{"id":284887,"date":"2025-02-17T11:00:00","date_gmt":"2025-02-17T10:00:00","guid":{"rendered":"https:\/\/dailyjus.com\/?p=284887"},"modified":"2025-02-17T10:03:04","modified_gmt":"2025-02-17T09:03:04","slug":"third-party-funding-in-international-investment-arbitration","status":"publish","type":"post","link":"https:\/\/dailyjus.com\/index.php\/2025\/02\/17\/third-party-funding-in-international-investment-arbitration\/","title":{"rendered":"Third-Party Funding in International Investment Arbitration"},"content":{"rendered":"\n

A Critical Reflection on Nachingwea & others v. United Republic of Tanzania<\/em><\/strong><\/h1>\n\n\n\n
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THE AUTHORS<\/strong>:
Prof. Ubena John Agatho<\/strong>, Justice of the Court of Appeal of Tanzania<\/strong>
<\/strong>Mark Malekela<\/strong>, Government Liaison at Alistair Group<\/strong><\/strong><\/p>\n\n\n\n

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<\/div>\n\n\n\n

Introduction<\/strong><\/h2>\n\n\n\n

Third-Party Funding (“TPF<\/strong>“) in international investment arbitration has sparked contentious debates over its potential to democratize access to justice, versus its ability to distort procedural fairness within arbitral proceedings. The appeal of TPF is clear: it helps offset the often-high costs of arbitration, making dispute resolution accessible to claimants and, in some cases, respondent states that might not otherwise be able to afford it. This is especially appealing in investment arbitration, where disputes often involve claims worth millions or even billions of dollars.<\/p>\n\n\n\n

The laws and regulations governing TPF vary greatly and are continually evolving as TPF is becoming a crucial component of international arbitration practice. This is well illustrated by the recent ICSID case Nachingwea and others v. Tanzania<\/em><\/a> <\/em>\u2013 (\u201cNachingwea Case<\/strong>\u201d), where the tribunal\u2019s award, delivered in 2023, partly offers insights on the regulation of TPF and claims for costs in investment arbitrations. The case raises questions about the implications of TPF on resource-constrained states in navigating disputes involving well-funded claimants in investment arbitration.<\/p>\n\n\n\n

This article explores the Nachingwea case<\/em>, focusing on how the Claimants leveraged TPF to finance their claims. It also discusses the challenges Tanzania<\/a> faced in addressing claims for costs of the arbitration proceedings, the available safeguards such as Security for Costs (“SfC<\/strong>“)<\/a> orders, and the potential of respondent states to use TPF to alleviate the burden on taxpayers\u2019 money used to fund the often-costly arbitration proceedings.<\/p>\n\n\n\n

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The Nachingwea Case: Third-Party Funding in Investment Arbitration<\/strong><\/h2>\n\n\n\n
<\/div>\n\n\n\n

The Dispute<\/h3>\n\n\n\n

The Nachingwea case arose out of a dispute over Tanzania\u2019s expropriation of the Ntaka Hill Nickel Project which involved the exploration and development of nickel sulfide deposits in Nachingwea. The Claimants contended that the cancellation of mining licenses violated the Tanzania-UK Bilateral Investment Treaty (1994) (\u201cBIT\u201d<\/strong>)<\/a>.<\/p>\n\n\n\n

<\/div>\n\n\n\n

Indiana Resources Limited (\u201cIndiana<\/strong>\u201d), an Australian listed company and the majority shareholder of Ntaka Nickel Holdings Ltd (\u201cNtaka<\/strong>\u201d), Nachingwea U.K. Ltd, and Nachingwea Nickel Ltd (\u201cNachingwea Tanzania<\/strong>\u201d) collectively referred to as \u2018the Claimants\u2019 \u2013 secured TPF to finance the ICSID arbitration, which ultimately resulted in an Award<\/a> of over USD 80 million against the United Republic of Tanzania for the unlawful expropriation of Indiana\u2019s investment on 14 July 2023.<\/p>\n\n\n\n

Funding<\/h3>\n\n\n\n

The Claimants secured TPF from Litigation Capital Management (\u201cLCM\u201d<\/strong>). LCM, a well-established litigation finance firm, provided the necessary financial backing in exchange for a share of any potential recovery. According to Diqer<\/a>, LCM approved the application for a non-recourse facility of up to USD 4.65 million, based on legal principles, evidence, and recoverability. The claim was successful due to Tanzania’s resource-rich state and its signatory status to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) (\u201cNew York Convention<\/strong>\u201d)<\/a> and Convention on the Settlement of Investment Disputes between States and Nationals of Other States (1965) (\u201cICSID Convention<\/strong>\u201d)<\/a>. The funding was made unconditional in August 2020. This financial arrangement underscored the growing trend where funders seek investment opportunities in Investor-State Disputes Settlement (ISDS) cases, targeting the large compensatory awards that often arise in treaty-based disputes.<\/p>\n\n\n\n

TPF allowed the Claimants to pursue costly arbitration proceedings against a sovereign state. The complexity of the case and the substantial sums at stake made it an attractive candidate for TPF, but the Tribunal\u2019s deliberations reveal the tension between promoting access to justice and ensuring fairness in the proceedings. This is particularly evident when the Tribunal had to deliberate on the Parties\u2019 submissions for costs, specifically, what it termed as \u201cthe additional TPF\u201d costs claimed by the Claimants as further analyzed in the next section.<\/p>\n\n\n\n

<\/div>\n\n\n\n

TPF, Costs and Security for Costs: What Should Respondent States Expect?<\/strong><\/h2>\n\n\n\n

In many cases, states face the risk of having to bear not only their own costs but also those of the claimants, which may be inflated due to the involvement of a third-party funder. The issue of cost allocation is critical, particularly for developing states like Tanzania<\/a>. The Tribunal in the Nachingwea case\u2019s<\/em> Award<\/a> deliberated on costs related to the arbitration proceedings but did not offer a comprehensive analysis of how TPF impacted the fairness of cost allocation between the parties.<\/p>\n\n\n\n

The Tribunal found that it is reasonable for Tanzania to bear the full sum of the Claimants\u2019 arbitration costs. However, it found that it was unreasonable to compensate the Claimants additional TPF costs as they did not provide convincing evidence to establish that their claim for 3 or 3.5 times the amount of the outstanding funding amount is either reasonable or justifiable (at para 407-409<\/a>).<\/p>\n\n\n\n

Claimants\u2019 claim underscores\u00a0 one of the major challenges that respondent states face when contesting TPF-backed cost claims arbitration. This challenge arises from the significant financial exposure, as evidenced in the famous Essar v. Norscot<\/em>, Judgment of the High Court of Justice of England and Wales [2016] EWHC 2361, 15 September 2016<\/a>, where the TPF costs were recovered from the respondent. The Nachingwea Tribunal could have also used the case as an opportunity to address concerns about the degree of influence exerted by LCM on the Claimants\u2019 strategy. Yet, in this respect, the Tribunal\u2019s award offers little critical reflection on whether the funder\u2019s financial interests could have skewed the Claimants\u2019 objectives or contributed to a prolongation of the dispute. This leaves a gap in the evolving jurisprudence on TPF and third-party funders involvement in investment arbitration.<\/p>\n\n\n\n

This gap is particularly significant as investors as claimants with backing from well-resourced third-party funders have the financial leverage to invest heavily in legal representation and expert testimony, which can place an immense burden on states.<\/p>\n\n\n\n

For instance, a public survey study by the Organisation for Economic Co-operation and Development (“OECD<\/strong>“)<\/a> on ISDS in 2012 found that the average cost of defending against an ISDS claim could range from USD 8 million to USD 30 million, creating a considerable drain on national budgets.<\/p>\n\n\n\n

As a counter measure, states could seek SfC from an investor as a guarantee that the taxpayer funds they spend to defend an unmeritorious claim can be recovered. This approach is supported by J.Ngowi<\/a> and seconded by an ISDS report by the International Institute for Sustainable Development<\/a>. Respondent states may wish to use SfC to filter out speculative or marginal claims by an investor disingenuously pursuing a weak case just for the settlement value will not want to post SfC and will instead choose to abandon the claim.<\/p>\n\n\n\n

Second, with the use of TPF in ISDS, it is clear that states \u2013 especially from the developing world- need to advance effective cost-management strategies, including financial considerations from potential funders. Even though many scholars argue that TPF is generally associated with claimants, respondent states may explore using TPF to finance their legal defenses. This argument is backed by Brekoulakis, and Rogers<\/a>, who argue that, while funders invest in claims, it is also possible to invest on the respondent\u2019s side of the case. The scholars cited the Bloomberg Foundation\u2019s TPF for Uruguay<\/a> in the investment arbitration brought by Philip Morris against Uruguay<\/a>.\u00a0 Additionally, the Africa Legal Support Facility (“ALSF”<\/strong>)\u2019s support to the Union of Comoros<\/a> in its out-of-court settlement of a dispute with a private operator in arbitration proceedings before the Court of Arbitration of the International Chamber of Commerce (\u201cICC<\/strong>\u201d)<\/a> in Paris could be noted as another example of the possibility of TPF for respondent states.<\/p>\n\n\n\n

From a financial perspective, states like Tanzania may stand to benefit significantly from TPF arrangements, provided that the defense against claims are successful. Defending an ISDS case can divert public funds away from critical development projects, public services, and infrastructure, placing additional stress on limited budgets. Potentially, TPF could relieve this burden by shifting the financial responsibility from the state to a third-party funder.<\/p>\n\n\n\n

However, even though TPF could theoretically apply to respondent states, the only difficulty as noted by funders is security<\/a>, in terms of a successful defense of the claim. This leads to the key question addressed in the next section: Could TPF be regulated and also provide a viable solution for states to defend themselves without depleting public resources?\u00a0<\/p>\n\n\n\n

<\/div>\n\n\n\n

The Need for TPF Regulation in Tanzania<\/strong><\/h2>\n\n\n\n

As most jurisdictions have recognized TPF as a lawful means of funding arbitration, and most international arbitration institutions have rules governing TPF and given the socio-economic conditions prevailing in the society, TPF is inevitable in Tanzania<\/a>. However, except for the rules of champerty and maintenance that apply to common law jurisdictions, including Tanzania, there is no legislation that prohibits TPF in Tanzania. Tanzania may, therefore, consider amending its arbitration laws to include a defined legal framework that allows TPF to be among the good seats of arbitration, which investors will likely choose with assurance that an arbitral award obtained in proceedings funded by a third party will be enforceable.<\/p>\n\n\n\n

With appropriate regulation, TPF could become an effective tool that helps states and investors engage more confidently in arbitration proceedings. Nigeria<\/a> \u2013 a common law jurisdiction, for example, has recently recognized TPF in its Arbitration and Mediation Act, 2023, and provided for a regulatory framework for its use in domestic and international arbitrations. This reflects an awareness that TPF has become a permanent tool in the local legal landscape. Instead of resisting its use, states should seek to regulate TPF to ensure that it is not caught-off guard by the practice and that safeguards like mandatory disclosures and SfC orders are imposed when needed.<\/p>\n\n\n\n

Incorporating TPF in Tanzania\u2019s Arbitration Act<\/a> would, therefore, provide further clarity and legal certainty for all parties involved in arbitration proceedings. For instance, by introducing provisions on disclosure requirements in the Act, Tanzania could ensure transparency in cases involving third-party funders, thereby reducing the risk of conflicts of interest or undue influence.<\/p>\n\n\n\n

Beyond national legislation amendments, there is also a compelling case for the inclusion of TPF provisions in Tanzania\u2019s BITs. As seen in Art. 3.37 of the EU-Vietnam Investment Protection Agreement (2019) (\u201cEVIPA<\/strong>\u201d)<\/a> and Art. 8.1 and 8.26 of the Comprehensive Economic and Trade Agreement between Canada and the European Union (2016) (\u201cCanada – EU CETA<\/strong>\u201d)<\/a> these agreements regulate the use of TPF by requiring the disclosure of third-party funders and allowing tribunals to issue SfC orders. Such provisions protect respondent states from frivolous claims while ensuring that investors have access to justice. EVIPA and CETA offer strong precedents for Tanzania to follow. By adopting similar provisions in Tanzania\u2019s BITs can enhance its attractiveness as a destination for foreign investment while safeguarding its sovereignty in the face of ISDS claims. This ensures that Tanzania is not left exposed to the financial risks associated with defending funded claims that may lack merit, but also setting clear expectations for foreign investors.<\/p>\n\n\n\n

<\/div>\n\n\n\n

Conclusion<\/strong><\/h2>\n\n\n\n

The Nachingwea case <\/em>has illustrated both the opportunities and risks presented by TPF in investment arbitration. While TPF has the potential to enhance access to justice, it also raises serious concerns about procedural fairness and cost allocation. The reluctance of tribunals to engage deeply with these issues reflects a broader gap in the regulation of TPF within the ICSID framework and national arbitration laws. <\/p>\n\n\n\n

As Tanzania and other developing states face more ISDS claims, sometimes backed by TPF, there is an increasing call on international arbitration institutions like ICSID, as well as national legislation, to develop more robust regulations that address unique challenges posed by TPF. Whether through mandatory disclosure rules, limitations on funder involvement, or more frequent use of security for cost orders, the landscape of ISDS arbitration is likely to evolve in response to the growing prevalence of TPF. <\/p>\n\n\n\n

<\/div>\n\n\n\n
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ABOUT THE AUTHORS<\/strong><\/p>\n\n\n\n

Prof. Ubena John Agatho <\/strong>is a Justice of the Court of Appeal of Tanzania<\/strong>. He previously served as a Judge of the High Court \u2013 Commercial Division. Prof. Ubena holds holds LL.B. from Mzumbe University, an LL.M. in Law and Information Technology, and an LL.D in Information Technology Law from Stockholm University.\u00a0\u00a0Before joining the Bench, he was a Senior Lecturer and Dean of the Faculty of Law at Mzumbe University. Specializing in Information and Communication Technology Law, he has served on various boards, including the Tanzania Posts Corporation and the Institute of Judicial Administration (“IJA<\/strong>“). He is a Mediator at the WIPO Arbitration and Mediation Centre, and a member of the African Union Cybersecurity Expert Group (“AUCSEG<\/strong>“). Prof. Ubena served as the chief editor and reviewer of various law journals including the Tanzania Lawyer and Oxford University\u2019s International Journal of Law and Information Technology. He has authored several legal scholarly works published in international peer-reviewed law journals.\u00a0\u00a0\u00a0<\/p>\n\n\n\n

Mark Malekela<\/strong> is a Government Liaison at Alistair Group<\/strong>, and a Committee Member of TIArb\u2019s Young Members Club (“TIArb-YMC<\/strong>“). He holds an LL.B. from Mzumbe University, and an LL.M. in International Commercial Arbitration Law from Stockholm University, where his thesis explored AI’s integration in International Commercial Arbitration and its implications on confidentiality. Mark began his legal career at Breakthrough Attorneys in Dar es Salaam, where he developed a solid foundation in corporate commercial law. He then trained and worked in the international arbitration practice at De Brauw Blackstone Westbroek N.V.<\/a> in Amsterdam and Clyde & Co<\/a>, focusing on amongst others, corporate-commercial law, and regulatory compliance.<\/p>\n\n\n\n

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*The views and opinions expressed by authors are theirs and do not necessarily reflect those of their organizations, employers, or Daily Jus, Jus Mundi, or Jus Connect.<\/em><\/em><\/p>\n\n\n\n

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