The Third-Party Funding for International Arbitration

The third-party funding in international investment and arbitration is a concern winning wide attention in recent years. The third-party financing, simply speaking, is a financial aid to arbitration parties (generally the applicant) from non-arbitration parties for initiating and going through arbitration procedures smoothly. It is an investment mode in which benefits are gained from the winner. Although the third party that provides funding is not a party to the arbitration proceedings, the pursuit of profits will inevitably drive it to intervene in the arbitration proceedings since it has provided financial support for the applicant, thus having some adverse effects on arbitration proceedings. Therefore, the third-party funding is, in many countries, subject to regulation and supervision to some extent though its legitimacy is recognized.

The third-party funding, originating from litigation, is applicable to arbitration. Many large investment companies regard investment arbitration as one of their major business, and international arbitration institutions are actively introducing and amending relevant arbitration rules to cope with the development of third-party funding arbitration. The third-party funding in international arbitration is essentially a way of financing rather than an “aid” to one party against the other party. By comparing the difference between the third-party funding and other funding forms, we can grasp the characteristics of the third-party funding in international arbitration. Finally, the conflicts of interest brought by the introduction of third-party funding to international arbitration are pointed out and the suggestions for China to cope with these conflicts of interest are put forward.

Despite its short history, the third-party funding can be found in most countries. Generally, the application of the third-party funding is limited to civil actions, and no country will recognize the public power of the third-party funding against itself. Hence, the third-party funding is inapplicable to criminal proceedings and administrative proceedings.

The significance of the third-party funding in international arbitration:

The third-party funding is different from contingent fees or contingency fee agreement. The contingent fee agreement requires lawyers to provide service first and shall not charge or only charge a small amount of attorney fees if the lawsuit is lost, or charge a certain proportion of benefits from the winning ruling. First, the third-party funding differs from contingent fees that the third party that provides the funding is not the agent of the party to arbitration. Second, the subject of contingent fees is limited to lawyers while there is no limitation on the subject of the third-party funding. Third, the contingent fee agreement is restricted to different degrees in different countries at the regulatory level. For example, France, Germany and other countries still explicitly prohibit lawyers from entering into contingent fee agreements with the plaintiff or applicant, while China allows lawyers to charge contingent fees only in civil cases concerning property relationships. However, the third-party funding here is generally still under very loose regulation.

The third-party funding and legal expenses insurance are not alike. Legal expenses insurance indicates that the party insures legal proceedings before or after a dispute occurs, so as to share the consequences of losing the case by paying the premium to the insurance company. Insurance institutions profit from premiums while the third-party funding institutions profit from the participation of interests from the winning award. This is the major difference. As the arbitration fee funded by the third party is an investment in the arbitration claim rather than the insurance, it influences and controls the arbitration procedures of the investee in a more direct manner.