Ciarb’s 2025 Guideline on Third-Party Funding in international arbitration

Third-party funding (“TPF”) is a contractual arrangement in which an external entity (the “funder”) covers a party’s legal costs in arbitration in exchange for a share of the recovery proceeds if the claim succeeds. Since it operates on a non-recourse basis, the funded party is not required to repay the funder if the claim is unsuccessful.

As legislative, regulatory and institutional developments to TPF continue to evolve across jurisdictions, the landscape of funded arbitration has grown increasingly complex for parties, funders and tribunals.

To address this, the Chartered Institute of Arbitrators (Ciarb) has released the 2025 Guideline on Third-Party Funding (the “Guideline”), explaining the functions of TPF and offering a general yet comprehensive framework for arbitration stakeholders to engage with funded claims.

The Guideline is structured in two parts. Part 1 outlines the key steps and considerations involved in the funding process, including pricing models, types of funding arrangements and contractual terms. Part 2 addresses the practical implications of TPF within arbitration proceedings, covering disclosure obligations, conflicts of interest, confidentiality and cost recovery.

This legal update highlights key provisions of the Guideline, along with practical insights.

Part 1: The funding process for arbitration

1. Functions and applicability of TPF

One primary goal of TPF is to empower financially constrained parties with meritorious claims to pursue arbitration against better-resourced opponents. Beyond promoting access to justice, TPF also serves as a practical financial tool for well-established corporates, enabling them to monetise claims while preserving working capital for core business operations.

Funders often bring additional value with strategic support and legal expertise, offering funded parties access to more professional guidance throughout the proceedings. Moreover, the disclosure of a funded claim signals to other stakeholders that the case is backed by a third party, reflecting the perceived strength of the claim¹1.

2. Structuring and managing TPF

The Guideline outlines the lifecycle of reaching a funding arrangement, from preliminary discussions to formalising the Litigation Funding Agreement (“LFA”). This process involves four key stages: (i) discussing the case on a no-name basis, (ii) setting out major financial terms on the Term Sheet provided by the funder, (iii) conducting due diligence on the claim, and (iv) getting approval from the funder’s Investment Committee before executing the LFA²2.

Upon evaluating the case’s legal merits, potential damages, enforcement and recoverability risk, duration and likelihood of settlement³3, funders can determine appropriate pricing models, such as percentage-based or multiple-based returns, or a mixture of both⁴4:

• The percentage-based model allows the funder to receive a pre-agreed percentage of the recovered amount, in addition to their invested amount. For example, if the funder invests HK$1 million in an arbitration and the recovered proceeds are HK$10 million, with an agreed percentage of 20%, the funder will receive HK$3 million (i.e. invested amount of HK$1 million plus HK$2 million being 20% of the proceeds)
• In the multiple-based model, the funder receives a return calculated as a multiple of the invested amount. For example, if the funder again invests HK$1 million and the agreed multiple is three times, the funder will again receive HK$3 million

3. Pros and cons of TPF

Whether TPF is suitable or not depends on the circumstances of each case. In this regard, the pros and cons, which the Guideline summarises, should be considered.

Key advantages include⁵5:

• Risk transfer: The funder takes all or part of the costs and risks, so with non-recourse financing, the claimant may not need to pay anything even if the claim is entirely rejected. Depending on the agreement and circumstances, the funder may also bear the risk of an adverse costs order if the claim fails
• Levelling the playing field: TPF enables parties with limited resources to pursue claims against better-funded opponents, promoting access to justice and making arbitration affordable for those who might otherwise be unable to proceed
• Corporate finance and risk management: Well-established companies may use TPF to offset risk, monetise claims or avoid diverting capital from core business needs
• Independent second opinion and strategic support: Professional funders conduct comprehensive due diligence and provide a second review of the case’s merits at no cost during initial assessment. Funders may offer strategic advice, recommend counsel or experts, and provide resources for intelligence gathering and asset tracing
• Availability: TPF can be arranged at any stage of a dispute, including during proceedings or at enforcement/appeal stages. It is available for a wide range of claims (contract, competition, insolvency, IP, etc.) in both arbitration and litigation contexts

Key disadvantages include⁶6:

• Long processing time: Securing funding can take from one month to a year, depending on the complexity and responsiveness of the parties involved
• High risk and cost: TPF is inherently risky, and the pricing may be high due to legal risks, duration, enforcement and funder operating costs. Terms may sometimes appear overpriced
• Level of intervention: Some funders may require regular updates and close monitoring, which can burden legal teams and increase administration costs. The degree of intervention varies between funders
• Potential conflicts of interest: The interests of the funder and the claimant may not always be aligned in the structure of returns (fixed or percentage-based), especially in low or high-value settlements or awards 

4. Types of LFAs

The Guideline also explores different funding structures, including⁷7:

• Single-case funding: This is the traditional form of LFA, usually on a non-recourse basis, with the funder only recovering investment if the case is successful. Terms are uniquely tailored to the dispute in question and negotiated between the funder and funded party. Risk and recoveries are assessed accordingly for the individual case
• Portfolio funding: This covers multiple cases managed by the same law firm or corporate client. It can be closed-ended (fixed group of cases) or open-ended (new cases added over time). It also allows for cross-collateralisation, so that losses in some cases can be offset by gains in others. Pricing and risk are spread across the portfolio, often resulting in more competitive terms
• Appeal and enforcement funding: This is used when a party needs funding for appeals or enforcement actions after an initial award. It may be required if the successful party faces challenges or difficulties in enforcing the award. The terms are tailored to the risk profile of the enforcement phase
• Awards monetisation: This provides liquidity to a successful party pending realisation of the award. The funder may offer to purchase the rights to enforce the award or provide an advance on its value. The funded party may receive a proportion of the award upfront, with the funder pursuing recovery
• Adverse costs risks and awards: The funding arrangements may include provisions for covering adverse costs, such as through After-the-Event insurance. The funder may provide indemnity or require the funded party to obtain insurance to cover potential orders for adverse costs
• Law firm finance: This refers to direct funding arrangement with a law firm to support its growth or ongoing cases, which may be particularly beneficial for smaller specialist firms needing cash flow support. Terms must ensure compliance with regulatory duties to act in the client’s interests
• Loans: Parties may consider traditional loans from banks or lenders as an alternative to non-recourse funding. Loans may be less expensive in a win scenario but carry the risk of repayment even if the claim is unsuccessful. Loan terms may involve collateral or charges on claim proceeds

5. Legal and commercial considerations in LFAs

Legal and commercial considerations in LFAs are central to the funding relationship and require careful negotiation and clarity.

The Guideline sets out key provisions that should be incorporated into an LFA, including definitions, financial terms, budget variation clauses, distribution or so-called waterfall provisions detailing order of priority in distribution, termination events and jurisdiction clauses⁸8:

• Definitions, such as what constitutes “success” of the claim, can vary in different parties’ understanding and significantly affect how recoveries are allocated, especially in multi-phase proceedings involving enforcement. Consistency across related documents (e.g. ATE insurance) is recommended
• Financial terms typically involve the funder’s choice of pricing model and must specify whether returns are calculated on committed or deployed capital. Early settlement clauses may provide for a lower return if the case settles quickly
• Funding commitment should set out a realistic funding commitment and budget. Budgets should be built from the bottom up and include contingencies
• Budget variation clauses are essential to manage unforeseen costs and avoid disputes over excess spending
• Distribution or waterfall provisions govern the priority and proportion of distributions among stakeholders, including funders, lawyers and insurers. The first priority is usually reimbursement of funds advanced; subsequent tiers cover other entitlements
• Termination clauses must clearly define adverse events that can bring the LFA to an end, such as refusal to follow counsel’s advice on settlement of offers, material decline in merits of the case and issues of conflict of interest. They should also clarify how disputes over termination are resolved
• Jurisdiction clauses should also be included, establishing the governing law and forum agreed by the parties

In addition to contract terms, the Guideline emphasises the importance of due diligence and case suitability. It recommends parties to assess a funder’s financial capacity, ability to indemnify adverse costs and internal conflict protocols⁹9. This protects the claimants from funding shortfalls and procedural risks.

The Guideline also sets out criteria for funders to evaluate cases, including the quantum of damages (often requiring a 1:10 budget-to-damages ratio), enforcement prospects, legal merits and credibility of the legal team¹⁰10. Funders typically seek cases with a strong likelihood of success and enforceable awards and may decline funding if the legal team lacks relevant expertise.

These considerations ensure that funding arrangements are commercially viable, legally sound and aligned with the interests of all parties involved.

6. After-the-Event insurance

Another key focus of the Guideline is managing financial risks through After-the-Event (“ATE”) insurance. It provides assurance for the claimant or the funded party against adverse costs in the event its claims are unsuccessful, and/or security for costs order. In some cases, ATE insurance may be required by the funders as part of the funding arrangement, as most funding arrangements do not cover adverse costs awards¹¹11. Deciding on ATE insurance depends on the risk of an adverse costs award, merits of the case, and applicable arbitration rules and law of the seat.

Part 2: Arbitration involving a funded party

1. The funder’s involvement

Usually, funders adopt a hands-off approach and may only be involved in high-level strategic advice, key decision-making (such as settlement discussions and choice of arbitrator, mediator, counsel and experts) and budget oversight to avoid extra layer of costs¹²12. That said, funders are usually entitled to receive regular updates on the case progress and any material developments.

2. Disclosure, conflicts of interest, confidentiality and privilege

The Guideline stresses disclosure obligations for the funded parties and their legal counsel, with early and transparent communication recommended to avoid conflicts of interest and enforcement risks¹³13. Conversely, non-disclosure may lead to challenging the award, for example where an arbitrator has a financial stake in the funder or is involved in other cases funded by the same funder¹⁴14. The IBA Guidelines on Conflicts of Interest 2024 were notably amended to equate funders to the parties under certain circumstances for the purpose of assessing conflicts¹⁵15.

This requirement varies in different jurisdictions and also depends on the arbitration rules chosen by parties. For example, Article 44 of the 2024 Administered Arbitration Rules published by the Hong Kong International Arbitration Centre (HKIAC) introduced the requirement that disputing parties should disclose the identity of any funders on an “on-going” basis¹⁶16.

Issues of confidentiality and privilege are also addressed, with guidance on drafting Non-Disclosure Agreements at early stages of the TPF arrangement – including the funders’ disclosure to affiliates, insurers or representatives – as well as funder’s obligations under the Association of Litigation Funders Code of Conduct¹⁷17.

3. Security for costs

Security for costs is an order requiring a party to provide financial assurance to cover the opposing party’s legal costs if the claim is unsuccessful. It is a more recent remedy in arbitration and only ordered in particular circumstances. The existence of third-party funding alone does not usually justify a security for costs order; tribunals must consider the claimant’s ability to pay and the merits. Funders may provide indemnity for adverse costs or require the funded party to obtain ATE insurance. Tribunals can, in some cases, award the costs of funding (including ATE premiums) to the successful party, but this depends on the law and rules of the seat.

4. Case management, costs recovery and settlements

Effective case management is essential for third-party funded matters. The Guideline recommends funded parties to provide regular updates to funders, maintain clear budgetary oversight and ensure strategic alignment throughout the proceedings. As mentioned above, the funder’s level of involvement usually focuses on controlling case strategy. These practices help manage expectations and maintain transparency in the funding relationship¹⁸18.

The Guideline also comments on the recovery of funding costs in arbitration. It emphasises that tribunals may have discretion to include TPF expenses as part of a costs award to a successful party, in addition to the legal and arbitration costs. This discretion is shaped by the applicable arbitration rules, the arbitration forum (the seat) and the language of the arbitration agreement¹⁹19. In many arbitrations, the successful party’s costs are paid by the unsuccessful party, but recovery of funding costs (e.g., funder’s fee) is not always allowed.

To preserve this possibility, the funded party should disclose existence of the TPF arrangement as soon as the LFA is executed. The tribunal will then consider the necessity and reasonableness of the funding costs. Such TPF costs are likely to be granted in cases where the claimant has no other practical alternative but to seek external funding due to the respondent’s conduct²⁰20.

The LFA should also include mechanisms for resolving disputes over settlement offers, which may involve monetary compensation or other commercial arrangements. The Guideline suggests that such disputes can be referred to an independent mediator or lawyer, for the settlement to be facilitated fairly and efficiently²¹21.

Key takeaways

As third-party funding becomes more prevalent and sophisticated, it is essential for practitioners to be aware of the evolving best practices around disclosure, conflicts of interest, cost recovery and the structuring of funding arrangements.

In this regard, the Guideline provides a comprehensive and practical roadmap for arbitration stakeholders navigating third-party funding.

In particular, the Guideline offers valuable clarity on the expectations and responsibilities of all stakeholders. It also highlights the importance of careful drafting and negotiation of LFAs, robust due diligence and ongoing communication between funders, funded parties and legal teams.

Ultimately, the Guideline reinforces that third-party funding, when properly managed, can enhance access to justice and support effective dispute resolution – so long as parties remain vigilant to the attendant risks and regulatory developments in this dynamic area.

Legal practitioners and corporates are encouraged to review their funding arrangements to ensure effective management and compliance with specific rules of the chosen seat of arbitration, while tailoring them to the circumstances of each case.