A third-party funder is typically understood as a non-disputing party that provides a portion or all of the funding for the costs of a party to arbitration proceedings, most commonly in return for an uplift or success fee.
Consistent with this, recent draft trade agreements (such as the European Union and Vietnam Free Trade Agreement (January 2016) and the Canada and European Union Comprehensive Economic and Trade Agreement (February 2016)) define third party funding to include non-disputing parties that finance part or all of the cost of the proceedings in return for a "remuneration dependent on the outcome of the dispute". In the same way, counsel that agree to uplifts or success fees in arrangements with clients - in the event of favorable outcomes - likewise agree to remuneration that is dependent on the outcome of a dispute.
One such recent example was the UNCITRAL arbitration Khan Resources Inc., et al. v. Mongolia (PCA Case No. 2011-09) relating to the cancellation of Khan's uranium licenses in 2009. The claimants in that arbitration agreed that they would pay a success fee to their counsel if a favourable award was rendered. This was defined in the fee agreement as "a decision of the Tribunal confirming the liability of Respondents resulting in an award of damages". On 2 March 2015, the Khan Resources tribunal (Williams, Fortier, Hanotiau) did just that, finding in favour of the claimants, ordering Mongolia to pay US$80 million in compensation, plus interest. The UNCITRAL tribunal further ordered Mongolia to reimburse the claimants for their arbitration costs, as well as their legal and other reasonable costs incurred in connection with the arbitration, an amount which totaled US$9,074,143". Seventy-seven percent of that amount (US$6,991,731) constituted legal fees, comprised of fees already paid of US$3,748,171, plus a success fee to be paid of US$3,243,560.
The tribunal, prior to ordering payment of the success fee, reviewed a redacted copy of the fee arrangement and concluded that it was satisfied that the decisions rendered in the award would "result in the claimants being liable to pay the success fee to its counsel". The tribunal then determined that the success fee was reasonable as compared to what would have been charged had the firm's normal hourly rates been applied (approximately US$5,700,000) and to the amount spent by respondent's counsel (US$7,116,707 and €300,000). On 7 March 2016, Khan Resources announced an agreement with Mongolia settling the dispute (and all outstanding matters in relation to the 2 March 2015 award) for US$70 million, with payment scheduled next month (on or before 15 May 2016).
The success fee arrangement in Khan Resources is no outlier. A review of ICSID and UNCITRAL awards rendered in recent years reveals a number of similar agreements. This is not surprising. In the 2013 Queen Mary / PwC arbitration survey - Corporate Choices in International Arbitration - respondents were asked about the "alternative" fee structures (structures not based solely on hourly rates) they used in arbitrations: 49% reported having used discounted hourly rates with either a success fee calculated as a percentage of damages or by reference to counsel's hourly fees.
Much like in Khan Resources, claimants that agree to success fees or uplifts with counsel typically make them contingent on a favourable outcome. For instance, in Pacific Rim Mining Corp. v. El Salvador (ICSID Case No. ARB/9/12), the claimant agreed to success fees on the resolution of disputes on "favorable terms" or "favorable resolution". There, the claimant agreed that a success fee of US$2.0 million would be paid if the dispute were resolved on favorable terms prior to the hearing, but that success fee would increase to US$2.5 million if the favorable resolution occurred upon completion of the hearing. In Íçkale Ínsaat Limited Sirketi v. Turkmenistan (ICSID Case No. ARB/10/24), the claimant agreed to award its counsel a "fee of €250,000 and a success fee equal to 5% of the amount recovered", in addition to incurred legal fees of US$291,636 and €676,650. To take another example, the claimant in Swisslion DOO Skopje v. Macedonia (ICSID Case No. ARB/9/16), incurred legal costs of €1,091,904 "subject to an upward adjustment of the average hourly fee depending upon the amount of damages awarded". The tribunals in Íçkale and Swisslion did not award legal costs to either party. The Pacific Rim arbitration remains pending.
On the other hand, parties have agreed, albeit with less frequency, to 100% contingency arrangements with counsel. In Waguih Elie George Siag and Mrs Clorinda Vecchi v. Egypt (ICSID Case No. ARB/5/15), for instance, the claimants and their counsel reached an agreement that the claimants would pay attorney's fees to their counsel only on successful recovery. The value of time incurred by the claimants' counsel, at their normal billing rates, was US$6,071,978, an amount claimants agreed they were "contractually obligated to pay". The ICSID tribunal in Siag and Vecchi v. Egypt (Williams, Pryles, Orrego Vicuña) agreed and awarded costs, ordering Egypt to pay the claimants US$6,000,000 as a reasonable contribution towards their reasonable costs and expenses, in addition to US$74,500,000 in damages.
To be sure, in some instances parties reference the existence of a success fee agreement, but opt not to disclose the terms of that arrangement. In Caratube International Oil Company LLP v. Kazakhstan (ICSID Case No. ARB/8/12), the claimant disclosed "the existence, but not the terms, of an additional success fee arrangement". Similarly, in Joseph Charles Lemire v. Ukraine (ICSID Case No. ARB/6/18), the claimant's counsel disclosed that it worked in consideration of a success fee, but such a fee was not included in claimant's cost submission on the grounds that it "had not yet been invoiced".
Success fees are also not limited to only original arbitration proceedings, but have been the subject of fee agreements in annulment proceedings. In the post-award proceedings in Duke Energy International Peru Investments No 1, Ltd v. Peru (ICSID Case No. ARB/3/28), the claimant's costs were US$1,373,325, based on the hourly rate charged by claimant's counsel. The claimant conceded, however, that it was only obligated to pay US$662,380 of that figure as its legal fees were capped, subject to an "unspecified success fee". The ad hoc committee dismissed Peru's annulment application, but held that each party should bear its own legal costs.
What is more, success fees are not limited to fee agreements with claimants. In its Practice Notes for Respondents, ICSID notes that "counsel fees are set by a party in consultation with its own counsel" and may include "a success fee". There are, however, only a few reported awards reflecting such arrangements involving respondents. One such example is the Tulip Real Estate and Development Netherlands B.V. v. Turkey (ICSID Case No. ARB/11/28) annulment proceedings. In that case, the respondent agreed to a conditional fee agreement with its counsel dependent on the success of Tulip's annulment application. Specifically, the respondent incurred US$718,347 in legal fees and expenses, an amount which included US$100,000 "contingent upon a favorable result of the annulment proceeding in the Respondent's favor". The tribunal dismissed Tulip's application for annulment, but ordered each party bear its own costs for legal representation and expenses.
The foregoing includes extracts from Chapter 11 of the forthcoming Procedural Issues in International Investment Arbitration (Oxford University Press, 2016).
For more information on Vannin Capital, please contact: Leanne Harker, Marketing at Vannin Capital, T: +44 (0)1624 615 111, E: firstname.lastname@example.org