Third-party funding blooms in Asia

It is an undeniable reality that dispute parties have opened their hearts to financial services from domestic and international funders. This is particularly so in international investment arbitration. Third-party funding (TPF) is booming in the litigation and arbitration sectors. It has noticeably spread from the West to take root in Singapore, China and other Asian countries.

While Singapore has gone through a progressive legislative journey to relax the regulation and prohibition of TPF, legislative evolution is much less evident in mainland China. China has no existing law regulating TPF, although the topic inspired much discussion during the ongoing amendment of the Arbitration Law.

In practice, however, TPF has been welcomed into the rules of several Chinese arbitration institutions. Continually emerging funders, as well as their dynamic marketing and funding activities, are also valid testament to the prospering of TPF in China.

TPF rules

In 2017, the Singapore International Arbitration Centre (SIAC) and the China International Economic and Trade Arbitration Commission (CIETAC) both responded to this trend by incorporating TPF provisions in their revised international investment arbitration rules. In 2019, the Beijing International Arbitration Centre (BIAC) also introduced article 39 to its International Investment Arbitration Rules of 2019, explicitly addressing TPF.

Apart from the development in institutional rules, TPF is seeping into commercial arbitration. For instance, the Hong Kong International Arbitration Centre (HKIAC) adopted TPF rules for commercial arbitration proceedings in 2018. The SIAC and CIETAC stayed on par by recently issuing revised commercial arbitration rules.

On 22 August 2023, the SIAC released its public consultation draft of rules, notably incorporating guidelines for TPF. In parallel, the CIETAC unveiled its updated arbitration rules on 5 September 2023, with an effective date of 1 January 2024, with article 48 providing clear directives on TPF.

There are noticeable differences between the SIAC and CIETAC rules. For example, the CIETAC rules impose a more stringent duty of disclosure on parties. By default, they must provide a broader range of information including facts relating to the existence of TPF arrangements (which could mean the content of the TPF agreement), the economic interests of the third-party funder, and the name and address of the funder.

Under the SIAC rules, the default disclosure obligation is narrower and only relates to the existence of a TPF agreement and the funder’s identity. The funder’s interest in the arbitration outcome would only be disclosed upon the tribunal’s order.

The tribunal enjoys broader discretion under the CIETAC rules. It is empowered to request parties disclose “relevant information”, which is open-ended and subject to the tribunal’s discretion.

In contrast, the SIAC rules are more specific and limited, and a tribunal can only order disclosure of “details of the third-party funder’s interest in the outcome of the proceedings, and whether it has committed to undertaking adverse costs liability”.

The SIAC rules introduce a requirement that, once a tribunal has been constituted, parties are prohibited from obtaining additional TPF that might lead to conflicts of interest. This measure is designed to ensure stability of the arbitral tribunal members and efficiency of the arbitration process.

Given the proliferation of funding institutions, maintaining the composition of the tribunal becomes a particular concern. There is no such limitation specified in the CIETAC rules.

Emerging Chinese funders

While international funders – such as Burford Capital, Omni Bridgeway, and Harbour Litigation Funding – have become known to many, several Chinese funders are rapidly maturing along the practice, engaging zealously in domestic and Asian-wide funding activities.

They include Hou Zhu (Hold Capital) and Ding Song (DSLC). With Chinese law remaining silent on TPF, these emerging Chinese funders are sailing in unchartered waters and their activities are subject to, and guided by, among others, industrial practice, code of conduct for lawyers (where applicable), and legislation in the place where the funding activities are carried out.

Recent practice

In recent years, Chinese courts have exhibited a more favourable and supportive stance towards the use of TPF in arbitration proceedings. In Case No. (2022) Jing 04 Min Te No. 368, the Chinese court admitted the validity of a TPF agreement in the arbitration proceeding, recognising that the parties’ choice to engage third-party funders was well within their legal rights.

The court further considered whether TPF breached the principle of confidentiality in arbitration proceedings. It held that the fundamental purpose of arbitration confidentiality was to avoid public disclosure of case details, but that this did not necessarily prohibit certain individuals, including third-party funders involved in the arbitration, from gaining knowledge of the case.

Despite this, the landscape of TPF in China is not without its challenges. Chinese judicial practice has demonstrated disparities within the realms of litigation funding. For instance, in Case No. (2021) Hu 02 Min Zhong No. 10224, the court denied the legality of the TPF agreement for the funding of a lawsuit, citing concerns about these agreements conflicting with public order and good morals. This particular decision was met with some criticism and should not be viewed as conclusive in rejecting TPF in litigation. Nevertheless, it does pose a setback to the advancement of the practice.

Unfavourable UK development

While TPF is booming across Asia, a recent UK judicial decision considerably set back the trend and caused concerns to the TPF community. In Paccar et al v Competition Appeal Tribunal et al (2023), the UK Supreme Court overturned the findings of lower courts and decided that a TPF agreement providing for a funder’s economic interest in the outcome of the case fell under the broad legislative definition of “claims management services” and therefore became an unenforceable “damages-based agreement”.

As correctly pointed out in a relevant Wolters Kluwer article, this case should not be able to stop the global wheels of TPF, and the prospects remain appealing. TPF under proper regulation is, and should be, a great tool affording parties’ access to justice in an uncertain world.

Mariana Zhong is a partner and Wu Ke is an associate at Hui Zhong Law Firm:
mariana.zhong@huizhonglaw.com | wuke@huizhonglaw.com