Banking on courts: financialization and the rise of third-party funding in investment arbitration

Abstract

In this paper, we explore the drivers of the rise of third-party funding (TPF) in investor-state arbitration. TPF involves financiers shouldering the legal fees of an investment treaty claim against a sovereign state in exchange for a share of any eventual award. Existing research has highlighted how TPF may exacerbate the inequities inherent to a legal regime that is already weighted in favor of private interests by increasing investors’ access to funding of their legal claims, but the factors which gave rise to TPF are little understood. We argue that financialization helps to explain both the spread and the characteristics of TPF. In particular, the evidence presented in this paper suggests that the large supply of investable capital that is searching for profitable investment opportunities helps to account for the rise of TPF. The analysis provides the basis for broader propositions and a research agenda about the ways in which financialization alters the logics of an international legal regime and aligns the interests of different private agents, both of which may change the public-private balance in investor-state arbitration and affect its legitimacy.