Chapter 1: Introduction to Third-Party Funding

Third-Party Funding in International Arbitration (Second Edition) (Bench Nieuwveld and Sahani;
Jan 2017)
Third-party funding is a growing phenomenon that is becoming more mainstream in both the
litigation and the international arbitration communities. Many prospective parties do not fully
understand what third-party funding entails or what legal parameters exist in each jurisdiction.
Therefore, this book explains the framework of third-party funding and attempts to create a
reference source for parties contemplating funding arrangements in a variety of key jurisdictions
worldwide.

§1.01 WHAT IS THIRD-PARTY FUNDING?

Third-party funding is a financing method in which an entity that is not a party to a particular
dispute funds another party’s legal fees or pays an order, award, or judgment rendered against that
party, or both. (1) The agreement between the funder and the funded party may also include
paying another party’s attorney fees if the funded party loses the case or the decision-maker (i.e.,
an arbitrator or panel of arbitrators, a judge or panel of judges, or a jury) orders the funded party to
pay the attorney fees of another party. Jurisprudence, academic literature, and news articles
relating to third-party funding in most jurisdictions largely focus on domestic litigation funding,
which represents the majority of third-party funding instances worldwide. Third-party funding in the
context of international arbitration is usually classified as either a subset or a close cousin of
litigation funding. Nevertheless, there are nuances of third-party funding in international arbitration
that depart from the general character of litigation funding and, therefore, require a different mode
of analysis. This book aims to shed some light on the unique attributes of third-party funding in
international arbitration by examining this phenomenon in key jurisdictions around the world.

§1.02 THE PLAYERS IN THIRD-PARTY FUNDING

[A] Types of Clients
There are many different types of clients for third-party funding, such as corporations, law firms,
individuals, and sovereign states, but in the quintessential third-party funding arrangement, the
client will either initiate a claim (known as a “claimant” in international arbitration) or defend against
a claim (known as a “respondent” in international arbitration). (2) By contrast, law firm funding
typically is described as a type of portfolio financing whereby the third-party funder’s investment is
based on predicted returns from multiple cases in which the law firm represents its clients. This
book focuses on direct third-party funding of an individual client who is a party to a litigation or
arbitration matter, rather than portfolio financing of law firms.

Clients seeking third-party funding will have largely similar experiences regardless of whether the
client is a claimant, a respondent, or both (if there are multiple claims in a particular dispute). (3)
The client will be asked to provide extensive information about the case, which may be confidential
or privileged under applicable law, to the potential funder so that it may assess the claim. The
funder will analyze the strengths and weaknesses of the claim or defense, the likelihood of success
on the merits, the ability to recover from the assets of the losing party, as well as other metrics.
This process is described further in Chapter 2 of this book on the mechanics of funding. If the
funder approves of the client’s case, the client would then negotiate a detailed funding agreement
with the funder. The funding agreement may include provisions addressing whether the funder
would pay an adverse costs award if the funded party loses. An adverse costs award requires the
losing party to pay some or all of the winning party’s costs of representation, which may include
attorney’s fees, evidentiary costs (including documents and witnesses), and administrative fees (in
the case of an institutional arbitration). The use of adverse costs awards and the expenses that
may be covered by an adverse costs award depends on the applicable law and the rules of
arbitration used. After the funding agreement has been signed, the funder will provide the client
with funds to pay the client’s attorney fees and evidentiary costs in the case. At this time, funding
arrangements also address complexities, such as whether the funder will pay security for costs or
adverse costs awards and under what (rare) circumstances the funder may terminate or withdraw
from the funding arrangement before the end of the case.
Claimants and respondents may have different experiences with third-party funding in certain
situations. Except when those differences are relevant, the terms “client” and “party” are used
throughout this book to refer to both claimants and respondents that utilize third-party funding.

[B] Types of Funders

The entity supplying the financial backing (commonly referred to as the “funder”) most often is the
client’s attorney or law firm, an insurance company, or an outside institution, such as a corporation,
bank, or other financial institution. Some institutional funders specialize in third-party funding, while
others invest in litigation or arbitration claims as part of a wider portfolio of traditional financial
investments. Many other funders invest on a case-by-case basis rather than devoting an entire
business unit to this investment type. The majority of these specialized funding institutions are
based in countries where the third-party funding industry is well-developed, such as Australia,
Germany, the United Kingdom (U.K.), the United States (U.S.), the Netherlands, Canada, South
Africa, and New Zealand, with much smaller pockets of third-party funding—if any at all—in
Continental Europe, Asia, Latin America, the Middle East, and Africa. (4) Emerging jurisdictions
that have recently established the legality of third-party funding in international arbitration (but not
domestic litigation) include Hong Kong and Singapore. The legal framework applicable to third-
party funding in these jurisdictions will be addressed in detail in later chapters.

§1.03 TYPES OF FUNDING RELATIONSHIPS

[A] Overview
The various funder and client combinations give rise to a wide menu of possible funding
relationships and agreements. Attorney financing is quite common in the form of pro bono,
contingency, conditional, or success fee arrangements. (5) If the client has an insurance policy that
covers the situation at hand, then the insurance policy may be considered as a form of third-party
funding if its terms provide that the insurance company will cover litigation or arbitration expenses.
A client can also approach an institution that has no connection to the dispute or to the parties,
such as a bank, hedge fund, or other financial institution. This type of funder usually will provide
the client with either a traditional loan or non-recourse funding where repayment is contingent upon
the client winning its case. The latter is the quintessential scenario that comes to mind when
envisioning third-party funding of international arbitration disputes: an institution provides financial
backing to a party to a dispute in exchange for the promise of a share of the proceeds if the party
recovers any money. This scenario is the primary focus of this volume, but the other options are
briefly defined in this introduction and will be addressed in detail in later chapters.

[B] Insurance
Insurance is one of the most common forms of third-party funding. (6) Under many insurance
policies, the insurance company agrees to fund the legal representation in any action to defend
against liability or recover damages, or to pay any award, order, or judgment against the insured,
or both. (7) There are many types of traditional insurance policies in which such arrangements are
common, such as automobile and malpractice insurance. With respect to third-party funding, the
key feature of traditional insurance is that the insurance company usually requires the insured to
relinquish much or all of the control over the management of the case and any possible settlement
negotiations or agreements that may arise. (8) The insurance policy may also give the insurance
company the sole right to determine when to pursue a case, how zealously to do so, and when to
settle or withdraw claims. (9) Thus, the financial contribution of the insurance company is usually
directly proportional to the amount of ownership and control it exercises over the case.

There are also specialized forms of insurance, called “Before-The-Event” (BTE) and “After-The-
Event” (ATE) insurance, that are specifically intended to cover either the insured’s own legal
expenses, or the legal expenses of the winning party if the insured loses the case, or both. (10)
Generally, BTE and ATE insurance policies cover the attorney fees and evidentiary expenses
needed to pursue or defend against the claim. Therefore, insurers that provide these two
specialized types of insurance generally do not require the client to relinquish very much control
over the management of the case itself. In exchange, however, the client is usually not insulated
from the risk of having to pay a judgment or award from its own pocket if it loses the case.
[C] Attorney Financing: Pro Bono, Contingency, and Conditional Fee Arrangements
Pro bono representation involves the attorney absorbing the entire cost of representing a client,
who is usually indigent or otherwise unable to pay, without any guarantee or reasonable
expectation of reimbursement or profit. Occasionally, an attorney may be repaid if he or she
represents a client on a pro bono basis and wins the case in a jurisdiction where the loser is
required to pay the winner’s attorney fees under general procedural law, under the statute
authorizing the claim, or by an order of the decision-maker. Pro bono representation is not normally
viewed as a type of “financing,” because money does not usually change hands directly between
the attorney and the client. Still, the practical effect of the attorney representing the client without
requiring payment could certainly be viewed as a form of “financing,” because the financial burden
of legal representation has been shifted from the client to the attorney.

Similarly, contingency representation involves an attorney representing a client at the attorney’s

own expense with the expectation that, if the client recovers money, the attorney will then be
repaid along with an additional fee based on a fraction or percentage of the amount recovered.
(11) If the client loses the case, then the attorney generally receives no repayment for his or her
services, and the practical effect of this arrangement is pro bono representation. If the client wins,
then the attorney normally receives a handsome profit.

A conditional fee arrangement is similar to contingency representation, except that the attorney
charges a discounted fee (instead of no fee) unless the client wins. (12) If the client wins, then the
attorney receives payment of its traditional fee at its normal hourly rate in addition to a “success
fee” as a bonus for winning the case. (13) A notable distinction between contingency fee
arrangements and conditional fee arrangements is that contingency fee arrangements place the
entire risk of loss squarely on the shoulders of the attorney while conditional fee arrangements split
the risk of loss between the attorney and the client. Conditional fee arrangements ensure that the
attorney will receive at least some remuneration for his or her effort.

With all three types of attorney financing, the client retains direct control over the management of
his or her case, despite the fact that the attorney is assuming most or all of the risk of the client
losing the case. Thus, attorney financing strikes a sharp contrast to traditional liability insurance,
where the insurance company often takes full control over the management of the dispute in many
jurisdictions around the world. The primary reason for the discrepancy between the powers
exercised by these two types of funders is that the code of conduct and professional ethics that
binds attorneys requires them to zealously pursue their client’s case and act in their client’s best
interest regardless of the likelihood of success. (14) Thus, the attorney would be violating the rules
of professional conduct if he or she reduced the effort with which he or she pursued the client’s
claim in order to reduce costs, even if the case began to seem unwinnable. A traditional liability
insurance company (i.e., one that is not providing ATE or BTE insurance), on the other hand, has
the ability to stave off its losses at any time by settling the case or withdrawing its claim, regardless
of the best interests of the insured. (15) An advantage for the attorney as a funder, however, is that
the attorney would not be required to pay any award, order, or judgment rendered against the
losing client, whereas the traditional liability insurance company often has contracted to do just
that.

[D] Loans
In contrast to the aforementioned types of financing, loans must be repaid regardless of the final
disposition of the dispute. A client may receive a loan from his or her attorney or law firm or may
apply for a traditional loan from a bank or other financial institution. (16) The primary advantage of
a loan is that the client retains all management and control over the dispute. The disadvantage,
however, is that the client is unable to mitigate the risk of losing the case, because the loan must
be repaid regardless of the final disposition.

An attorney or law firm may also seek out a business loan in order to bridge the gap between the
current expenses of the attorney or law firm and the influx of cash expected from normal client fees
or successful contingency or conditional fee cases. (17) A business loan may contribute to general
operating funds or may underwrite particular open matters that the attorney or firm is handling. The
loan may be secured by physical assets of the firm or by expected return on the firm’s portfolio of
cases, also known as “portfolio financing” as discussed earlier in this Chapter.

[E] Assignment of a Claim

Assignment of claims may occur following a fundamental corporate change, such as a merger,
acquisition, or sale of assets, as well as through liquidation during bankruptcy, insolvency, or other
similar legal processes. (18) Another common method is the sale of the right to pursue a claim in
exchange for a monetary payment or other valuable assets in jurisdictions allowing such transfers.
(19) A familiar example is a debt collection agreement in which the original creditor sells the right to
collect the debt to a third-party debt collection agency that takes over the pursuit of the debtor. (20)
The original creditor may sell the debt claim for less than its original worth in exchange for an
immediate payment from the third-party debt collector. (21) The third-party debt collection agency
becomes the new creditor and assumes all the risk of being unable to collect the debt. (22) Another
example is third-party financing for class actions or mass claims, where the claimants either sell or
assign their claims to a non-profit association that will use third-party funding to pursue legal
actions or settlements on behalf of the class or group. (23) In classic third-party funding
arrangements in most jurisdictions, however, usually the client assigns some of the proceeds of the
successful claim to the funder, rather than the right to pursue the claim, in order to ensure
compliance with various laws and ethical rules in that jurisdiction.

[F] Classic Third-Party Funding in International Arbitration: Non-recourse Financing with

Repayment Contingent on Success
As mentioned earlier in this introduction, non-recourse financing, where repayment is contingent on
the client’s success in the dispute, is the quintessential scenario for third-party funding in
international arbitration. On its face, it resembles contingency financing by an attorney or law firm,
except that the funder is an outside entity such as a bank or financial institution. Such an institution
falls somewhere between an attorney and an insurance company in terms of ownership and
control over the dispute. The institution is not constrained by the same professional and ethical
rules as an attorney, so it can exercise more freedom in deciding the extent of its financial
commitment and, in some jurisdictions, it may be allowed to have day-to-day involvement in the
management of the case. (24) However, it retains far less control than a traditional liability
insurance company that effectively steps into the shoes of the insured and fully takes over the
management and settlement of the dispute.

In addition, banks and financial institutions may invest in law firms, generally, rather than invest in
a particular claim, when it is legal to do so under the laws and regulations of a particular
jurisdiction. (25)

§1.04 THE EFFECT OF THE TYPE OF FUNDER ON THE ATTORNEY-CLIENT RELATIONSHIP

It is important to note that the nature of the attorney-client relationship differs depending on
whether the funder is the attorney, a financial institution, or an insurance company. In the case of
attorney financing, the attorney-client relationship is a linear relationship in which the client retains
control and management of the case as though the client had self-financed the dispute.

Similarly, the client retains nearly the same level of control when a bank or other financial
institution is the funder. This is partly because the client, in most jurisdictions, must retain its
attorney separately from its funding agreement. In many jurisdictions, the funder must be cautious
with respect to how far it may intrude on the attorney-client relationship and the attorney’s
professional and ethical obligations to the client. (26) This three-way relationship might be aptly
illustrated by an equilateral triangle figure, in which the client-attorney and client-funder lines are
solid, and the line between the attorney and the funder is dotted. The dotted line indicates both that
the funder and attorney are working together at the inclination of their mutual client, and that they
are prevented from signing a separate contract defining their relationship to one another in light of
the attorney’s professional and ethical obligations to the client. (27) In many jurisdictions, the
funder is barred from being a concurrent client of the attorney and a named party to the underlying
dispute, except where it has purchased the claim outright from the original client, as described
above.
By contrast, under traditional liability insurance agreements, the insurance company is often a
concurrent client of the attorney. In some jurisdictions, the insurance company may single-
handedly hire and pay the attorney and may be a named co-party along with the insured party in
the dispute, which allows the insurance company to exercise nearly unlimited control over the
management of the case. An equilateral triangle would best illustrate this three-way relationship,
where solid lines represent the insurer-insured and insurer-attorney relationships and a dotted line
represents the insured-attorney relationship. This demonstrates that the insured has given up
nearly all of its rights to manage the attorney’s role in the case in exchange for indemnification from
the insurance company.

It should be noted that, as mentioned earlier, BTE and ATE insurers do not usually require the
client to relinquish as much control, partly because the insurer has not agreed to take on the
responsibility of paying any final judgment or award rendered in the case. (28) Thus, the practical
effect of BTE and ATE insurance is similar to funding by financial institutions, because the client
retains control over the case and may agree to share decision-making powers with the funder
regarding the cost and direction of the legal representation in jurisdictions where this practice is
legal. (29)

Figure 1 graphically represents the relationships described above, seen below. Solid lines indicate
contractual agreements, and dotted lines indicate working relationships without contractual
agreements.

As mentioned earlier in this introduction, these various funding relationships give rise to shifts in
the balance of power to manage and control the way in which the attorneys handle the dispute, as
illustrated in Figure 2, below. In situations where the client borrows money through a traditional
loan agreement or the attorney finances the representation, the client retains full control over its
case. By contrast, in situations where the claim is assigned or sold or where a traditional liability
insurance arrangement is involved, the client usually retains little or no control over the direction of
the case. Third-party funding through a financial institution or through ATE or BTE insurance allows
the party to retain full control over its attorneys and, in some jurisdictions, allows the funder to
share in the management of the case through consultation with the client in order to reach a mutual
goal of financial gain (or avoidance of loss). As mentioned earlier, this final arrangement is the
quintessential scenario representing third-party funding in international arbitration. In Figure 2,
below, these funding options are grouped according to the amount of management and control
over the case exercised by the client and the funder.

Recently, some funders have entered into joint ventures or purchased ownership interests in their
underlying clients. Other funders have invested in existing law firms or started their own law firms.
The “Alternative Business Structures” (ABS) laws in the U.K. have made the latter option possible.
On the whole, these phenomena are too new to assess their impact . It will remain to be seen
whether funder-client or funder-law firm corporate combinations will become more prevalent in the
future. (30)

§1.05 THE PRACTICAL MECHANICS OF THIRD-PARTY FUNDING

[A] The Impetus for the Industry
The leading jurisdictions worldwide—in terms of volume and sophistication of third-party funding
arrangements—are Australia, the U.K., the U.S., and Germany. Although there is some debate
about the exact start of third-party funding, commercial third-party funding industry has existed,
arguably, for about three decades in Australia, for about two decades in Germany, for about
sixteen years in the U.K., and for about a decade in the U.S. (31) In the past, third-party funding
was a smaller niche market, but in recent years, the demand for third-party funding services in
these and other jurisdictions has grown exponentially.

There are four main forces driving the sharp increase in the demand for dispute financing. The first
force is the public policy ideal of increasing access to justice for claimants that otherwise could not
afford to pursue a meritorious claim individually or through class actions or mass claims. (32)
Another force is the slew of companies seeking a means to pursue a meritorious claim while also
maintaining enough cash flow to continue conducting business as usual. (33) A third force is the
worldwide market turmoil and uncertainty following the 2008 global financial crisis, which has
inspired hedge funds, banks, and other financial investors to seek investments that are not directly
tied to or affected by the volatile and unpredictable financial markets. The global economic
slowdown has also inspired companies facing bankruptcy or insolvency to seek funding to pursue
claims that may generate cash flow for their businesses or mitigate the risk of losing a “bet-the-
company” dispute. (34) The fourth, newly-developed force is the demand for third-party funding as
corporate finance, whereby corporate entities that have plenty of cash reserves available to pay for
dispute resolution are nevertheless choosing to enter into bespoke arrangements with traditional
third-party funders that more resemble venture capital or other equity financing structures as a
means of raising capital for general operating expenses or expansion to meet new business goals.
(35)

For funders and other investors, international arbitration is a particularly attractive area of
investment because of the high values of the claims, the speed of the proceedings, the potential for
greatly reduced evidentiary costs, the greater predictability of the outcome than in litigation, the
industry expertise of the decision-makers, and the high enforceability of arbitration awards. With
respect to enforceability, there are currently 157 jurisdictions in which a party can enforce an award
through the 1958 United Nations Convention on the Recognition and Enforcement of Foreign
Arbitral Awards (the “New York Convention”), which is the main vehicle for enforcing arbitral
awards worldwide. (36) These and other forces will likely lead to further increases in the supply of
willing third-party funders and the demand from clients who are either unwilling or unable to finance
their own disputes.

[B] Basic Mechanics of Funding Agreements

Usually, the funder bargains directly with the client to provide funding for the client’s legal
representation in exchange for a portion of the expected return or payment of a BTE or ATE
insurance premium. A typical funding agreement would include methods for calculating the
maximum amount of money the funder will contribute to the legal representation, the portion of the
return that the funder would expect to receive upon success, and the maximum adverse costs
award that the funder would pay, if any, in the event that the client loses the case. These
calculations are often based on a variety of factors, which may include a percentage of the
recovery, a multiple of the amount of capital invested, or the anticipated time expected to receive
the recovery. (37)

Institutional investors generally classify dispute investments as specialized assets. While a market
for public trading of claim bundles, securities, or derivatives has not yet developed, a few major
funders have successfully raised immense amounts of capital through an initial public offering. (38)
Undoubtedly, this has whetted investors’ appetites for the complex dispute-related investment
products that the market will likely offer in the future.

Chapter 2 addresses the mechanics of funding agreements in greater detail.

§1.06 ETHICAL ISSUES REGARDING THIRD-PARTY FUNDING

[A] Overview
Chapter 3 takes a historical look at how courts and legislative bodies around the world have thus
far handled some of the initial ethical issues and concerns that affected the advent of third-party
funding at its genesis. The future growth and development of the third-party funding industry will
largely depend on the direction of the jurisprudence, or lack thereof, in the jurisdictions where the
practice is currently thriving or beginning to manifest itself. (39) Much of this jurisprudence relates
to the attorneys’ professional and ethical responsibilities and the procedural safeguards built into
the sophisticated judicial systems in economically advanced nations. (40) These rules and
safeguards expressly apply in the context of litigation, and it is unclear whether many or few
jurisdictions will decide to apply these rules to third-party funding agreements in international
arbitration matters. As the industry matures, this controversy will continue to percolate just below
the surface, but the authors predict that it will bubble over within the next few years, if the industry
grows large enough to force key jurisdictions to decide whether to restrict or regulate the practice.

An added layer of complexity in international arbitration is that the funding agreement usually is
unrelated to the merits of the underlying dispute. An arbitral tribunal does not have the authority to
rule on a contract that is unrelated to the subject matter of the dispute, unless the parties submit
that contract to the tribunal for consideration. In addition, the funding agreement must contain an
arbitration clause, or be subject to a subsequent arbitration agreement concluded by the exact
same parties, in order for an arbitral tribunal to have jurisdiction over any disputes over the funding
agreement. Furthermore, if the funding agreement is unrelated to the general merits of the dispute,
then one of the parties must raise an issue relating to the funding agreement in order for the
arbitral tribunal to have jurisdiction over the matter. Otherwise, the arbitral tribunal would be acting
ultra petita if it issued an order or award relating to the funding agreement, regardless of the
existence of an arbitration clause within the funding agreement. (41)

All of these unique characteristics of international arbitration taken together would seem to compel
all jurisdictions worldwide to allow third-party funding in international arbitration. However,
international arbitration also requires parties and arbitral tribunals to comply with mandatory
procedural laws of the seat of arbitration, and a court at the seat of arbitration may decide to
impose its view on the validity or desirability of the third-party funding agreement during a
proceeding to recognize, enforce, annul, vacate, or set aside the award. (42) In addition, a court at
the place of enforcement or at the seat may decide that the existence of a funding agreement is a
public policy issue that is relevant to its decision regarding whether to recognize, enforce, annul,
vacate, or set aside an award under the New York Convention or another enforcement
mechanism. (43) Overall, none of these situations has arisen frequently enough to set a trend or
develop universal norms on this issue yet, but some jurisdictions have taken the position that a
third-party funding agreement is within the purview of a court that the parties have voluntarily
consulted to recognize, enforce, annul, vacate, or set aside their arbitral award.

[B] Major Ethical Issues

The ethical doctrines that are most influential to the continued existence and viability of the third-
party funding industry are those that affect whether a third-party funding agreement would be valid
and enforceable in a particular jurisdiction. Maintenance, champerty, and usury are the most
widespread and long-standing doctrines that may serve to constrain the existence or validity of any
individual third-party funding agreement. (44)

[1] Maintenance and Champerty

The doctrines of maintenance and champerty originated in the ancient Greek and Roman legal
systems, evolved in the common law system of England during feudal times, and spread to other
jurisdictions largely through the far-reaching British Empire. (45) Some nations deem these
doctrines obsolete and prefer newer ones aimed at preventing frivolous and fraudulent claims.
Others have revived the doctrines of maintenance and champerty in recent years and used them
as a lens through which they evaluate the desirability and the legality of third-party funding
agreements. (46)

Various jurisdictions around the globe define maintenance differently. However, a broad-based
definition would be that maintenance is the act of providing financial assistance to a party to a
dispute without taking an interest in the outcome and without an expectation of receiving a share of
that party’s recovery. (47) Champerty is providing the same assistance with the expectation of
receiving a share of any money recovered if the party wins. (48) Maintenance is an umbrella term
encompassing champerty as a type of maintenance in which the funder seeks to profit from the
client’s successful claim. (49)
Many jurisdictions in the nineteenth and twentieth centuries outlawed acts of maintenance or
champerty as violations of the widespread public policy against stirring up excessive litigation and
frivolous claims and as a safeguard against the extortion and oppression of indigent clients by
wealthy funders. (50) In the twenty-first century, however, many jurisdictions are reexamining these
doctrines to consider whether they are still useful and relevant given the myriad of other
safeguards against fraud and abuse that are embedded in legal systems today. (51) In some
jurisdictions, these doctrines are being reaffirmed, while in others they are being abolished or
redefined to carve out an exception with respect to third-party funding. (52)

[2] Usury
Usury is the act of charging or receiving a greater interest rate or rate of return on a loan of money
than the law allows. (53) Historically, usury laws were intended to protect consumer borrowers
from predatory lending or otherwise excessive interest payments. (54) The presence of a loan is
the key element of the definition of usury that raises potential issues with respect to third-party
funding, because courts in various jurisdictions disagree as to whether third-party funding
constitutes a loan. (55)

On the one hand, most third-party funders would only agree to pay for a client’s representation
after they have calculated with reasonable certainty that they will likely recover the amount of their
investment plus some extra funds. The funder’s expectation of a return of its capital, plus some
extra funds as profit, resembles a lender’s expectation of the return of the initial loan amount plus
interest. On the other hand, in third-party funding, the client’s obligation to repay the funds is
conditioned on recovering money in the case. Thus, unlike a loan, the client does not have an
absolute obligation to repay the funder or provide the funder with profit, if the client does not
recover any funds. Whether a third-party funding agreement is classified as a loan in a particular
jurisdiction is the key to determining whether the doctrine of usury applies to third-party funding. If
the doctrine of usury applies to third-party funding in a particular jurisdiction, then it would likely
make dispute funding a much less attractive investment option in that jurisdiction.

§1.07 THE AGGREGATE EFFECTS OF THIRD-PARTY FUNDING

Many other practical issues relate to the potential aggregate effects of allowing third-party funding
to flourish widely. Below is a list of aggregate issues commonly raised in discussions about third-
party funding:

(a) the possible waiver of the attorney work product doctrine when the client discloses
privileged documents to a potential third-party funder; (56)
(b) the potential waiver of the attorney-client privilege when the client discloses privileged
information to a potential third-party funder; (57)
(c) the potential encouragement of non-meritorious claims;
(d) the possible discouragement of settlement in favor of fighting for a larger recovery; (58)
(e) the potential use of the legal system for financial speculation; (59)
(f) the possible future bundling, securitization, and trading of legal claims; (60)
(g) the risk that the funder may put its own interests ahead of the client’s interests; (61)
(h) the potential conflicts of interest that may arise if the funder meddles in the attorney-client
relationship; (62)
(i) whether the existence of a funding agreement must or should be disclosed to the decision-
maker or the opposing party; (63) and
(j) whether the funding of investment arbitration claims on the side of the investor or defenses
on the side of the host State comports with the spirit of the investor-State dispute resolution
system. (64)
§1.08 THIRD-PARTY FUNDING IN ARBITRATION RULES AND GUIDELINES
In the years since the first edition of this book was published, a few institutions have addressed
third-party funding in international arbitration expressly in the context of disclosure.

For example, the International Bar Association (IBA) issued revised Guidelines on Conflicts of
Interest in International Arbitration in November 2014. (65) The revised General Standard 6(b) and
the Explanation to General Standard 6(b) include express references to third-party funding,
including broadly defining a third party funder as an entity that has a “direct economic interest in
the award,” and include a requirement that arbitrators disclose connections to funders when
relevant to the case. (66) The IBA also modified the Non-Waivable Red List, section 1, and the
Orange List, section 3.4, to include several references to “an entity that has a direct economic
interest in the award to be rendered in the arbitration.” This is interpreted to include third-party
funders, as well as other entities that may be financing a party’s arbitration costs. In order to
determine whether the arbitrator’s connection to a funder may be relevant, General Standard 7(a)
and the Explanation to General Standard 7(a) also gave the arbitrator the power to order the
parties to disclose their funding to the arbitrator. Thus, indirectly, the IBA Guidelines are the first
official attempt to put a duty on parties to disclose third-party funding in all cases as a matter of
procedure. It is important to note, however, that the IBA Guidelines are purely voluntary, and many
parties do not reference the IBA Guidelines in their arbitration agreements. However, this move by
the IBA may perhaps have inspired other arbitration institutions, as discussed below, and even
state parties to investment treaties, as discussed in Chapter 14, to consider addressing disclosure
of third-party funding.

With respect to guidance from arbitral institutions, in December 2015, the International Chamber of
Commerce (ICC) Commission on Arbitration issued a Report entitled Decisions on Costs in
International Arbitration that included some guidance to arbitrators regarding third-party funding.
(67) The ICC Commission on Arbitration’s Report defines a third-party funder as an “independent
party that provides some or all of the funding for the costs of a party to the proceedings (usually the
claimant), most commonly in return for an uplift or success fee if successful.” (68) The Report then
provides the following guidance to tribunals: “Where a tribunal has reason to believe that third-
party funding exists, and such funding is likely to impact on the non-funded party’s ability to recover
costs if successful, the tribunal might consider ordering disclosure of such funding information as is
necessary to ascertain that the process remains effective and fair for both parties.” (69) The Report
also provides a worldwide survey of laws regarding disclosure of third-party funding. (70)

The ICC Court of Arbitration’s Note to parties and arbitral tribunals on the conduct of the arbitration
under the ICC Rules of Arbitration states that relationships that arbitrators have with any “entity
having a direct economic interest in a dispute or an obligation to indemnify a party for the award”
should be taken into account. (71) Notably, it appears that the ICC Court of Arbitration adopted a
definition of third-party funder that closely resembles the definition in the IBA Guidelines.

While these three definitions may be slightly different, the overarching theme is the same and
appears to leave additional regulation to individual jurisdictions.

Other arbitral institutions are also beginning to address third-party funding. For example, CIETAC
Hong Kong Arbitration Center has issued draft guidelines for public comment on third-party funding
in international arbitrations under their rules. (72) As of the time of this writing, the guidelines have
not been finalized. The Singapore International Arbitration Center (SIAC) recently published a
practice note titled “On arbitrator conduct in cases involving external funding.” (73) The
International Centre for Settlement of Investment Disputes (ICSID) is starting the process of
revising its arbitration rules and has expressed an intent to address third-party funding in its
revisions. (74)

Finally, a Task Force on Third-Party Funding in International Arbitration was constituted in 2013 to
study the impact of third-party funding in international arbitration and produce a useful Report. The
Task Force is jointly organized by the International Council for Commercial Arbitration (ICCA) and
Queen Mary University of London School of Law (Queen Mary). The ICCA-Queen Mary Task
Force on Third-Party Funding describes its mission as follows:

The Third-Party Funding Taskforce [sic] will systematically study and make recommendations
regarding the procedures, ethics, and related policy issues relating to third-party funding in
international arbitration. The Task Force is comprised of representatives drawn from among all
relevant stakeholders and interested members of ICCA. Its work will be presented in a series of
White Papers and a number of public colloquia to be hosted at Queen Mary’s Centre for
Commercial Law Studies, London. (75)

The Task Force is preparing a Report that addresses key issues in third-party funding in
international arbitration, including defining third-party funding, suggesting best practices for those
involved in third-party funding arrangements, avoiding and managing conflicts of interest that may
arise, protecting the client’s confidential information and evidence under the attorney-client
privilege or similar doctrines based on local law, and advising arbitral tribunals and institutions on
how to approach allocating costs when a third-party funder is involved in the case.

The Task Force is currently wrapping up its work and finalizing its report for publication. A public
version of the working draft of the ICCA-Queen Mary Task Force Report was presented and
discussed during a joint conference hosted by the Institute for Transnational Arbitration (ITA) and
the American Society of International Law (ASIL) on April 12, 2017 in Washington, D.C., USA
entitled “Third-Party Funding in International Arbitration: Legal and Ethical Considerations:
Commentary on the Report of the ICCA/Queen Mary Task Force.” (76) The Task Force also invited
the public to comment on its draft Report in September and October 2017. The Task Force is
scheduled to conclude its work and present its final Report at the ICCA Congress in Sydney,
Australia on April 15-18, 2018. ICCA will also publish the final Report of the Task Force.

§1.09 SCOPE OF THIS BOOK

This book focuses mainly on third-party funding arrangements in which the funder is a financial
institution or a provider of BTE or ATE insurance, rather than the attorney or law firm representing
the client in the case. This book analyzes and assesses the legal regime in a variety of countries
based upon legislation, judicial opinions, ethics opinions, and practitioner anecdotes describing the
state of third-party funding in that jurisdiction. Unfortunately, in many jurisdictions, the cases that
shape the legal regime involve what went wrong with a funding agreement, rather than what
worked well. Since even the existence of a third-party funding agreement in a dispute is often kept
secret, it can be difficult to glean the specifics of successful funding agreements. The authors have
pieced together a snapshot of third-party funding in various jurisdictions from whatever information
is readily available.

Whole chapters are dedicated to the jurisdictions with the most activity and jurisprudence relating
to third-party funding, such as Australia, the U.K., the U.S., Germany, the Netherlands, Canada,
and South Africa. Regional overviews are presented for Continental Europe, Asia, Latin America,
the Caribbean, the Middle East, and Africa because there seems to be little or no third-party
funding in those regions. Chapter 2 addresses the mechanics of funding agreements. Chapter 3
provides an overview of the ethical framework constraining third-party funding in various
jurisdictions, such as the doctrines of maintenance, champerty, and usury, as well as attorney
professional ethics rules. A new Chapter 14 addresses third-party funding in investor-state
arbitration, which has experienced a dramatic rise in prevalence in the years since the first edition
of this book was published. The book concludes with a few predictions regarding the future of the
third-party funding industry worldwide. (77)

References
1)
Maya Steinitz, Whose Claim Is This Anyway? Third-Party Litigation Funding, 95 Minn. L. Rev.
1275-1276 (2011).
2)
Ibid. 1277, 1302.
3)
Ibid. 1302.
4)
Selvyn Seidel, The Third Man, The Eur. Law. 106, 5 (May 2011).
5)
Douglas R. Richmond, Other People’s Money: The Ethics of Litigation Funding, 56 Mercer L. Rev.
649-650 (2005).
6)
Steinitz, supran. 1, at 1295-1296.
7)
Ibid.
8)
Ibid.
9)
Ibid.
10)
Bristows, Guide to Litigation Costs Funding and Insurance, (last accessed Oct. 31, 2011);
Raconteur Media, Raconteur on Legal Efficiency, The Times (Supplement), 7-9, (Mar. 25, 2010),
http://np.netpublicator.com/netpublication/n89269938.
11)
Steinitz, supran. 1, at 1292-1293.
12)
Bristows,supran. 10.
13)
Bristows,supran. 10.
14)
Richmond, supran. 5, at 651-652, 659-664.
15)
Steinitz, supran. 1, at 1295-1296.
16)
Richmond, supran. 5, at 650-651.
17)
Ibid. 650.
18)
Steinitz, supran. 1, at 1296-1299.
19)
Ibid.
20)
Ibid.
21)
Ibid.
22)
Ibid.
23)
Nate Raymond, Attorneys Explore Third-Party Funding in Commercial Disputes, N.Y.C. L. J.
(Online), http://www.newyorklawjournal.com/PubArticleNY.jsp?id=1202459123832, Jun. 3, 2010;
Steinitz, supran. 1, at 1278, 1296-1299.
24)
Steinitz, supran. 1, at 1294.
25)
Richard Lloyd, The New, New Thing, The Am. Law. (Supplement), 22-26 (Jun. 1, 2010).
26)
Fulbrook Management LLC, Investing in Commercial Claims Nutshell Primer 9-10 (2d. ed.), Mar. 3,
2011, paper given at the Fordham Law School Roundtable on Third-Party Funding of International
Arbitration Claims: The Newest “New New Thing” (New York, Jun. 15, 2011); Raconteur, supran.
10, at 7-9; Steinitz, supran. 1, at 1324-1325; Richmond, supran. 5, 651-652, 659-664.
27)
Richmond, supran. 5, at 651-652, 659-664; Fulbrook Management LLC, supran. 26, at 9-10;
Steinitz, supran. 1, at 1276.
28)
Bristows, supran. 10.
29)
Ibid.
30)
For a detailed discussion of the legal and ethical issues surrounding funder-client and funder-law
firm combinations, see Victoria Shannon Sahani, Reshaping Third-Party Funding, 91 Tul. L. Rev
405 (2017).
31)
Selvyn Seidel, Investing in International Arbitration Claims—Burford Group, Iberian Law, (Jan. 4,
2011), http://www.iberianlawyer.com/dispute-resolution/3439-investing-in-international-arbitration-
claims-.
32)
Fulbrook Management LLC, supran. 26, at 22.
33)
Raconteur, supran. 10, at 7-9; Steinitz, supran. 1, at 1275-1276.
34)
Doug Jones, Third-Party Funding of Arbitration, paper given at Hot Topics in International
Arbitration at SJ Berwin (London, Sep. 22, 2008), 7; Ralph Lindeman, Third-Party Investors Offer
New funding Source for Major Commercial Lawsuits, vol. 0, no. 42 The Bureau of National Affairs
(BNA) Daily Report for Executives, 1-8 (Mar. 5, 2010); Raconteur, supran. 10, 7-9; Steinitz, supran.
1, at 1283-1284.
35)
Christopher P. Bogart, The European Arbitration Review 2017: Third-Party Financing of
International Arbitration, Global Arb. Rev., Oct. 14, 2016,
http://globalarbitrationreview.com/insight/the-european-arbitration-review-2017/1069316/third-
party-....
36)
Jones, supran. 34, at 9-10; Clifford Hendel, Third Party Funding, http://latinarbitrationlaw.com/third-
party-funding, Oct. 1, 2010; At the time of this writing, 157 state and quasi-state parties have
signed the New York Convention. For a current list of signatories to the New York Convention,
seehttp://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/NYConvention_status.html.
37)
Selvyn Seidel, PowerPoint, The Future of Third Party Funding: A Look into the Next Five Years,
presentation given at the Fordham Law School Roundtable on Third Party Funding of International
Arbitration Claims: The Newest “New New Thing” (New York, Jun. 15, 2011).
38)
Steinitz, supran. 1, at 1335.
39)
Sara Randazzo, Third Party Funding of Lawsuits Gains Ground but Raises Eyebrows, Daily J.,
Sep. 10, 2010; Louis M. Solomon, “Perspective: Third-Party Litigation Financing: It’s Time to Let
Clients Choose,” N.Y.C. L. J. (online), (Sep. 13, 2010),
http://www.newyorklawjournal.com/PubArticleNY.jsp?id=1202471825734.
40)
Solomon, supran. 39; Steinitz, supran. 1, at 1291-1292.
41)
For a discussion of the ultra petita doctrine, see, International Commercial Arbitration: Important
Contemporary Questions, International Council for Commercial Arbitration Congress series no. 11,
226-240 (Albert Jan van den Berg ed. Alphen aan den Rijn: Kluwer Law International, 2002).
42)
Seidel, supran. 37.
43)
Jern-Fei Ng, The Role of the Doctrines of Champerty and Maintenance in Arbitration, 76(2)
Arbitration 2010 208-213 (Sweet and Maxwell, May 2010).
44)
Richmond, supran. 5, 652-655.
45)
Ari Dobner, Litigation for Sale, 144 U. Pa. L. Rev. 1543-1546 (April 1996); Ng, supran. 43, at 208-
213; Max Radin, Maintenance By Champerty, 24 Cal. L. Rev. 48, 49, 52-54 (1935);
Steinitz,supran. 1, at 1275-1276.
46)
Lloyd, supran. 25, at 22-26; Ng, supran. 43, at 208-213; Raymond, supra 23; Richmond, supran.5,
at 652-655.
47)
John Beisner, Jessica Miller & Gary Rubin, Selling Lawsuits, Buying Trouble: Third-Party Litigation
Funding in the United States, released by the U.S. Chamber of Commerce Institute for Legal
Reform, (October 2009); Steven Garber, Alternative Litigation Financing in the United States:
Issues, Knowns and Unknowns, released by the RAND Institute for Civil Justice Law, Finance, and
Capital Markets Program,
http://www.rand.org/pubs/occasional_papers/2010/RAND_OP306.sum.pdf (2010); Jones, Third-
Party Funding of Arbitration (paper), 10-12; Doug Jones, supran. 34; Ng, supran. 43; Richmond,
supran. 5, at 652-655.
48)
Ari Dobner, supran. 45.
49)
Ari Dobner,supran. 45.
50)
Richmond, supran. 5, at 651-652; Steinitz, supran. 1, at 1288.
51)
Ng, supran. 43, at 208-213; Steinitz,supran. 1, at 1278-1282.
52)
Ng, supran. 43, at 208-213; Richmond, supran. 5, at 655-660; Steinitz,supran. 1, at 1289.
53)
Richmond, supran. 5, at 665.
54)
Ibid. 665-667.
55)
Ibid.
56)
Michele DeStefano Beardslee, Taking the Business Out of Work Product, 79 Fordham L. Rev.
1869-1937 (April 2011).
57)
Michele DeStefano Beardslee, The Corporate Attorney-Client Privilege: Third Rate Doctrine for the
Third Party Consultants, 62 S. Methodist U. L. Rev. 727-802 (2009).
58)
Beisner, Miller & Rubin, supran. 47; Gary Rubin (on behalf of the U.S. Chamber Institute for Legal
Reform), A Critical View of Third-Party Funding: Lessons from Civil Litigation (draft as of Jun. 2,
2011), paper given at the Fordham Law School Roundtable on Third-Party Funding of International
Arbitration Claims: The Newest “New New Thing” (New York, Jun. 15, 2011).
59)
Jones, supran. 34, at 3.
60)
Steinitz, supran. 1, at 1318-1322, 1335.
61)
Jones, supran. 34, 8.
62)
Steinitz, supran. 1, at 1323-1325.
63)
Seidel, supran. 37.
64)
Ibid.
65)
IBA Guidelines on Conflicts of Interest in International Arbitration (Oct. 23, 2014), available at
http://www.ibanet.org/Publications/publications_IBA_guides_and_free_materials.aspx.
66)
IBA Guidelines on Conflicts of Interest in International Arbitration, Oct. 23, 2014, Explanation to
General Standard 6(b), p. 14.
67)
See ICC Commission on Arbitration, Decisions on Costs in International Arbitration—ICC
Arbitration and ADR Commission Report (Dec. 1, 2015), available at
http://www.iccwbo.org/Advocacy-Codes-and-Rules/Document-centre/2015/Decisions-on-Costs-in-
Internatio....
68)
ICC Commission Report: Decisions on Costs in International Arbitration, footnote 44—Offprint from
ICC Dispute Resolution Bulletin 2015, Issue 2.
69)
Id., at para. 89.
70)
Id., at 45-46.
71)
See ICC Court of Arbitration, Note to parties and arbitral tribunals on the conduct of the arbitration
under the ICC Rules of Arbitration (Mar. 1, 2017 version), para. 24,
https://iccwbo.org/publication/note-parties-arbitral-tribunals-conduct-arbitration.
72)
James Rogers, Third-Party Funding for Arbitration in Hong Kong: CIETAC HKAC’s Draft
Guidelines on Third-Party Funding for Arbitration, in Norton Rose Fulbright, International arbitration
report Issue 7—September 2016, http://www.nortonrosefulbright.com/files/international-arbitration-
report-issue-7-142408.pdf.
73)
Singapore International Arbitration Centre Practice Note, PN—01/17 (Mar. 31, 2017), Administered
Cases under the arbitration rules of the Singapore International Arbitration Center, On Arbitrator
Conduct in Cases Involving External Funding, Mar. 31, 2017,
http://www.siac.org.sg/images/stories/articles/rules/Third%20Party%20Funding%20Practice%20No
te%2031%....
74)
See Lacey Yong, ICSID to Target 16 Areas for Rule Reform, Global Arb. Rev., May 9, 2017,
http://globalarbitrationreview.com/article/1141282/icsid-to-target-16-areas-for-rule-reform;ICSID
secretary general’s top priorities for reform, Global Arb. Rev. May 3, 2017,
http://globalarbitrationreview.com/article/1140847/icsid-secretary-generals-top-priorities-for-refor...
(“stakeholders want to see … rules governing disclosure of third-party funding and its impact on
security for costs”).
75)
ICCA, “Third-Party Funding,” http://www.arbitration-icca.org/projects/Third_Party_Funding.html.
See also Leo Szolnoki, ICCA and Queen Mary Examine Third-Party Funding, Global Arb. Rev.,
Oct 11, 2013, http://globalarbitrationreview.com/article/1032714/icca-and-queen-mary-examine-
third-party-funding.
76)
One of the co-authors of this book is a member of the ICCA-Queen Mary Task Force. Since the
Task Force has not yet finalized its Report, the Authors have decided not to discuss the details of
the Task Force Report in greater detail in this book. Further information about the work of the Task
Force is available on the ICCA website here: http://www.arbitration-
icca.org/projects/Third_Party_Funding.html.
77)
Seidel, supran. 37.