Third-party funding in post-pandemic era

Third-party funding (TPF) is no longer new or a foe to the international arbitration community. Rather, it has gained quite some momentum in several common law countries where it was historically prohibited due to doctrines of maintenance and champerty.

While civil law countries such as China do not have TPF-related legislation, the market tends to interpret the legal vacuum as tacitly permitting TPF in both litigation and arbitration matters.

The rising trend of TPF in international arbitration is driven by multiple factors, including commercial management of capital fluidity and allocation of risks in the uncertainty of arbitration outcomes. Of course, TPF is welcomed by claimants and respondents with counterclaims who are in constrained financial situations.

The latest proliferation of TPF is also partly due to businesses looking for a quick resolution to disputes piled up during the pandemic, without further draining their already tight cash flow.

However, TPF was historically prohibited for justifiable reasons, and even today it is not free of deficiencies such as potential conflicts of interest between the funder and interested parties, potential influence over (or manipulation of) the arbitration proceedings, or disruption of potential settlement that would otherwise be achieved without TPF.

In this context, many countries/regions and arbitration institutions adapted by enacting or amending domestic laws or updating institutional arbitration rules to better regulate TPF and, more importantly, cater to user needs and boost the pro-arbitration image of their jurisdiction.

Interestingly, availability of TPF has become an important factor in choosing a seat of arbitration. In a 2021 international arbitration survey, 8% of users recognised “third-party funding permissible in the jurisdiction” as a factor making that seat more attractive.

Asian approach

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  Striving to maintain its status as an international commercial dispute resolution hub, Singapore enacted a new amendment to the Civil Law Act (CLA) in 2017, paving the way for permitting TPF in its international arbitration and related proceedings. Under the CLA, third-party funding agreements are valid and enforceable if concluded with a “qualifying third-party funder”, further defined as a funder with paid-up share capital of at least SGD5 million (USD3.6 million), or equal amount in managed assets.
  Since 28 June 2021, Singapore has further expanded permissible fields for funding to domestic arbitration and court proceedings before the Singapore International Commercial Court.

• Hong Kong. Hong Kong’s Arbitration and Mediation Legislation (Third-Party Funding) (Amendment) Ordinance, 2017, effective from 1 February 2019, allows TPF in domestic and international arbitrations (including court-related and mediation-related proceedings), but not litigation. Funded parties are required to disclose existence of the financing agreement, as well as the name of the third-party funder, to the arbitration institution and other parties involved in the arbitration.
  A notable recent change was the Arbitration and Legal Practitioners Legislation (Outcome Related Fee Structures [ORFS] for Arbitration) (Amendment) Ordinance 2022, enacted on 30 June 2022, lifting the ban on outcome-related fee structures in arbitration and related court procedures, and offering users more flexible and diversified fee arrangements. The ORFS ordinance, together with the TPF ordinance, will appeal to international arbitration users and maintain Hong Kong’s competitiveness as a leading arbitration seat.

• Mainland China. The laws of mainland China are silent on TPF. Unlike Singapore or Hong Kong, China does not have a history of prohibiting TPF. Parties are allowed to enter into outcome-related fee agreements, i.e., contingency fees, which to some extent resemble TPF in that a party’s lawyer fees are mostly or entirely invested by a lawyer through his/her representation, receiving a return based on the outcome of the case. Critics may argue that there are ethical issues, since the lawyer represents the client with financial interests in the outcome.
  Noticeably, Chinese arbitration institutions like CIETAC and BAC have laid down their rules on TPF in investment arbitration, actively working on aligning with international arbitration practice.

• Several arbitration institutions have tailored their own arbitration rules and attuned to the needs of arbitration users to regulate TPF in practice, while also bringing it to the forefront.

The following table compares rules regarding TPF among several renowned arbitration institutions:

Pursuers of TPF in international arbitration need to take a cautious approach and are advised to select reliable and professional funders, thoroughly evaluating their ability to fulfil the contract and address risks.

With the assistance of lawyers, both parties’ rights and obligations should also be determined before entering into a TPF agreement, especially the extent of the funder’s control over arbitration, and bearing adverse costs.

Yang Xueyu is a partner at Hui Zhong Law Firm. She can be contacted at +86 10 5639 9660 or by e-mail at yang.xueyu@huizhonglaw.com

Mariana Zhong is a partner at Hui Zhong Law Firm. She can be contacted at +86 10 5639 9618 or by e-mail at mariana.zhong@huizhonglaw.com

Wu Ke, an associate at Hui Zhong Law Firm, also contributed to this article