The Changing Economics of Dispute Resolution
Arbitration sells itself on speed, flexibility, and fairness. But for many claimants, the first hurdle isn’t procedure—it’s money. Filing an arbitration can mean committing to months or years of legal fees, expert costs, and institutional charges that can run into millions in high-value disputes. For those without deep pockets, “access to justice” becomes a hollow promise.
Third-party funding is changing that equation. By financing claims in exchange for a slice of the winnings, funders are rewriting the economics of arbitration. Whether this is a lifeline for the under-resourced or a Trojan horse for commercial influence is the debate shaping the next chapter of dispute resolution.
Understanding Third-Party Funding
At its simplest, third-party funding involves an external party—usually a specialist investment firm—covering all or part of the costs of a legal claim. In return, the funder takes an agreed share of any award or settlement if the case succeeds. If it fails, the claimant owes nothing, and the funder bears the loss. This risk-reward trade is at the heart of the model.
The concept isn’t new. It has been common in certain litigation markets for decades, particularly in class actions and personal injury suits. But in arbitration, especially high-value international cases, its role has grown more visible only in the last 15–20 years. The rise of global funders, coupled with the increasing costs of complex disputes, has pushed the practice into mainstream conversation among corporate counsel and law firms.
Leveling the Playing Field for Claimants
The strongest selling point of third-party funding is that it opens the doors of arbitration to those who would otherwise have to walk away. Arbitration can easily outprice individuals, small and medium enterprises, or even large companies facing financial stress.
Imagine a small Indian engineering firm with a strong contractual claim against a European conglomerate for breach of a supply agreement. The claim is worth millions, but mounting an arbitration before an international tribunal could cost hundreds of thousands of dollars upfront. Without funding, the firm may have no choice but to settle cheaply or abandon the claim entirely. With a funder backing the case, it can fight on equal terms, hiring experienced counsel, engaging the best experts, and pursuing enforcement if it wins.
The psychological effect on the opposing party should not be underestimated either. Knowing a claimant has the backing of a professional funder—one that has vetted the claim’s merits and is willing to invest heavily—can shift settlement dynamics. It signals that the case is serious, credible, and well-resourced.
Why Funders Enter the Game
From the funder’s perspective, arbitration can be an attractive investment class. High-value commercial and investment treaty arbitrations often involve substantial sums in dispute, with relatively predictable timelines compared to litigation in congested courts.
Before committing funds, a funder conducts exhaustive due diligence. They assess the legal merits, potential defences, damages quantum, enforceability of an eventual award, and the respondent’s ability to pay. This pre-investment scrutiny not only protects the funder’s capital but can indirectly benefit the claimant by identifying weaknesses early and refining the strategy.
The expected returns can be high, often two to four times the amount invested or a fixed percentage of the award. But the risk is equally real: if the case fails, the investment is written off. This risk-sharing element is what makes the arrangement appealing to claimants.
The Risks of Influence and Control
Despite the benefits, third-party funding is not a cure-all. One of the most cited concerns is the potential for funder influence over strategic decisions. While most funding agreements stipulate that the claimant and its legal team retain control, the funder’s financial stake can create subtle pressure.
Consider a situation where the claimant wants to reject a settlement offer, believing a higher award is possible. The funder, keen to lock in returns and avoid further costs, might push for acceptance. Conversely, a funder might encourage aggressive tactics that increase the chance of a big win but expose the claimant to higher risk or cost.
Such tensions can test the relationship between claimant, counsel, and funder. They also raise ethical questions about the independence of legal advice and the sanctity of client autonomy.
Confidentiality Under Strain
Confidentiality is one of arbitration’s hallmark features, yet third-party funding complicates it. To secure funding, claimants must share sensitive documents, legal opinions, and strategy details with the funder. Even with strong non-disclosure agreements, there is an inherent risk in widening the circle of those who have access to privileged material.
Arbitral tribunals are beginning to address these concerns. In some cases, they have set guidelines on what information can be shared, when, and under what safeguards. Institutions are also increasingly aware of the need to protect confidentiality while accommodating legitimate funding arrangements.
The Debate Over Disclosure
One of the thorniest issues in third-party funding is whether the existence of funding must be disclosed. Proponents of disclosure argue that it is necessary to avoid conflicts of interest, for example, if an arbitrator has ties to the funding firm. Opponents fear that disclosure could prejudice the tribunal against the claimant or give the opposing party tactical ammunition, such as probing the claimant’s financial position.
Different jurisdictions and arbitral institutions have taken different approaches. The ICC, SIAC, and HKIAC have introduced disclosure requirements. Singapore and Hong Kong have legislated for it in the context of international arbitration. In contrast, there is no uniform global standard, leaving room for uncertainty.
The Indian Experience So Far
In India, third-party funding in arbitration is still in its early phase. There is no explicit statutory framework governing it, but it is not prohibited. A handful of states, such as Maharashtra and Gujarat, have recognized funding agreements in civil litigation, providing a starting point for their acceptance in arbitration.
The conversation is gaining momentum. With Indian companies increasingly involved in international trade and cross-border projects, disputes are inevitable, and many will be resolved through arbitration. Funding could become a practical necessity, especially for smaller businesses competing against foreign giants.
Yet India must grapple with some key legal questions. Are funding agreements enforceable under Indian contract law? How should lawyers navigate professional ethics rules that bar certain fee arrangements but say little about third-party funders? Should disclosure be mandatory in domestic and international arbitrations seated in India? The answers will shape the growth of the industry.
International Models and Lessons
Globally, mature arbitration hubs have moved towards regulated acceptance rather than prohibition. Singapore and Hong Kong have enacted laws permitting funding in arbitration, subject to disclosure and ethical rules. The UK relies on a mix of common law principles and voluntary codes of conduct. Australia’s courts have been generally supportive, viewing funding as a legitimate means of facilitating access to justice.
These jurisdictions show that with careful regulation—clear disclosure rules, conflict checks, claimant autonomy protections, and confidentiality safeguards—third-party funding can be integrated into the arbitration ecosystem without undermining fairness.
Critics and Their Concerns
Not all voices in the arbitration community are convinced. Critics argue that funding could encourage speculative or marginal claims, driven by the lure of potential payout rather than genuine grievance. Others worry that funders, in pursuit of returns, may push claimants into settlements that serve the funder’s interests more than the claimant’s.
Some see a broader systemic risk: if funding becomes too dominant, arbitration could shift from a dispute resolution mechanism into a form of investment vehicle, with cases treated as assets to be traded. That could erode public confidence in the neutrality and purpose of the process.
The Filtering Effect
Supporters counter that funders, far from encouraging weak claims, act as gatekeepers. Because they only make money if the claim is successful, they have no incentive to support frivolous disputes. Their rigorous vetting process can help weed out hopeless cases before they clog the system, arguably improving the overall quality of claims in arbitration.
Striking the Balance
The truth lies somewhere between the extremes. Third-party funding is neither a silver bullet nor a ticking time bomb. It is a financial tool with clear benefits and real risks. The challenge for legislators, arbitral institutions, and the legal community is to strike the right balance: enabling access while safeguarding fairness and autonomy.
Key safeguards might include:
- Mandatory disclosure of funding arrangements to tribunals to manage conflicts of interest.
- Provisions ensuring the claimant retains ultimate decision-making authority.
- Confidentiality protocols to protect sensitive information shared with funders.
- Ethical guidance for lawyers to navigate their duties when a funder is involved.
The Road Ahead
Third-party funding is not philanthropy; it is investment. Funders enter the arena to make a profit, and their interests will not always align perfectly with those of the claimants they support. But if regulated thoughtfully, this profit motive can coexist with, and even enhance, the broader goal of access to justice.
In the right framework, funding can help arbitration live up to its promise as a fair, accessible, and effective means of dispute resolution. In the wrong framework—or a regulatory vacuum—it could undermine the very trust and independence that give arbitration its value.
For now, the question is not whether third-party funding will grow in arbitration—it already is. The real question is whether we can shape it into a tool that empowers the pursuit of rights rather than distorting it. The answer will decide whether it becomes a boon or a bane for access to justice.CONTRIBUTED BY: LAKSHAY NANDWANI