An Uncontrolled Flame — Third-Party Financing in Investor-State Disputes
By Denny Han
In 2016, professional wrestler Hulk Hogan (real name Terry Gene Bollea) sued the celebrity magazine Gawker for spreading salacious video tapes about the wrestler’s relationships. Normally, this would not be a problem for Gawker. As a magazine that trades in rumors, Gawker had ample financial resources to draw upon for defamation cases. This time, however, Gawker had attracted a powerful enemy in the billionaire investor Peter Thiel. Thiel was not directly involved in the legal dispute, but he could nonetheless finance Hogan’s legal fees and hire the most expensive lawyers around to crush Gawker in court. And crush they did: $115 million USD ruling against Gawker and its subsequent collapse demonstrated the clear efficacy of Thiel’s strategy.
The question of whether an investor should be allowed to intervene in a legal dispute is actually a very old debate, and has been increasingly contentious in the arena of international commercial law. The technical term for funders like Thiel is ‘third party funder’, or TPF. He wasn’t a party to the dispute, but he was still crucial in bankrolling Hulk Hogan and giving the necessary funds for the legal process. TPFs can be spiteful billionaires looking to destroy salacious magazines, but are more often companies that finance legal processing costs in exchange for a portion of the winnings. In function, TPFs are a specialized form of private banks that offer loans for companies in legal disputes.
These wealthy TPFs frequently get involved in international investment disputes, or Investor-State disputes (ISDs). In ISDs, a foreign company sues a country for its actions adversely affecting the company’s investment. For example, a Canadian mining company Gabriel Resources sued Romania for blocking the construction of a gold mine next to a UNESCO World Heritage Site. ISDs are particularly expensive to settle, where average legal fees can skyrocket to exorbitant numbers like 8 billion USD just for the state alone (approximately 2.6% of Romania’s current GDP). Considering that ISDs can threaten to singlehandedly ruin a nation’s economy, TPFs can certainly be a tempting risk.
The primary benefit of these third-party funders is fairly self-evident — access to funds. Engaging legal proceedings has a higher barrier to entry, and these funders lowers the barrier and increases access to justice. Large companies that would otherwise get away with breaking promises to smaller governments can now face legal challenges that would have been financially insurmountable. Looking through an economic lens, greater access to justice will also lead to greater participation in international investment as countries feel more secure in allowing foreign investment. A secondary benefit is access to expertise, as ISDs are infamously complicated. In any given dispute, advocates may need to understand the local investment law, international commercial trade law, international public law, the financial knowledge to analyze the State’s actions, and linguistic competence to analyze foreign documents. They will also be expected to shoulder the responsibility of competent representation for a billion-dollar lawsuit for upwards of 5–6 years where failure can result in financial ruin for a significant population. Established funding companies can specialize in specific debates and have easier access to relevant experts.
It’s important here to note, however, these benefits come at a steep cost. TPFs seek a return on investment, and consequently the highest chance of success in the legal proceeding. This may mean that they only take on cases with merit, but may also mean controlling how the case is handled to ensure quality argumentation. Thus arises the main issue with TPFs — autonomy. Contracts with TPFs often result in some amount of control over a party’s behavior. This includes influences over arguments, witnesses, or most often the type of compensation. TPFs are particularly motivated to force parties to complete the trial and gain larger awards rather than settle with smaller payouts. Even if such control is not explicitly required, TPF’s tacit exercise of power would nonetheless be a prominent influence over the party’s behavior.
The question of autonomy poses a particular problem for ISDs, as funders exercise a large amount of influence over the government in exchange for their support. Ironically enough, TPFs and their insistence on taking on good legal claims have been observed to pressure governments to not take legal action against mining companies and create the risk of losing. An optimistic view may consider the involvement of TPFs as a necessary trade-off between the states’ access to justice and an expression of the state’s freedom in making contracts however it sees fit. The cynical view may describe this as giving wealthy financiers another channel to exercise political power over the behavior of a foreign government, and point out that there just isn’t a viable way to sidestep the funding issue by domestic legislation. In another words, Peter Thiel but on the international scale.
The debate over how much influence TPFs should be allowed to exercise over the beneficiary is still hotly debated; nevertheless, the trend among legislative bodies has been overwhelmingly inclusive. The International Chamber of Commerce, the current biggest center for ISDs, has recently updated its legislation to allow parties to engage with TPFs. One observer of the conference to business law compared it to fire in a rather emphatic idiom:
“Fire can burn down the planet, but if its use is regulated it can contribute to the welfare of all on the planet”.
Yet the current trend seems to simply skip the first half of that phrase. The potential of utilizing fire shouldn’t forgo the knowledge that even a ‘regulated’ fire can easily escape. Countries are often forced to make an impossible choice: take the risk of fighting disputes alone with a ruinously large legal bill that can easily destroy the country’s economy, or take the equally risky move of seeking financiers that can easily destroy the country’s autonomy. Is the warmth of a fire truly good if it means searing oneself in the process?
