outcomes that may be legally correct but challenging when viewed through a broader lens.” It is therefore crucial to better understand and address the role of TPF in driving “challenging” outcomes in investment law and ISDS cases.
TPF can impact decisions to settle, or not settle, claims. While not all funders take an active interest or role in management of a claim, some may consider this role to be of critical importance. Funders have various reasons to settle, or not, including the desire to book revenue of a certain amount or in a particular period, or to influence the development of the law. Additionally, funders’ primary ethical and regulatory obligations are to their shareholders, not to the funded party, so they may push settlement decisions or outcome demands that are different from those preferred by the local enterprise whose investment underlies the ISDS case.
A related issue is that the presence of a funder can shift bargaining power in favour of the claimant, with consequent impacts on the state’s willingness to settle and on settlement outcomes. Respondent states face risks related to ISDS claims that investors do not, including their unique risks of exposure to damage awards based on vague and unpredictable legal standards, and of perceived reputational harms. While investors may also assume risks in bringing claims, namely the risk of not recovering losses suffered, ISDS is not necessarily an investor’s only means of recourse, which could also include political risk coverage or domestic law or contract claims, or even diplomatic pressure. While this asymmetrical exposure to risk can alone tilt playing fields in the investor’s favour in settlement discussions, TPF can shift evolving power dynamics and settlement outcomes even further in favour of an investor and away from the state. This, in turn, can cause settlement terms to reflect those imbalanced power relationships more than the merits of the case.
3. Impacts on governments
TPF can impact governments’ willingness and ability to regulate investment in order to advance sustainable development aims. Governments need policy space in order to achieve public interest objectives and to react to changing circumstances, evidence, needs and priorities. Policy space is not, and should not be, unlimited, but it is also important not to overly deter by unduly discouraging (or requiring compensation for) good faith actions taken by governments in the public interest to achieve economic, social and environmental aims. It is therefore important to understand whether and how TPF may exacerbate risks of overdeterrence, whether by increasing the overall likelihood of an ISDS case, targeting certain types of governments, pursuing certain types of claims, or increasing the likelihood of funder-favourable outcomes.
For instance, claims in extractive industries and infrastructure, with heightened damage awards, may be particularly attractive to third-party funders due to their large potential payouts. Countries reliant on private investment in these industries as a development strategy may figure prominently on funders’ radars, especially if the regulatory frameworks governing either are relatively nascent, changing or a bubbling source of controversy. In such cases, as noted above, investors may hold a relatively strong upper hand in settlement negotiations when the threat of an ISDS case looms. The presence of a third-party funder backing the suit may further tilt bargaining power in the claimant’s favour and induce a settlement that, even if not causing the government to abandon the measure, increases its cost of maintaining it, which may deter the government from taking similar action in the future. The prospect of chill may be particularly problematic in these contexts given that robust government regulation of investments in the extractive industry and infrastructure is essential to capturing the benefits and avoiding the environmental, social and economic harms such projects may generate.
Of course, some governments may be more sensitive to regulatory chill than others. Governments with limited resources to fund a robust defense and any potential liabilities, those that are more sensitive to perceived reputational costs, or those that are dependent on other countries for development assistance, economic regulations or diplomatic support may be less willing to contest claims. But, overall, it is crucial to understand whether TPF drives cases and outcomes that increase the likelihood and worsen the effects of overdeterrence.
Ban TPF in ISDS
More robust testing of the pros and cons of TPF is desirable, including the concerns highlighted above. Such testing, however, is difficult in light of the opacity surrounding funders’ involvement in ISDS cases. Given that it is funders, the potentially regulated actors, who hold the information that would be crucial for dispelling concerns about, and demonstrating the value of, their practices, the unavailability of information should not be used to justify a laissez-faire approach. Rather, given the risks that TPF poses to the aims of the system, a precautionary approach to regulation should apply and total ban on the practice should be of foremost consideration by policy-makers.
Notably, various states have called for a ban on TPF in ISDS, particularly in the context of discussion in UNCITRAL’s Working Group III discussions on ISDS reform. Argentina and the United Arab Emirates have gone one step further and actually included a ban in their 2018 . The United States restricts TPF of domestic claims against the federal government.
To the extent policy-makers determine that permitting TPF in certain kinds of cases advances the policy objectives of their investment treaty programs, partial bans could also be explored. For example, if governments have concerns about truly impecunious claimants accessing ISDS or decide that certain kinds of claims (for example, claims for direct expropriation) warrant TPF, mechanisms to permit TPF in those cases could be developed. Such mechanisms could, for example, place the burden on the claimant to demonstrate that it meets clear criteria, which may include demonstrated impecuniosity, exhaustion of local remedies, and clean hands, among others.
A ban with specific exceptions could also be accompanied by other rules and mechanisms, such as requirements for funders to submit to the jurisdiction of the tribunal with respect to liability for cost awards, ethical obligations and transparency requirements, among other matters.
Overall, TPF in ISDS risks exacerbating problems with underlying investment standards and ISDS by introducing into the already asymmetric ISDS system a new actor with its own incentives for challenging even good faith government regulation needed to advance sustainable development objectives. The value of TPF to actors other than the arbitration bar, arbitrators, funders and some claimants has not yet been made clear, while the risks to treaty objectives are apparent. Reform initiatives and negotiations that fail to address TPF threaten to lock in a system and perpetuate an industry the intent and effects of which do not support—and may even undermine—the aims of modern international investment law.
Brooke Güven is legal researcher at the Columbia Center on Sustainable Investment (CCSI) and Lise Johnson is head of Investment Law and Policy at CCSI.
 See generally International Council for Commercial Arbitration (ICCA). (2018, April). Report of the ICCA–Queen Mary task force on third-party funding in international arbitration. Retrieved from https://www.arbitration-icca.org/media/10/40280243154551/icca_reports_4_tpf_final_for_print_5_april.pdf
 Güven, B., & Johnson, L. (2019, May). The policy implications of third-party funding in investor–state dispute settlement (CCSI Working Paper). Retrieved from http://ccsi.columbia.edu/files/2017/11/The-Policy-Implications-of-Third-Party-Funding-in-Investor-State-Disptue-Settlement-FINAL.pdf
 Chen, D. L. (2015). Can markets stimulate rights? On the alienability of legal claims. The RAND Journal of Economics, 46(1), 23–65, pp. 25, 33; see also Abrams, D. S., & Chen, D. L. (2012). A market for justice: A first empirical look at third party litigation funding. University of Pennsylvania Journal on Business Law, 15, 1075, p. 1078.
 Pohl, J. (2018). Societal benefits and costs of international investment agreements: A critical review of aspects and available empirical evidence ( Working Papers on International Investment, 2018/01). Paris: OECD Publishing. Retrieved from https://doi.org/10.1787/e5f85c3d-en; Bonnitcha, J. (2017). Assessing the impacts of investment treaties: Overview of the evidence. Winnipeg: . Retrieved from https://www.iisd.org/library/assessing-impacts-investment-treaties-overview-evidence
 See, e.g., Gilson, R., Sabel C.F., & Scott, R. E. (2010). Braiding: The interaction of formal and informal contracting in theory, practice, and doctrine. Columbia Law Review, 10, 1377, pp. 1387-1402
 Pelc, K. J. (2017). What explains the low success rate of investor-state disputes? International Organization, 71(3), 559-583.
 Chen (2015), supra note 3, p. 49; Abrams & Chen (2012), supra note 3, pp. 1105–1106.
 Remmer, K. (2018). The outcomes of investment treaty arbitration: A reassessment. In L. Johnson & L. Sachs (Eds.). Yearbook on international investment law & policy 2015-16. Oxford University Press.
 Burford Capital describes portfolio financing as “inherently flexible and ideally suited for…matters that would otherwise be less attractive for funding.” Burford Capital. (2016). Beyond “litigation finance.” Retrieved from https://www.burfordcapital.com/wp-content/uploads/2016/09/Burford-Beyond_Litigation_Finance-US_Web.pdf
 Burford Capital. (2019). Environmental, social and governance factors. Retrieved from https://www.burfordcapital.com/investors/investor-information/environmental-social-governance
 Hart, T. (2014). Study of damages in international center for the settlement of investment disputes cases. Transnational Dispute Management, 11(3), pp. 8–10.
 Kerner, A. & Pelc, K. (2019, forthcoming). Do investor–state disputes harm FDI? (Working paper). Montreal: McGill University.
 Garcia, F. J. (2018). Third-party funding as exploitation of the investment treaty system. Boston College Law Review, 59, 2911, p. 2930; Garcia, F. J. (2018, July 30). The case against third-party funding in investment arbitration. Investment Treaty News, 9(2), 7–9. Retrieved from https://www.iisd.org//2018/07/30/the-case-against-third-party-funding-in-investment-arbitration-frank-garcia
 Working Group III 35th Session, Audio recordings (April 25, 2018). Retrieved from https://icms.unov.org/CarbonWeb/public/uncitral/speakerslog/a2ad492b-22e9-497c-93c8-4be3130e9978; Working Group III 37th Session, Audio recordings (April 1, 2019). Retrieved from https://icms.unov.org/CarbonWeb/public/uncitral/speakerslog/9e4160d4-6cef-4de6-83c0-d9c4645bf253
 Agreement for the Reciprocal Promotion and Protection of Investments between the Argentine Republic and the United Arab Emirates, signed April 16, 2018, not yet in force, Art 24. Retrieved from https://investmentpolicy..org/international-investment-agreements/treaties/bilateral-investment-treaties/3819/argentina—united-arab-emirates-bit-2018-
 31 USC § 3727 (United States Anti-Assignment of Claims Act).