Third-Party Funding in International Investment Arbitration – Economic Analysis and Regulatory Options

The trend towards use of third-party funding (TPF) for litigation financing is increasingly affecting international investor state dispute settlement (ISDS) as well. Explicit regulation of TPF in existing international investment agreements as well as in extant ISDS jurisdiction is still rare. Nevertheless, concerns have been raised on TPF's potential to increase the volume of ISDS proceedings and scrutiny of state actions, which could negatively affect states' right to regulate as well as the legitimacy of ISDS more generally, given the intensified recent debates on its desirability and possible alternatives. On the other hand, TPF can potentially improve access to justice particularly for smaller investors in this context. Against this background, the paper develops an economic framework which takes a market-based approach to TPF, distinguishing between “demand” and “supply” factors for external litigation finance, and applies it to international investment arbitration. Building on this, different regulatory options for TPF in ISDS are investigated, progressing from an outright ban to more sophisticated possibilities such as the imposition of disclosure requirements or the institution of a special support infrastructure for smaller investors