Third Party Funding in International Arbitration

Third Party Funding in international arbitration

    Third party funding is not new. Originally designed to support companies that did not have the means to pursue claims, its use has broadened to the extent that it has become a feature of the litigation landscape in several jurisdictions. Funders also look at international arbitration, attracted by the high-value claims, perceived finality of awards, and the enforcement regime provided by the New York Convention.

    The last few years have seen a marked increase in funding activity, initially focused on investor-state arbitration, but now spreading to commercial international arbitration. However, unlike in national litigation where disputes are decided by court appointed judges, the use of third party funding in private arbitration, with party-appointed arbitrators, has given rise to various ethical and procedural issues.

    In this Quickguide we explain what third party funding is and the practicalities of securing it, and then go on to outline the issues it gives rise to in international arbitration. 

    What is third party funding?

    Third party funding is where someone who is not involved in an arbitration provides funds to a party to that arbitration in exchange for an agreed return. Typically, the funding will cover the funded party's legal fees and expenses incurred in the arbitration. The funder may also agree to pay the other side's costs and provide security for the opponent's costs if the funded party is so ordered.

    As the use of third-party funding has increased, so have the number and range of institutions that are prepared to finance litigation and arbitration. In addition to specialised third party funders, insurance companies, investment banks, hedge funds and law firms have entered the market. 

    As the market has developed, the range and sophistication of funding products and structures available has broadened. There is no one size fits all and the description above is funding at its most basic. Third party funding, or "litigation finance" as it is commonly referred to, has evolved. In addition to funding one-off cases, litigation finance is being used for a broader range of purposes, with the proceeds of the litigation or arbitration being used as collateral. Another recent trend is the development of portfolio funding, where funders provide a funding package that covers a portfolio of cases. 

    When is third party funding appropriate?

    Recent innovations in the products available have made third party funding appropriate in more situations than was previously the case. However, if looking to fund on a one-off case basis, the following is a useful preliminary checklist:

    • Funders are unlikely to provide funding for cases that do not involve damages. Given that funders receive their return by reference to recoveries made, they are primarily interested in claims with a damages outcome. As such, funding is generally only available to claimants or to defendants with a monetary counterclaim. 
    • Funding an arbitration matter is a high risk investment, and funders will require a certain investment to quantum ratio. Unless they specialise in funding smaller claims, funders will generally only fund one-off cases where likely damages are assessed at £10 million plus.
    • Funders will require good prospects of success. They will undertake their own separate analysis of the claim and only fund it if they have confidence in it and the way it is being advanced.
    • Funders will want to know if the target (i.e. the respondent) is able to meet the claim, costs and interest. Also, and particularly where it is a State, the funder will want to know what its payment record is in relation to arbitration awards. The funder will also want to know where assets are situated; enforcement risk is a key concern. If situated in jurisdictions where enforcement is difficult, that may deter some funders. Other considerations, including whether the target will fight to the bitter end, may also influence the funder.
    • The seat of the arbitration is important as that will determine whether funding is permitted under local law. The place of enforcement will also be important as the fact of funding may be used to raise public policy arguments to frustrate or deny enforcement.  

    Advantages and disadvantages

    A potential claimant may approach a funder for various reasons:

    • Necessity: Arbitration can be expensive. If a claimant does not have the means to pursue a meritorious claim, funding may well be its only option.
    • Risk management: Claimants with the funds to arbitrate may want to lay off some of the risk associated with costly arbitration, and the inherent unpredictability of costs, and be prepared to give up a proportion of any recoveries to do so. It also enables a company to invest that money elsewhere. In addition, the funded party is relieved of costs pressures and cash-flow issues associated with the legal costs of the arbitration.
    • Validation: Funders are only interested in good claims. They will therefore conduct extensive due diligence and carry out their own analysis of the merits before agreeing to provide funding. This objective analysis may assist the claimant to shape its case strategy, and may also encourage early settlement once the other party is made aware that the claim has the backing of a funder.

    However, there are also disadvantages to using third party funding: 

    • Expensive: A successful claimant will generally have to pay a significant proportion of damages recovered to the funder. While there is the potential for successful claimants to recover these funding costs from the respondent (see below), the decision on recoverability will always be fact dependent. Expense therefore remains a factor to be considered. 
    • Autonomy: Although funders are generally prohibited from taking undue control or influence in an arbitration, there may be some loss of autonomy on the part of the funded party (in particular when considering settlement) as funders may reserve the right of approval of the settlement. 
    • Disclosure: Increasingly, funded parties are being required (whether by order of the tribunal or the applicable institutional rules) to disclose the fact of funding and the identity of the funder (but not necessarily the funding terms). This in turn may prompt the respondent to make an application for security for costs.
    • Costs: Substantial costs can be incurred when packaging the case for presentation to a funder. These will have been wasted if the application for funding is unsuccessful. Even if successful, funders are not usually liable for any costs incurred before the funding arrangement is put into place, including the costs of packaging and the negotiation of the funding arrangements (see below).

    Approaching a funder: practical tips

    Finding a funder

    Third party funding is a developing market with new funders entering all the time. When choosing a funder, it is important to ensure that a funder has sufficient capital to meet all liabilities that could arise. Questions should also be asked of the source of capital and how reliable they are, and whether the fund has a defined period or sunset date.

    This should not be an issue if dealing with a reputable funder with an established track record. However, proper due diligence as to financial standing and reputation should be carried out, particularly if dealing with new entrants to the market. 

    Packaging the claim

    If you think you have a claim that is appropriate for funding, and just want a "preliminary feel" for whether a funder would be interested, most funders are prepared to discuss a case informally over the telephone. 

    If the funder is interested, the next step will be to "package" the claim so that the funder can carry out a full assessment of the merits. Typically, a funder will require: 

    (a) Key documents and evidence so that proper case analysis can be carried out either by in-house experts or external counsel.

    (b) Any legal advice and opinions given by the legal team and counsel. This should cover both liability and quantum – the funder will need to be satisfied of the value of the claim.

    (c) Information on the respondent's position. A funder will investigate this independently as it is crucial for them to be confident of recovery. However, useful information includes financial viability of the respondent, location of any assets, and their attitude towards arbitration.

    (d) A detailed budget, including the number and cost of any expert witnesses likely to be required, and a timeline setting out the anticipated process up to the hearing. The funder will need to be satisfied that the ratio of necessary investment to expected return is sufficient.

    The funder will then conduct extensive due diligence in order to satisfy itself of the merits of the case. Factors that will influence its decision are listed above. Timing will depend on the complexity of the case and whether the funder conducts the due diligence in-house or has to seek assistance from external counsel. In exceptional cases funding can be put in place in a number of days, but it will typically take at least a month. 

    Calculating the funder's return

    The funder's return, and the way it is calculated, will always be tailored to the particular case. Funders adopt different approaches to pricing and various factors will be taken into account, including: the size of the expected damages, the likely length of the matter, and the level of risk. 

    The way the return is calculated will vary between cases and funders. It could be calculated according to a fixed percentage share (typically 30 per cent to 50 per cent of recoveries), a multiple of the funding to be provided (usually a multiple of three or four), or a combination of both. Funders are becoming more innovative in their approach; for example, some funders are prepared to take an equity share in the claimant company (where the only asset is the claim). The funder's share of the proceeds can also be staged depending on when success is achieved or by reference to the extent of the damages recovered. 

    Issues to consider when dealing with a funder

    Privilege and confidentiality

    A funder will need to be provided with confidential information as early as the "preliminary chat" stage. It is therefore sensible to enter into a non-disclosure agreement at this early stage. 

    Packaging a claim for third party funders will invariably involve sending privileged documents and legal advice. Provided protections are in place, the general view is that sending these confidential documents to a funder does not constitute a waiver of privilege. However, the rules of privilege in the relevant jurisdiction should always be checked. And funded parties should ensure that all communications with a funder are made pursuant to a non-disclosure agreement or agree that any documents are sent to the funder on a restricted waiver basis. For more on privilege under English law, see our Privilege Quickguide


    At some point an interested funder will ask for exclusivity. This usually occurs just before the funder is about to incur significant costs in reviewing a case. If a funder relies on external assistance to assess the merits of a claim, exclusivity may be required at an early stage.

    Although understandable from the funder's point of view, it could be disadvantageous as it would prevent other funders from looking at a case, and there is no guarantee that the particular funder will decide to fund at the end of the due diligence process. Caution should therefore be exercised before agreeing to exclusivity.


    The dynamics of settlement discussions can be distorted by virtue of the somewhat misaligned interests of the funded party and the funder. A particular jurisdiction's approach towards funding may also determine the extent to which the funder can participate in settlement discussions.

    Litigation funding arrangements will usually contain provisions that deal with settlement and, in particular, the procedure by which the dispute will be settled in the event that the funded party and the funder do not agree. For example, a funding agreement may specify that, where the funded party and the funder disagree as to whether to accept an offer of settlement, senior counsel will act as a "tie breaker".

    Reporting requirements

    As to the level of involvement of funders in the matters they fund, in general, most funders will adopt a "light touch" approach. In common law jurisdictions, the funders will be conscious of the need to remain at arm's length. Otherwise the arrangement could be found to be unenforceable. The civil law approach is more relaxed and funders may engage more. That said, many funders will have too many cases to be actively engaged with any one of them. Most funders will therefore only require limited reporting, usually on a quarterly basis or at key stages of the arbitration.

    Issues relevant to international arbitration

    The nature of international arbitration, and in particular the mechanism for the appointment of arbitrators, raises several issues surrounding the use of third party funding.

    In arbitration, where the arbitrators are often selected by the parties, this gives rise to potential conflicts of interest where an arbitrator, or his/her colleagues or firm, have a relationship with a funder involved in the case. This in turn can give rise to other procedural and ethical issues.

    These have been debated at length. Consequently, the International Council for Commercial Arbitration (ICCA), along with Queen Mary College at the University of London (QMUL), set up a Task Force to assess these concerns.1 Its report was published in April 2018.2

    Conflicts of interest

    The increase in the number of funded arbitration claims, the small number of funders, and the relationship between funders and the law firms actively involved in international arbitration work are some of the factors that have added to the concern regarding the potential for conflicts of interest and the increasing call for greater transparency. 

    The concerns stem from party-appointment of arbitrators: repeat appointment of individual arbitrators in cases involving the same funder, or appointment of an arbitrator by a funded party where that arbitrator already has a relationship with the funder, are but two of the potential conflict scenarios.

    The issue has also been considered by the International Bar Association: General Standard 7 of the Guidelines on Conflicts of Interest in International Arbitration now contains a requirement for the disclosure of a party's funding arrangements in certain circumstances.3 In its new guidance on conflict disclosure for arbitrators, the ICC International Court of Arbitration also addresses the issue: third party funding is now one of the circumstances that arbitrators should consider disclosing as a potential conflict. Both of these presupposes that the existence of third party funding is disclosed by the funded party to the tribunal.

    Disclosure of the funding agreement

    There is no general obligation on a funded party to disclose the fact of its funding arrangement. However, in light of the concerns regarding conflicts, the demand for greater transparency is growing. 

    Disclosure of the funding arrangement will often benefit a funded party. The fact that a claim is funded demonstrates that an independent third party has faith in the merits of the claim and so its existence may encourage settlement. More importantly, disclosure at an early stage prevents the other party from raising conflicts arguments at the enforcement stage should the funded party prove successful.

    However, it is unlikely that voluntary disclosure will be the adopted approach. Institutions are now beginning to address the issue of mandatory disclosure. The Singapore International Arbitration Centre was the first, giving the Tribunal the power to order the disclosure of the existence of and, where appropriate, details of the third party funder's interest in its Investment Arbitration Rules and whether it has agreed to be liable for adverse costs (Rule 24(l)). It also issued a Practice Note on arbitrator conduct that clarified that arbitrators should ask for disclosure of the involvement of external funders. 

    The Hong Kong International Arbitration Centre (HKIAC) has adopted a similar approach. Its arbitration rules now require funded parties to disclose the existence of a funding agreement, the identity of the funder and any subsequent changes to such information. The SCC has addressed the issue by adopting a policy encouraging disclosure of the identity of any third parties with an interest in the outcome of the dispute.The ICC Rules also now cater for disclosure of funding arrangements as a result of revisions made in 2021 (Article 11(7)). And as from 1 July 2022, so will the ICSID Rules which now include a mandatory requirement for parties to disclose any third party funder that has provided funds for the purposes of pursuing or defending a claim (Arbitration Rule (AR) 14(1)).

    Recently negotiated free trade agreements have also addressed the issue, requiring disclosure of the existence, but not the terms, of any funding arrangement.5 And requirements for disclosure have been included in legislation enacted to permit third party funding in international arbitration, e.g. in Singapore and Hong Kong. 

    In the meantime, tribunals are taking matters into their own hands and ordering disclosure where necessary.6 Such orders are only likely to increase.

    Allocation of costs and security for costs 

    Costs is often a topic discussed with third party funding. The ICCA-QMUL Task Force considered that more guidance was required regarding the factors that should be taken into account when addressing costs applications. It therefore set up a Working Group which made a number of findings.7  

    In summary, it found that an application for security costs should, in the first instance, be determined on the basis of the applicable test, without regard to the existence of any funding arrangement. The terms of any funding arrangement may be relevant if relied upon to establish that the claimant (or counterclaimant) can meet any adverse costs award (including, in particular, the funder's termination rights). And in the event that security turns out not to have been necessary, the tribunal may hold the requesting party liable for the reasonable costs of posting such security.

    On allocation of costs, the Working Group considered that third party funding should not make a difference to decisions on how costs should be allocated on the outcome of the arbitration. In particular recovery costs should not be denied on the basis that a party seeking costs is funded by a third-party funder.

    Recovery of costs of funding

    The Working Group also looked at recoverability of funding costs (the return paid by the funded party to the funder). That will depend on the definition of recoverable costs in the applicable national legislation and/or procedural rules, but generally should be subject to the test of reasonableness and disclosure details of such funding costs from the outset of or during the arbitration so that the other party can assess its exposure.

    The ICCA-QMUL approach is similar to that taken by the ICC in its report on decisions in costs in international arbitration published in December 2015.8 Recoverability of the costs of funding is discussed in Part VI. The ICC considers that there may be circumstances where it would be reasonable for the successful funded party to recover the costs of funding.

    This approach was followed in an English seated ICC arbitration where the arbitrator considered it reasonable and in the interests of justice to award indemnity costs, and included in his costs award almost £2 million in funding costs. His costs award was upheld by the English court.9 Another ICC tribunal decision awarding the successful claimant its costs of funding the claim came to light in 2021 when the English court again upheld the decision (see our briefing).10 Of note is the fact that the funding in that case was by way of a shareholder loan provided by a related entity and that the fact of funding was only disclosed during the submissions on costs. However, the tribunal considered that both the principle of having recourse to that type of funding and the level of funding costs was reasonable in the circumstances.  

    Both tribunal decisions confirm that the cost of funding can be included in the costs awarded to the successful party, but whether they will be will always be fact dependent.

    While these decisions are likely to encourage funded parties to seek recovery of their funding costs, the reasonableness hurdle remains an important safeguard.

    Funder's liability for costs 

    The other issue that has concerned many is whether a funder can be ordered to pay costs. This flows from the concern that the existence of third party funding will lead to an increase in the number of claims brought, and in particular, the number of investment treaty claims where the potential gains are considerable. With that in mind, should not the funder be accountable for costs in the event that the funded party is unsuccessful (as is the case in domestic litigation in certain jurisdictions)? However, the ICCA-QMUL Working Group considered that absent an express power, a tribunal will lack jurisdiction to issue a costs order against a third party funder.

    SIAC, in its investment treaty rules, has tackled the issue of costs and third party funding. The rules give the tribunal the power to take third party funding arrangements into account when deciding on the apportionment of costs (Rule 33.1). The tribunal can also take into account any third party funding arrangements in respect of any adverse costs orders (Rule 35). In its 2018 revision to its rules, HKIAC included provisions that expressly allow a tribunal to take into account third-party funding when determining all or part of the costs of the arbitration. Neither the ICC nor the LCIA directly address the issue of funding costs in their latest revisions (preferring to provide the tribunal with a broad discretion), but other institutions may well follow SIAC's lead. 

    The issue of a funder's liability for adverse costs may not be an issue in practice as funding agreements often deal with liability for adverse costs, or appropriate insurance is arranged to cover the funded party's liability for an adverse costs order. 

    Regulation of third party funding 

    Some jurisdictions have in place limited rules that regulate the use of third party funding in domestic proceedings. However, in the context of international arbitration, there is currently no formal regulation of its use. In considering what form its report on third party funding should take, the ICCA Task Force looked at the issue of regulation and the viability of imposing international best practice guidelines on the use of third party funding. However, it considered it preferable to provide limited guidance on select issues with a view to promoting greater understanding of third party funding and facilitating consistency in dealing with the issues third party funding gives rise to in international arbitration. 

    Third party funders will have a preference for arbitrations in jurisdictions that are perceived as being funder-friendly. Generally speaking, the seat of the arbitration will be the relevant jurisdiction. Those jurisdictions that are currently regarded as being funder-friendly include the US, UK, Australia, Germany, France, Singapore, Hong Kong and the Netherlands. However, attitudes in other jurisdictions towards third party funding are changing.

    Maintenance and champerty 

    Historically, in common law jurisdictions, the principles of "maintenance" and "champerty"11 prevented the funding of litigation by third parties. The underlying justification for this was to avoid third parties profiting from litigation in which they had no legitimate interest, as there was concern that this would result in frivolous or vexatious litigation. However, as part of the desire to improve access to justice, jurisdictions have adopted a more pragmatic approach to third party funding.  

    In some jurisdictions, such as Ireland, maintenance and champerty remain torts and crimes. In May 2017, the Irish Supreme Court blocked a third party funder from funding a major case against the Irish state on grounds of champerty. However, attitudes in other jurisdictions are changing; both Hong Kong and Singapore have introduced legislation to permit and regulate its use in international arbitration. 

    1. The Task Force comprised representatives of all stakeholders from geographically and industry distinct perspectives. Various Working Groups were established to look further into certain of the issues identified.
    2. Report of The ICCA-Queen Mary Task Force On Third-Party Funding In International Arbitration: https://www.arbitration-icca.org/media/10/40280243154551/icca_reports_4_tpf_final_for_print_5_april.pdf.
    3. The IBA Guidelines are available at http://www.ibanet.org/Publications/publications_IBA_guides_and_free_materials.aspx. The ICC guidance is available at: http://www.iccwbo.org/News/Articles/2016/ICC-Court-adopts-Guidance-Note-on-conflict-disclosures-by-arbitrators/.
    4. SCC policy: Disclosure of third parties with an interest in the outcome of the dispute, adopted 11 September 2019.
    5. Examples include the EU-Vietnam FTA, the revised version of CETA, and the latest EU proposals on the EU-US TTIP.
    6. In Muhammet Cap & Sehil Insaat Endustri Ve Ticaret Ltd Sti v Turkmenistan, an ICSID Tribunal ordered the claimants to disclose their funding status and details of any funding agreement. The Tribunal's order followed an application by the respondents for disclosure of the funding status on the basis that an application for security for costs could be made in the proceedings in the future. The potential application for security for costs being made appears to have been a factor in the making of the orders.
    7. Report of The ICCA-Queen Mary Task Force On Third-Party Funding In International Arbitration: https://www.arbitration-icca.org/media/10/40280243154551/icca_reports_4_tpf_final_for_print_5_april.pdf.
    8. Available on the ICC website: http://www.iccwbo.org/Advocacy-Codes-and-Rules/Document-centre/2015/Decisions-on-Costs-in-International-Arbitration---ICC-Arbitration-and-ADR-Commission-Report/.
    9. Essar Oilfields Services Ltd v Norscot Rig Management PVT Ltd [2016] EWHC 2361 (Comm).
    10. Tenke Fungurume Mining SA v Katanga Contracting Services SAS [2021] EWHC 3301 (Comm).
    11. Maintenance is the financial support of litigation by a third party with no legitimate commercial interest in it. Champerty is maintenance where the maintainer receives a share of the proceeds.

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.


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