- 15-Oct-2025
- public international law
Third-party funding (TPF) in arbitration refers to a financial arrangement in which a third party, typically an investment fund, provides financial support to a party (claimant or respondent) involved in arbitration proceedings. In return, the third-party funder receives a share of the awarded amount or settlement if the case is successful. Third-party funding has gained popularity in international arbitration as it allows parties with limited financial resources to pursue claims or defend themselves without bearing the full cost of the proceedings.
While third-party funding can provide access to justice, it also raises various ethical, regulatory, and practical issues, including concerns about control over the case, confidentiality, and the potential for abuse in certain circumstances.
A third-party funder provides financial support to a party in exchange for a percentage of the final award or settlement if the case is won. This support often covers costs such as legal fees, arbitration expenses, and other costs associated with the arbitration process.
The agreement may specify that the funding will be repayable only if the case is successful, and if the claim fails, the funder typically does not receive any return on investment.
The third-party funding agreement typically outlines the terms of the funding, including the percentage of the award or settlement the funder will receive. The agreement also details the level of control the funder will have over the case, if any, as well as confidentiality provisions and risk-sharing arrangements.
Third-party funding can enable parties, particularly those with limited financial resources, to pursue arbitration or defend claims they otherwise could not afford.
It ensures that disputes, especially meritorious claims, are not abandoned due to financial constraints.
The funder takes on the financial risk, and the party does not have to bear the full cost of the arbitration. This can provide peace of mind and encourage claimants to pursue cases they might otherwise avoid due to the high costs involved.
The funded party does not have to make upfront payments to cover the costs of the arbitration. The financial burden is shifted to the third-party funder.
Many third-party funders are experienced in the arbitration field and may offer strategic advice or expertise, in addition to providing financial support. Their involvement may improve the chances of success in the arbitration.
One of the major concerns regarding third-party funding is the potential for a conflict of interest. Funders may have an interest in the case that goes beyond just financial considerations. For example, a funder may exert influence over the strategy or decisions made during the arbitration, which could affect the fairness of the process.
The funder’s desire for a high return might lead to aggressive tactics that are not in the best interest of the party, or even prolong the proceedings unnecessarily.
Although the funded party typically maintains control over the conduct of the arbitration, there is a risk that the funder might seek to assert influence over the legal strategy or settlement decisions to maximize their financial return.
This could lead to ethical concerns, particularly if the funder has too much influence over decisions related to settlements or jurisdiction.
The involvement of a third party in the arbitration process may compromise confidentiality. Information about the dispute, the funding arrangement, or even the case itself may be shared with the funder, which could lead to potential leaks or exposure of sensitive information.
It is crucial to have strong confidentiality clauses in place to protect the integrity of the dispute resolution process.
There is a concern that third-party funding could be used to exploit the arbitration system. Funders might finance weak claims in hopes of exploiting legal systems or simply pressuring the other party into settling for a favorable amount, even if the claim is without merit.
The lack of regulation in certain jurisdictions could lead to an increase in speculative funding and frivolous claims.
The regulation of third-party funding varies across jurisdictions. In some countries, third-party funding is unregulated, while in others, specific rules have been introduced to address the concerns of conflicts of interest and control.
Some jurisdictions require full disclosure of funding arrangements to ensure transparency. Others have introduced rules to prevent funders from directly controlling the case or influencing key decisions, such as whether to settle or continue litigation.
The International Chamber of Commerce (ICC) and UNCITRAL (United Nations Commission on International Trade Law) have issued guidelines and codes of conduct that aim to address issues related to transparency in third-party funding arrangements.
In 2018, the ICC published a report highlighting the importance of transparency in funding arrangements and setting guidelines for disclosure of funding in arbitration.
In India, third-party funding is not as widely accepted as it is in other jurisdictions, but there is growing interest. The Delhi High Court in a 2018 ruling approved third-party funding in arbitration, but there are no specific regulations governing it. The Indian legal system is still evolving in terms of how third-party funding is viewed in domestic and international arbitration.
A small technology company in India is involved in a dispute with a multinational corporation over a patent infringement in an international arbitration proceeding. The company cannot afford the legal costs and arbitration fees but believes it has a strong case.
A third-party funder agrees to cover the arbitration costs in exchange for a percentage of the award if the company wins the case. The funding arrangement allows the small company to proceed with the arbitration and potentially win compensation for the patent infringement.
However, the funder may have some influence over strategic decisions such as whether to settle or pursue the case in court, potentially leading to concerns about the independence of the company’s decisions.
Third-party funding is an increasingly popular option in international arbitration, particularly for parties lacking the financial resources to pursue or defend claims. While it offers significant advantages, such as access to justice and risk sharing, it also raises ethical, legal, and practical concerns related to control, confidentiality, and potential abuse. Proper regulation and disclosure of funding arrangements are crucial to ensure the integrity of the arbitration process.
Answer By Law4u Team
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