Authored By: Peter Chukwunweike Ugwuanyi
Enugu State University of Science and Technology
1. Introduction
Investor-State Dispute Settlement (ISDS), by design, is an international legal framework developed to protect foreign investments from arbitrary State interference by ensuring that economic disputes are resolved before neutral and independent tribunals.1
Historically, access to this system required significant financial capital, which limited high-stakes arbitration primarily to wealthy multinational entities. In recent years, however, the rise of Third-Party Funding (TPF), a financial mechanism in which an outside entity funds a party’s legal costs in exchange for a share of the financial award, has characterised international investment disputes.2
TPF may democratise access to justice by enabling aggrieved foreign investors to pursue legitimate claims despite potential liquidity constraints, but it equally introduces a structural imbalance into the arbitral process. The most acute of these imbalances is arguably the procedural risk imposed on respondent sovereign States, which face costly litigation without any guarantee of recovering their legal expenditure should the funded investor’s claim prove unmeritorious.
This article examines the operational role of TPF in investor-State arbitration, compares the BIT reforms of Nigeria and India, and critiques the persistent uncertainty surrounding security for costs in ISDS, while proposing an actionable legal solution to remedy this systemic gap.
2. Third-Party Funding and Its Role in Investor-State Arbitral Disputes
Fundamentally, ISDS allows foreign investors to bring claims against host States under Bilateral Investment Treaties (BITs) or multilateral investment agreements,3 before tribunals such as those constituted under the International Centre for Settlement of Investment Disputes (ICSID) or under the UNCITRAL Arbitration Rules. Because these arbitrations usually entail tens of millions of dollars in legal fees and administrative costs, litigation risk management has become a priority for the parties involved.
Third-Party Funding was originally used to describe an arrangement in which an entity with no prior legal or commercial interest in a dispute finances a funded party’s legal costs in exchange for a contingent percentage of any recovered award. If the party’s claim fails, however, the funder typically receives no return and absorbs its own investment loss.4
Initially prohibited under the common law doctrines of maintenance and champerty, ancient torts which prohibited non-parties from improperly meddling in litigation for profit, TPF is now broadly recognised across modern international arbitration jurisdictions.5
In investor-State disputes, TPF serves a dual purpose. For impecunious investors, particularly those whose assets have been nationalised or severely damaged by alleged host State measures, TPF acts as a lifeline to enforce treaty rights.6 For solvent corporate entities, TPF may operate as a strategic corporate finance tool for offloading litigation risk and preserving working capital.7 However, this commercialisation of arbitral claims creates an asymmetrical dynamic: while the funded claimant stands to gain substantial monetary damages, the respondent State faces no prospective financial upside beyond an order for costs if it successfully defends itself against the claim.8
3. Comparative Dynamics: The Nexus Between Nigerian and Indian BIT Reforms
Nigeria and India both represent key Global South economies whose international investment law architectures have undergone systemic overhauls. While both were historically recipients of traditional BITs that heavily favoured investor protection over State regulatory autonomy, both nations have now pivoted toward modern legal regimes that balance investor rights with State sovereignty and institutional safeguards.
In Nigeria, a significant statutory development occurred with the enactment of the Arbitration and Mediation Act (AMA) 2023. The AMA explicitly recognises TPF in arbitration, thereby formally abolishing the common law torts of maintenance and champerty for arbitral proceedings within Nigeria.9 Under Sections 61 and 62 of the AMA 2023, TPF is authorised but subject to strict mandatory disclosure requirements, obliging a funded party to give written notice of the funder’s identity to the opposing party and the arbitral tribunal upon initiation of proceedings. This approach is consistent with Nigeria’s modern treaty practice, exemplified by the Nigeria-Morocco Bilateral Investment Treaty (2016), which incorporates explicit provisions on sustainable development, investor obligations and enhanced regulatory oversight.
India has pursued a distinct path toward investment treaty reform following a series of high-profile adverse ISDS awards. In 2015, India introduced its revised Model BIT,10 which drastically narrowed investor protections, eliminated general Fair and Equitable Treatment (FET) clauses, and required the exhaustion of domestic remedies as a precursor to the initiation of international arbitration proceedings by an investor. Unlike Nigeria’s explicit statutory recognition of TPF under the AMA 2023, India’s domestic legal framework on TPF remains governed primarily by civil procedure provisions, such as the Code of Civil Procedure as applied in certain Indian states, and by judicial decisions permitting funding arrangements provided they are fair and not extortionate.11
The nexus between both jurisdictions lies in their shared objective of “preventing speculative or abusive arbitration claims while maintaining a transparent legal environment”. Although Nigeria has directly institutionalised TPF regulation through statutory enactment, India’s modern BIT policy focuses on curbing treaty abuse by limiting investor access to arbitration altogether.
Consequently, both jurisdictions reflect a growing international consensus that unfiltered access to investor-State arbitration must be tempered by regulatory safeguards, so as to distinguish speculative claims from meritorious ones in the determination of modern investor-State disputes.
4. The Security for Costs Conundrum: A Critique of Existing Regulatory Gaps
Despite statutory advances in jurisdictions like Nigeria, and institutional updates across arbitral bodies, a critical procedural flaw persists in international investment arbitration: the evident uncertainty surrounding orders for security for costs. Security for costs is an interim relief order directing a claimant to put up financial security, such as a bank guarantee or escrow deposit, to ensure that the respondent can recover its legal costs if the tribunal dismisses the claim and awards costs against the claimant.12
The central problem surrounding security for costs in ISDS stems from the limits of arbitral tribunals’ jurisdiction over third-party funders. Given that a funder is not a signatory to the underlying BIT or the arbitration agreement, tribunals generally lack direct jurisdiction to issue a binding costs order against the funder at the conclusion of a dispute.13 Consequently, if an impecunious investor loses its case and is ordered to pay the host State’s legal costs, the funder can walk away without liability, leaving the sovereign State with an uncollectible award against an insolvent shell company.
Owing to the exceptionally high standard required to obtain security for costs, current international arbitral practice fails to adequately address this problem. Tribunals have long treated security for costs as an exceptional remedy, requiring respondent States to prove extraordinary circumstances, such as deliberate asset dissipation or bad-faith impecuniosity. The existence of a TPF agreement per se has repeatedly been held by tribunals to be insufficient to justify an order for security for costs, as demonstrated in Manuel García Armas v Venezuela and World Wide Minerals v Kazakhstan.14
There are a few rare instances in which an ICSID tribunal granted security for costs based partly on a history of non-payment and third-party funding,15 but these remain the exception. Institutional rules, including Rule 53 of the 2022 ICSID Arbitration Rules and Section 62 of Nigeria’s AMA 2023, mandate the disclosure of TPF to identify conflicts of interest, but create no clear procedural obligation for the funder to provide security for adverse legal costs. This regulatory vacuum exposes host States to unrecoverable expenditure of public funds, which by and large impedes procedural fairness in ISDS.
5. Conclusion: Practical Realities and Actionable Solutions
The integration of Third-Party Funding into investor-State arbitration reflects a permanent shift in the financing and conduct of international investment disputes. Whereas TPF provides enabling capital for foreign investors to enforce treaty guarantees, its unregulated operation poses systemic risks for respondent host States. Notably, although the comparative trajectories of Nigeria and India demonstrate a clear intention to modernise investment frameworks, neither system has resolved this central flaw: the uncertainty of recovering arbitration costs from funded, insolvent claimants through the security for costs mechanism.
To close this gap and establish procedural symmetry in ISDS, the following concrete legal reforms should be adopted:
Rebuttable Presumption of Security for Costs: National legislation (such as future amendments to Nigeria’s AMA 2023 and India’s arbitration law framework) and international institutional arbitration rules should establish a rebuttable presumption that, upon disclosure of a TPF agreement, the arbitral tribunal shall order the claimant to provide security for costs. The burden should then shift to the funded claimant to demonstrate either its independent financial solvency or that the funding agreement includes an enforceable commitment by the funder to cover adverse cost awards.
Direct Arbitral Jurisdiction over Funders for Costs: Future BITs and national arbitration laws should incorporate provisions granting arbitral tribunals express jurisdiction to issue joint and several cost orders directly against third-party funders financing claims under the treaty.
By implementing these structural safeguards, international investment dispute resolution systems will preserve access to third-party funding while shielding host nations from the conundrum of unrecoverable litigation costs.
Footnote(S):
1 Jean E Kalicki and Anna Joubin-Bret (eds), Reshaping the Investor-State Dispute Settlement System: Journeys for the 21st Century (Brill Nijhoff 2015).
2 Tiwalade Aderoju, The Nigerian Arbitration and Mediation Act 2023: A comparison with the Arbitration and Conciliation Act 2004 and global practices’ (IBA, 20 December 2023) <ibanet.org> last accessed 20 August 2026.
3 UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration (opened for signature 17 March 2015, entered into force 18 October 2017) A/RES/69/116, Art I.
4 ICSID, ‘ICSID Convention, Regulations and Rules’, (came into effect July 1 2022, International Centre for Settlement of Investment Disputes 2022), ch VII r 51.
5 Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance 2017 (Ord. No. 6 of 2017), pt 2 s 3 sub-s 98E.
6 Lisa B.N, Victoria S.S, Third-Party Funding in International Arbitration, (2nd edn, Wolters Kluwer 2017) 19.
7 Ibid.
8 Vijayvergia Chitransh and Belmannu Pavan, ‘Exploring The Prospects of Host-state Counterclaims In Corruption Disputes’, [2020] AI 36 583.
9 Arbitration and Mediation Act 2023.
10 Model Text for the Indian Bilateral Investment Treaty 2015, Ministry of Finance, Government of India.
11 Code of Civil Procedure 1908 (Act No 5 of 1908), Ord XXV.
12 Godwin Omoaka, Stanley Nweke-Eze and Olusola Odunsi, Third-party Funding in Nigeria-seated Arbitration Proceedings proceedings, (IBA, 24 November 2021) <ibanet.org> last accessed 20th August 2026.
13 LCIA, London Court of International Arbitration Rules, (1 October 2020) art 26.8.
14 (Jurisdiction) Procedural Order No 9 (Decision on Security for Costs), PCA Case No 2016-08 (20 June 2018).
15 RSM Production Corporation v Saint Lucia, (Provisional Measure) (Decision on Saint Lucia’s Request for Security for Costs) ICSID Case No ARB/12/10 (13 August 2014).
Reference(S):
Legislation and Treaties
Arbitration and Mediation Act 2023
Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance 2017 (Ord. No. 6 of 2017), pt 2 s 3 sub-s 98E.
Code of Civil Procedure 1908 (Act No 5 of 1908), Ord XXV
ICSID, ‘ICSID Convention, Regulations and Rules’, (came into effect July 1 2022, International Centre for Settlement of Investment Disputes 2022), ch VII r 51.
LCIA, London Court of International Arbitration Rules, (1 October 2020) art 26.8
Model Text for the Indian Bilateral Investment Treaty 2015, Ministry of Finance, Government of India
UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration (opened for signature 17 March 2015, entered into force 18 October 2017) A/RES/69/116, Art I
International Cases
(Jurisdiction) Procedural Order No 9 (Decision on Security for Costs), PCA Case No 2016-08 (20 June 2018).
RSM Production Corporation v Saint Lucia, (Provisional Measure) (Decision on Saint Lucia’s Request for Security for Costs) ICSID Case No ARB/12/10 (13 August 2014).
Secondary Sources
Godwin Omoaka, Stanley Nweke-Eze and Olusola Odunsi, Third-party Funding in Nigeria-seated Arbitration Proceedings proceedings, (IBA, 24 November 2021) <ibanet.org> last accessed 20th August 2026.
Jean E Kalicki and Anna Joubin-Bret (eds), Reshaping the Investor-State Dispute Settlement System: Journeys for the 21st Century (Brill Nijhoff 2015).
Nieuwveld L.B, Sahani V.S, Third-Party Funding in International Arbitration, (2nd edn, Wolters Kluwer 2017) 19.
Tiwalade Aderoju, The Nigerian Arbitration and Mediation Act 2023: A comparison with the Arbitration and Conciliation Act 2004 and global practices’ (IBA, 20 December 2023) <ibanet.org> last accessed 20 August 2026.
Vijayvergia Chitransh and Belmannu Pavan, ‘Exploring The Prospects of Host-state Counterclaims In Corruption Disputes’, [2020] AI 36 583.
