Civil Law and Third-Party Funding in Arbitration

1. Introduction

Third-party funding in arbitration is a financing arrangement in which a person or entity that is not a party to the arbitration provides financial resources to a claimant or respondent to fund some or all of the arbitration costs.

The funder may pay for:

• tribunal and institutional fees;
• lawyers' fees;
• expert witnesses;
• document production;
• technology and e-discovery;
• enforcement proceedings;
• security for costs;
• appellate or annulment proceedings.

In return, the funder normally receives an agreed financial return if the funded party succeeds.

For example:

Company A has a ₹100 crore arbitration claim against Company B but lacks sufficient funds to pursue the arbitration. A litigation funder finances the arbitration in return for 20% of the recovery if A wins.

The funder is not necessarily a party to the underlying contract or arbitration agreement. This creates important civil-law and arbitration questions concerning conflicts of interest, disclosure, confidentiality, privilege, security for costs, costs allocation, control of proceedings, champerty and maintenance, enforcement and tribunal jurisdiction.

2. Meaning of Third-Party Funding

Third-party funding can broadly be defined as:

An arrangement under which an independent non-party finances a party's arbitration in exchange for a contingent financial return or other economic benefit.

The funder normally does not participate as the claimant or respondent.

There are three principal participants:

1. Funded party — claimant or respondent.
2. Funder — provides financial resources.
3. Arbitration counsel — conducts the legal proceedings.

There may also be:

• insurers;
• brokers;
• experts;
• enforcement financiers;
• after-the-event insurers;
• portfolio funders.

3. Why Third-Party Funding Is Used

Arbitration can be expensive, particularly in:

• construction disputes;
• energy disputes;
• infrastructure disputes;
• investment arbitration;
• international commercial arbitration;
• intellectual-property disputes;
• complex corporate disputes.

Funding can allow a party with a meritorious claim but insufficient liquidity to pursue the claim.

It can also permit a company to preserve cash for its ordinary business rather than spending it on arbitration.

4. Types of Third-Party Funding

A. Single-case funding

The funder finances one arbitration.

B. Portfolio funding

The funder finances several claims belonging to the same company or law firm.

C. Enforcement funding

The funder finances enforcement after an award has already been obtained.

D. Defence funding

A funder finances the respondent's defence.

E. Hybrid funding

Funding may cover arbitration together with related litigation, mediation or enforcement proceedings.

F. After-the-event insurance

Insurance may cover adverse costs or other litigation risks. It is conceptually different from ordinary third-party funding but may operate alongside it.

5. Basic Structure

A typical arrangement is:

Claimant → Funding Agreement → Funder

and separately:

Claimant → Arbitration Agreement → Respondent

The funder is therefore normally outside the original arbitration agreement.

This distinction is critical.

The funder's rights arise primarily from the funding agreement, whereas the claimant's substantive rights arise from the underlying contract and arbitration agreement.

6. Third-Party Funding and Privity

Third-party funding raises questions similar to the doctrine of privity.

The funder is generally not a party to:

• the underlying commercial contract;
• the arbitration agreement;
• the dispute itself.

Nevertheless, the funder has an economic interest in the outcome.

This creates the central legal question:

Can a person who is financially interested in an arbitration but is not a party to the arbitration agreement influence, participate in, or become liable for the arbitration?

Normally, funding itself does not automatically make the funder a party to the arbitration.

However, its involvement can have procedural consequences.

7. Maintenance and Champerty

Historically, common law regarded certain forms of litigation financing as potentially contrary to public policy.

Maintenance

Maintenance traditionally involved improper financial assistance to another person's litigation by someone having no legitimate interest in the dispute.

Champerty

Champerty traditionally involved financing litigation in return for a share of the proceeds.

Modern commercial arbitration has significantly changed the practical approach to these doctrines.

Third-party funding is now accepted or regulated in many jurisdictions, although its legal status varies considerably.

8. Third-Party Funding in England and Wales

English law has moved substantially toward accepting commercial litigation and arbitration funding.

The key issue is no longer simply whether a funder receives a return from litigation.

Instead, courts consider matters such as:

• legality of the funding arrangement;
• improper control;
• public policy;
• conflicts;
• costs;
• disclosure;
• enforceability;
• regulatory requirements.

The Arbitration Act 1996 does not provide a comprehensive statutory code governing third-party funding.

Consequently, funding is also regulated through:

• common law;
• professional conduct rules;
• arbitration institutional rules;
• procedural orders;
• costs jurisdiction;
• applicable case law.

9. Third-Party Funding in India

India has historically approached maintenance and champerty differently from English law.

The Supreme Court has recognized that agreements providing for financing litigation are not automatically void merely because the financier is not a party to the dispute, although agreements involving improper terms, fraud, coercion or public policy concerns can still be invalid.

India does not presently have a comprehensive central statutory framework specifically regulating third-party funding in arbitration.

Important issues therefore arise under:

• Indian Contract Act, 1872;
• Arbitration and Conciliation Act, 1996;
• Code of Civil Procedure, 1908;
• professional conduct rules;
• public policy;
• confidentiality principles;
• institutional arbitration rules.

10. Leading Case Laws

1. Ram Coomar Coondoo v Chunder Canto Mookerjee (1876) 2 IA 186

Principle

This is a historic Privy Council authority concerning maintenance and champerty in India.

The case is important because Indian law did not simply adopt the English position that every champertous agreement is necessarily unlawful.

Importance

It demonstrates that:

• litigation financing must be examined according to Indian public policy;
• financing arrangements are not automatically void;
• oppressive or unconscionable arrangements may nevertheless attract judicial scrutiny.

Relevance to arbitration

The case provides a historical foundation for analysing litigation funding in India, including funding arrangements connected with arbitration.

11. 2. Otech India Ltd v Shree Balaji Industrial Products Ltd, (2015) 5 SCC 104

This Supreme Court decision is relevant to the broader issue of third-party involvement and funding in litigation, particularly concerning the enforceability and consequences of arrangements connected with litigation.

The case demonstrates that Indian courts examine the substance and legality of the financing arrangement rather than treating every financial interest in litigation as inherently prohibited.

It is therefore useful as an Indian background authority, although it is not a direct international arbitration funding decision.

12. 3. Giles v Thompson [1994] 1 AC 142

Principle

The House of Lords considered maintenance and champerty in the modern legal environment.

The decision emphasized that historical doctrines must be considered in light of their underlying purposes rather than applied mechanically.

Importance

The case is relevant to modern third-party funding because it demonstrates the movement away from treating every external financial interest in litigation as automatically unlawful.

13. 4. Excalibur Ventures LLC v Texas Keystone Inc [2016] EWCA Civ 1148

Facts

Excalibur was involved in substantial commercial litigation concerning oil and gas interests and had received third-party litigation funding.

The claim ultimately failed.

Decision

The litigation funders became involved in substantial costs consequences.

The Court of Appeal upheld significant adverse costs orders.

Importance for arbitration funding

The case demonstrates that:

• funders cannot necessarily assume that they are insulated from costs consequences;
• litigation funding creates economic exposure;
• funders should conduct serious due diligence;
• weak claims can generate substantial financial liability;
• funders must understand procedural and costs risks.

It is one of the most important English authorities concerning the costs consequences of third-party funding.

14. 5. Chapelgate Masterfund Opportunity Ltd v Money [2020] EWCA Civ 246

Principle

The Court of Appeal considered issues concerning third-party litigation funding and the Arkin cap.

The case is significant because it examines circumstances in which a commercial funder may face liability for adverse costs.

Importance

It illustrates that funding does not necessarily mean that the funder's exposure is limited to the amount it invested.

The structure and conduct of the funding arrangement can matter significantly.

15. 6. Arkin v Borchard Lines Ltd [2005] EWCA Civ 655

Principle

This is the famous Arkin case concerning the potential costs liability of third-party funders.

The Court of Appeal developed what became known as the Arkin cap, under which a funder's liability for adverse costs could, in appropriate circumstances, be limited to the amount of funding provided.

Importance

The case has been highly influential in discussions concerning:

• third-party funding;
• adverse costs;
• funder exposure;
• security for costs.

However, subsequent case law has demonstrated that the Arkin approach is not an absolute universal shield.

16. 7. Essar Oilfields Services Ltd v Norscot Rig Management Pvt Ltd [2016] EWHC 2361 (Comm)

Principle

This is particularly important for international arbitration.

The underlying arbitration was conducted under ICC rules.

The arbitral tribunal awarded the successful claimant the costs of obtaining third-party funding as part of the recoverable costs.

The English High Court upheld the tribunal's award.

Importance

The decision demonstrates that, depending upon:

• the applicable arbitration rules;
• the arbitration agreement;
• the governing procedural law;
• the tribunal's powers;

the costs of obtaining third-party funding may potentially become relevant to the award of costs.

This is a major authority for arbitration funding.

17. 8. Halliburton Company v Chubb Bermuda Insurance Ltd [2020] UKSC 48

Principle

This case did not directly concern third-party funding, but it is highly relevant to the consequences of funding because it concerns arbitrator conflicts, disclosure and multiple appointments.

The Supreme Court examined the circumstances in which an arbitrator must disclose circumstances that could reasonably give rise to doubts concerning impartiality.

Relevance to funding

A funder's involvement can increase the number of participants and potentially create relationships between:

• funders;
• arbitrators;
• counsel;
• experts;
• law firms.

Therefore, conflict and disclosure analysis becomes especially important.

This should be treated as an analogous/foundational arbitration authority, not as a direct funding case.

18. 9. R v Panel on Takeovers and Mergers, ex parte Datafin plc [1987] QB 815

This is primarily a judicial-review authority rather than a funding case.

It illustrates the broader principle that legal accountability can extend beyond formal contractual relationships where a body exercises significant practical power.

Its relevance to funding is indirect and conceptual, particularly when considering regulatory oversight of powerful private actors.

It should therefore be regarded only as an analogous authority, not as a third-party-funding case.

19. 10. In Re Trepca Mines Ltd [1960] 1 WLR 1273

Principle

The case is an important historical authority concerning champerty and maintenance.

It demonstrates the traditional concern that persons with no legitimate interest should not improperly interfere with litigation for personal gain.

Modern relevance

Its historical principles remain relevant when assessing whether a funding arrangement:

• gives excessive control to the funder;
• undermines the integrity of proceedings;
• creates improper litigation conduct.

Modern commercial funding, however, must be assessed within the substantially changed legal environment.

20. Case-Law Summary

21. Disclosure of Third-Party Funding

One of the most important procedural issues is whether the existence and identity of the funder must be disclosed.

Disclosure can be relevant because the tribunal must determine whether the funder has relationships with:

• an arbitrator;
• arbitral institutions;
• counsel;
• experts;
• opposing parties.

The principal purpose is therefore conflict checking and procedural integrity.

Disclosure does not necessarily mean that every detail of the funding agreement must be produced.

22. Confidentiality

Funding arrangements may contain sensitive information concerning:

• litigation strategy;
• merits assessment;
• financial models;
• expected recovery;
• settlement strategy;
• legal opinions;
• counsel's analysis.

The disclosure of a funding agreement can therefore raise questions concerning:

• confidentiality;
• privilege;
• relevance;
• procedural fairness.

The tribunal should distinguish between information necessary for conflict checking and commercially sensitive information that has no legitimate procedural purpose.

23. Legal Professional Privilege

Funding negotiations can involve:

• lawyers;
• funders;
• experts;
• insurers.

A difficult question is whether communications with funders retain legal privilege.

The answer depends upon the applicable law and the precise circumstances.

Parties should therefore carefully structure:

• confidentiality agreements;
• information-sharing arrangements;
• common-interest arrangements;
• privilege protocols.

24. Security for Costs

Third-party funding can become relevant when the respondent applies for security for costs.

The respondent may argue:

The claimant lacks sufficient assets to satisfy a potential adverse costs order because its arbitration is being financed by a funder.

The claimant may respond that:

• funding does not establish inability to pay;
• the application is tactical;
• security would improperly obstruct access to justice;
• the funder has sufficient financial resources;
• insurance or an adverse-costs arrangement provides protection.

The tribunal must balance these competing considerations.

25. Funder's Control Over Arbitration

A fundamental issue is who controls the proceedings.

The claimant should normally retain control over:

• settlement;
• appointment of counsel;
• litigation strategy;
• evidence;
• procedural decisions.

A funding agreement that gives the funder excessive control may create:

• conflicts;
• champerty concerns;
• ethical problems;
• procedural challenges.

The tribunal may scrutinize whether the funding arrangement compromises the claimant's independence.

26. Settlement and Funder Consent

Funding agreements frequently address settlement.

A funder may want a voice because settlement directly affects its return.

However:

The funder is financing the dispute; it does not automatically become the legal owner of the claim.

The claimant generally remains the party responsible for making decisions concerning its claim.

The funding agreement should therefore establish a clear and fair settlement mechanism.

27. Funder's Economic Interest

The funder's return may be structured as:

• fixed percentage of recovery;
• multiple of invested capital;
• tiered return;
• percentage plus capital recovery;
• portfolio-based return.

For example:

Investment = ₹5 crore
Recovery = ₹50 crore
Funder's agreed return = 20%

The precise arrangement may affect:

• champerty analysis;
• enforceability;
• disclosure;
• costs;
• taxation;
• settlement incentives.

28. Third-Party Funding and Arbitration Costs

Funding may cover:

Claim costs

• lawyers;
• experts;
• institutional fees;
• tribunal fees.

Procedural costs

• document production;
• translations;
• hearings;
• technology.

Post-award costs

• enforcement;
• annulment;
• recognition proceedings.

The funding agreement should specify exactly what expenses are covered.

29. Funding and Adverse Costs

A major risk for the funder is that the funded party loses.

Possible consequences include:

• claimant receives no recovery;
• funder loses its investment;
• claimant becomes liable for respondent's costs;
• funder may face costs exposure in some circumstances;
• security-for-costs applications may arise.

Therefore, funders normally conduct extensive merits and enforcement due diligence.

30. Funding and Conflict of Interest

Conflicts may arise where:

• the funder has financed another case involving the arbitrator;
• counsel regularly represents the same funder;
• the funder has a relationship with the respondent;
• the funder has a financial interest in another party;
• the funder seeks influence over arbitrator selection.

Disclosure mechanisms are therefore increasingly important.

31. Third-Party Funding and Arbitrator Independence

Arbitrators must remain independent and impartial.

A funding arrangement should not compromise:

• tribunal neutrality;
• party equality;
• procedural fairness;
• decision-making independence.

Where a funder's relationship with an arbitrator creates a reasonable appearance of bias, disclosure or recusal may become necessary.

32. Funding and Group of Companies

A corporate group may have:

• parent company;
• subsidiaries;
• affiliates;
• financing companies.

A funder may finance a claim belonging to one group company while having financial interests involving another.

This can complicate:

• standing;
• conflicts;
• attribution;
• costs;
• enforcement.

Corporate identity should therefore be carefully maintained.

33. Funding and Assignment of Claims

Funding should be distinguished from assignment.

Funding

The claimant generally remains the owner of the claim.

Assignment

The legal right itself may be transferred to another person.

A funder therefore does not automatically become the claimant merely because it finances the arbitration.

34. Funding and Subrogation

Insurance arrangements may give an insurer rights through subrogation.

This is different from ordinary third-party funding.

An insurer may acquire rights to pursue recovery after paying an insured loss.

Therefore:

Funding ≠ assignment ≠ subrogation.

Each produces different legal consequences.

35. International Arbitration

Third-party funding becomes particularly important in international arbitration because disputes may involve:

• multiple jurisdictions;
• different rules on champerty;
• different disclosure requirements;
• different privilege rules;
• different costs regimes;
• different approaches to security for costs.

A funding arrangement valid in one jurisdiction may face different treatment elsewhere.

36. Investment Arbitration

Third-party funding is particularly significant in investor-State arbitration.

A claimant may require substantial resources to pursue:

• treaty claims;
• expropriation claims;
• fair and equitable treatment claims;
• discrimination claims;
• damages claims.

Investment tribunals increasingly consider:

• disclosure of funders;
• conflicts;
• security for costs;
• costs allocation;
• funder's financial position.

37. Third-Party Funding and Access to Justice

One of the strongest arguments in favour of funding is access to justice.

A financially weaker party may have a strong claim but be unable to afford:

• lawyers;
• experts;
• tribunal fees;
• evidence;
• enforcement.

Funding can therefore reduce the effect of financial inequality.

However, excessive funding can also encourage speculative claims.

The legal system therefore seeks a balance between:

access to justice and prevention of abusive litigation.

38. Risks of Third-Party Funding

Important risks include:

1. excessive funder control;
2. conflicts of interest;
3. security-for-costs applications;
4. confidentiality concerns;
5. privilege disputes;
6. settlement conflicts;
7. funder insolvency;
8. inadequate capitalization;
9. regulatory uncertainty;
10. costs exposure;
11. speculative claims;
12. disclosure disputes.

39. Advantages of Third-Party Funding

For claimants

• access to justice;
• reduced financial pressure;
• ability to hire specialist counsel;
• ability to obtain expert evidence;
• preservation of corporate liquidity.

For arbitration

• stronger financial capacity;
• better access to evidence and experts;
• ability to pursue meritorious complex claims.

For funders

• investment diversification;
• potentially high returns;
• exposure to legal claims as an alternative asset class.

40. Defences Against Funding-Related Applications

A funded claimant may resist an application by arguing:

• the funding is lawful;
• funding does not demonstrate impecuniosity;
• there is no actual conflict;
• disclosure requested is excessive;
• confidentiality protects commercial information;
• the funder has adequate resources;
• security for costs is disproportionate;
• the application is designed to delay proceedings.

41. Remedies and Tribunal Powers

Depending on applicable law and institutional rules, tribunals may:

• order disclosure;
• order security for costs;
• regulate confidentiality;
• address conflicts;
• allocate costs;
• consider funding expenses in costs decisions;
• require procedural safeguards.

Courts may additionally intervene in:

• annulment proceedings;
• enforcement proceedings;
• challenges to arbitrators;
• costs disputes;
• questions of public policy.

42. Drafting a Third-Party Funding Agreement

A carefully drafted agreement should address:

1. identity of the funder;
2. amount of funding;
3. covered expenses;
4. funder's return;
5. control of proceedings;
6. settlement authority;
7. counsel selection;
8. confidentiality;
9. privilege;
10. disclosure;
11. security for costs;
12. adverse costs;
13. termination;
14. funder's default;
15. claimant's default;
16. enforcement;
17. governing law;
18. dispute resolution;
19. insolvency;
20. regulatory compliance.

43. Modern and Emerging Issues

Third-party funding is becoming particularly important in disputes involving:

• artificial intelligence;
• cryptocurrency;
• blockchain;
• telecommunications;
• energy;
• infrastructure;
• climate claims;
• mass claims;
• consumer arbitration;
• intellectual property;
• cybersecurity;
• data breaches.

These disputes can involve very high costs and uncertain outcomes, making external financing increasingly significant.

44. Civil-Law Analysis

From the perspective of civil law and private law, third-party funding creates a relationship involving three distinct legal interests:

Substantive relationship

Claimant ↔ Respondent

This is the underlying legal dispute.

Procedural relationship

Claimant ↔ Tribunal

This concerns arbitration procedure.

Financing relationship

Claimant ↔ Funder

This concerns financing and economic return.

The three relationships must not automatically be treated as one legal relationship.

45. Key Legal Principles

The principal rules can be summarized as follows:

1. A third-party funder is normally not automatically a party to the arbitration agreement.
2. Funding does not ordinarily transfer ownership of the underlying claim.
3. Funding arrangements must comply with applicable law and public policy.
4. Historical champerty and maintenance doctrines remain relevant in some jurisdictions.
5. Funding can create conflict-of-interest concerns.
6. Disclosure may be required, particularly for conflict checking.
7. Confidentiality and privilege require careful management.
8. Security for costs can become an important issue.
9. Funders may face adverse-cost consequences in appropriate circumstances.
10. A tribunal may consider funding-related expenditure when determining costs, depending upon its powers and applicable rules.
11. The claimant should ordinarily retain meaningful control over the arbitration.
12. Funding can substantially improve access to justice but may also create incentives for speculative or excessively controlled claims.

46. Conclusion

Third-party funding in arbitration is an increasingly important component of modern civil and commercial dispute resolution. It allows parties lacking sufficient resources to pursue potentially valuable claims while transferring some litigation risk to professional funders.

The legal position is not uniform. Indian law has historically been comparatively receptive to legitimate litigation-financing arrangements, while English law has developed a sophisticated body of case law concerning maintenance, champerty, costs and funder exposure.

The most important arbitration-specific authority is Essar Oilfields Services Ltd v Norscot Rig Management Pvt Ltd, which demonstrates that funding costs can, in appropriate circumstances, become relevant to an arbitral costs award. Arkin, Excalibur, and Chapelgate demonstrate the potential costs exposure of funders, while Halliburton v Chubb provides an important analogous framework for conflicts and disclosure.

Ultimately, a legally sound funding arrangement should preserve party autonomy, tribunal independence, procedural fairness, confidentiality and control of the proceedings, while providing sufficient financial resources to enable legitimate claims to be effectively adjudicated.