Third-Party Funding in International Arbitration: Strategic Legal Guide for Claimants, Investors and Companies

International arbitration is often described as a preferred method for resolving cross-border disputes.

It can offer neutrality, confidentiality, procedural flexibility, specialist decision-makers and enforceable awards. For businesses operating across jurisdictions, arbitration may be more practical than litigating in the courts of one party's home country. Yet arbitration can also be expensive: legal fees, tribunal fees, institutional costs, expert evidence, document production, translations, hearings, travel, enforcement and security applications can place significant financial pressure on parties.

A company may have a strong claim but lack the liquidity to pursue it. A distressed business may be owed substantial damages but need working capital for operations. An investor may have a treaty claim but face the cost of long proceedings. A claimant may not want to carry arbitration spend on its balance sheet. A family business may have a valuable cross-border claim but be unwilling to expose its core assets to litigation cost. This is where third-party funding becomes strategically important.

Third-party funding allows an external funder to finance some or all of the costs of a dispute, usually in exchange for a share of the proceeds if the claim succeeds. If the claim fails, the funder may lose its investment, depending on the funding structure. But funding is not merely a financial product. In international arbitration, it raises legal, procedural, ethical and strategic questions — affecting disclosure, conflicts of interest, security for costs, privilege, settlement strategy, control, confidentiality, enforcement and the overall conduct of the case. This guide explains how claimants, investors, boards and companies should think about third-party funding in international arbitration.

1. What Is Third-Party Funding?

Third-party funding is an arrangement where a person or entity who is not a party to the dispute provides financing for arbitration or litigation costs in return for a financial interest in the outcome. The funder may finance legal fees, tribunal fees, arbitration-institution fees, expert fees, document-production and translation costs, hearing costs, enforcement costs, adverse-costs exposure, security for costs, or a portfolio of multiple claims.

The funding may be non-recourse, meaning the funder is paid only if the claim succeeds. However, structures vary widely: single-case funding, portfolio funding, law-firm funding, corporate claim monetisation, award-enforcement funding, defence-side funding in limited circumstances, insurance-backed funding, after-the-event insurance, hybrid fee arrangements, or the assignment or acquisition of claims. The legal and commercial consequences depend on the structure, and a claimant should not treat all funding arrangements as the same.

2. Why Third-Party Funding Matters in Arbitration

Third-party funding matters because arbitration risk is economic as well as legal. A party may have a strong claim but still decide not to proceed because of cost, delay and uncertainty. Funding may help a claimant pursue a meritorious claim, preserve cash flow, reduce legal spend, shift part of the risk, monetise a claim, strengthen negotiation leverage, obtain access to specialist lawyers and experts, continue operations while pursuing recovery, enforce an award after a successful arbitration, and avoid abandoning a claim under financial pressure.

For companies, funding may turn a legal claim from a cost centre into a recoverable asset. For investors, it may support treaty claims or commercial arbitration arising from infrastructure, energy, construction, mining, telecoms, finance, technology or cross-border investments. For distressed businesses, it may preserve claims that would otherwise be lost. For defendants, the existence of funding may signal that the claim has been reviewed by a professional funder and considered commercially viable. Funding therefore changes the strategic landscape of arbitration.

3. Funding Is Not Suitable for Every Case

Not every claim is fundable. Funders usually examine the legal merits, quantum and recoverability; the respondent's ability to pay and the enforceability of any award; jurisdiction and applicable law; the quality of evidence and the credibility of witnesses; procedural complexity, duration and budget; adverse-costs risk and settlement prospects; the legal team; and any political, regulatory or reputational risk.

A claim may be legally strong but commercially unattractive if the respondent has no assets. It may have large damages but weak evidence, or good merits but serious jurisdictional obstacles. It may be difficult to fund if the expected recovery is too low compared with the cost of proceedings. The funder's question is not only whether the claimant can win; it is whether the claimant can recover enough, within a reasonable risk profile, to justify the funding investment.

4. The Economics of Funded Claims

Funding changes the economics of arbitration. The funder typically expects a return if the claim succeeds, structured as a percentage of damages recovered, a multiple of capital deployed, the higher of a percentage or multiple, staged returns depending on settlement timing, a portfolio-level return, a priority payment waterfall, or a success-based fee tied to recovery.

The claimant should understand the economic consequences before signing. How much funding is available and what costs are covered? What return does the funder receive, and is the funder paid before the claimant? What happens if the case settles early or recovery is only partial? Are enforcement and adverse costs included, and is security for costs covered? What happens if the budget increases, can either side terminate, and how is recovery distributed? A funding agreement should be modelled against different outcomes: a claimant should know what it actually receives if the case settles for 30%, 50%, 75% or 100% of the claim. The headline funding offer may look attractive until the waterfall is tested.

5. Third-Party Funding in Investment Arbitration

Third-party funding is especially important in investment arbitration, which may involve claims by foreign investors against states under investment treaties, investment agreements or domestic investment laws. These cases can be complex, lengthy and expensive. Funding may be relevant where a state measure has harmed an investment, where an investor lacks liquidity after expropriation or regulatory action, where a company has lost a concession, licence or project, where a politically sensitive dispute requires long-term financing, where the investor wants to shift risk away from the operating business, where enforcement against state assets may be difficult, or where the claim requires specialist treaty counsel and experts.

Investment-arbitration funding raises particular issues: transparency, public interest, state respondents, treaty interpretation, security for costs, funder influence, settlement authority, the legitimacy of investor-state dispute settlement, and recovery and enforcement against sovereign assets. Because investment arbitration often involves public-law dimensions, third-party funding is more controversial than in purely commercial disputes, and the funding structure should be carefully considered.

6. Third-Party Funding in Commercial Arbitration

Commercial-arbitration funding may arise in disputes involving construction, energy, infrastructure and shipping; finance, shareholder disputes, joint ventures and M&A; supply, distribution and technology contracts; intellectual property, real-estate development and hospitality projects; insurance and reinsurance; and international trade.

In commercial arbitration, funding is often driven by business considerations. A company may prefer to preserve cash flow rather than spend heavily on legal fees; a claimant may wish to shift part of the risk; a private-equity or family-owned business may want to pursue claims without disrupting operations; a company in distress may need funding to unlock a claim that could restore value. Commercial-arbitration funding may be less politically sensitive than investment arbitration, but it still raises legal and procedural issues, including disclosure, conflicts, confidentiality, costs, privilege, settlement control and enforcement.

7. Disclosure of Third-Party Funding

One of the most important questions is whether the existence of funding must be disclosed. Disclosure may be required by arbitration rules, a tribunal order, national law, professional rules, institutional guidance, conflict-checking requirements, treaty provisions, case-management considerations or party agreement. It may concern the existence of funding, the identity of the funder, the terms of the funding agreement, the degree of funder control, adverse-costs and insurance arrangements, or the corporate relationship between funder and party.

Many arbitration systems increasingly recognise the importance of disclosing at least the existence and identity of a funder, so that arbitrators can check for conflicts. Disclosure of the funding agreement itself is more controversial: a party may resist broad disclosure because the agreement contains confidential, privileged, commercially sensitive or strategic information. The correct approach depends on the applicable rules, the tribunal, the seat, the institution and the circumstances of the case.

8. Conflicts of Interest

Third-party funding can create conflicts of interest. Potential conflicts may arise where an arbitrator has a relationship with the funder, where counsel has acted for or against the funder, where the funder has financed other cases involving the arbitrator, where the funder has business relationships with tribunal members, where the funder is connected to a party, witness, expert or law firm, where the funder has an interest in related proceedings, or where the funder is part of a larger financial group with relevant connections.

Conflict issues can threaten the integrity of the arbitration. If not identified early, they may lead to challenges against arbitrators, procedural delays or award-enforcement issues. For this reason, early disclosure of the funder's identity may be necessary to protect the process. The purpose of disclosure is not to prejudice the funded party; it is to ensure that the tribunal is properly constituted and independent.

9. Security for Costs

Security for costs is one of the most important procedural issues in funded arbitration. A respondent may argue that a funded claimant should be required to provide security for the respondent's costs because the claimant may be unable to pay an adverse-costs order — contending that the claimant is impecunious, that funding shows an inability to pay, that the funder may not be liable for adverse costs, that the claimant is using funding to pursue risk-free arbitration, and that enforcement of a costs award may be difficult.

The claimant may respond that funding does not prove impecuniosity, that the claim is meritorious, that security would unfairly prevent access to justice, that the respondent caused the claimant's financial position, that adverse-costs insurance exists or the funding agreement covers adverse costs, and that security would be oppressive or tactical. Tribunals must balance fairness. Funding alone should not automatically justify security for costs, but it may become relevant where there is evidence that the claimant cannot satisfy an adverse-costs order. Claimants considering funding should assess security-for-costs risk at the outset; a funding package that ignores adverse costs may be incomplete.

10. Adverse Costs and After-the-Event Insurance

In many arbitrations, the losing party may be ordered to pay part of the successful party's costs, so a funded claimant should consider who bears adverse-costs risk. The options may include funder coverage, after-the-event insurance, claimant self-funding, a separate adverse-costs facility, a security arrangement, or a hybrid structure.

The funding agreement should state clearly whether adverse costs are covered and the limit of coverage, whether security for costs is covered, who decides whether to obtain insurance and who pays the premium, whether cover continues through enforcement, and what happens if the funder terminates. Adverse costs should not be an afterthought: a claimant may win access to funding yet remain exposed to serious costs risk if the arbitration fails.

11. Control of the Arbitration

Third-party funding raises a fundamental question: who controls the case? The claimant is the party to the arbitration; the funder is financing it; counsel owes duties to the client; and the funder has an economic interest in the outcome. This creates potential tension. The funding agreement should address who instructs counsel, who decides strategy and who approves settlement; whether the funder may be consulted or can veto decisions; whether the funder can terminate funding; what happens if claimant and funder disagree; whether independent advice is required; and how disputes between claimant and funder are resolved.

A well-structured funding arrangement preserves the claimant's control while allowing the funder to monitor its investment. Excessive funder control may create ethical, procedural and enforcement risks. The funded party should not become a nominal claimant controlled by a non-party.

12. Settlement Strategy

Funding can affect settlement. A claimant may be more willing to pursue proceedings because the financial burden is reduced; a respondent may see funding as evidence that the claim has passed independent review; a funder may prefer settlement if the return is attractive; and a claimant may prefer to continue if it wants full vindication or strategic leverage.

Settlement provisions should be clear. The funding agreement should address who may accept or reject settlement, whether funder consent is needed, what happens if the claimant rejects a reasonable offer, how settlement proceeds are distributed, whether early settlement changes the funder's return, whether mediation costs are funded, and how confidential negotiations are handled. Funding can support settlement by giving the claimant financial stability, but it can also complicate settlement if economic incentives are not aligned. The parties should discuss settlement mechanics before the dispute reaches a critical stage.

13. Confidentiality and Privilege

Funding requires sharing case information with the funder — pleadings, evidence, witness statements, expert reports, legal analysis, quantum assessment, procedural strategy, settlement discussions, counsel opinions and enforcement analysis. This raises confidentiality and privilege concerns.

The claimant should consider whether sharing documents waives privilege, whether confidentiality obligations bind the funder, whether the funder may share documents with advisors, whether consultants or insurers are involved, whether documents are protected across jurisdictions, whether the seat of arbitration affects privilege, and whether common-interest or similar protections apply. The funding agreement should impose strict confidentiality obligations, and counsel should manage what is shared, how it is shared and with whom. A careless disclosure to a funder may create later disputes over privilege.

14. Funder Due Diligence

Before agreeing to fund a case, a funder will conduct due diligence, reviewing jurisdiction, merits, quantum, evidence and witnesses; the legal team and the likely tribunal; applicable law, the procedural timetable and the budget; respondent solvency, asset location and enforcement risk; settlement prospects; and political, reputational and adverse-costs exposure.

The claimant should prepare carefully, because a weak funding submission may fail even if the claim itself is strong. The strongest submissions usually include a clear case theory, documentary evidence, a realistic damages analysis, a budget, a procedural roadmap, an enforcement strategy, a candid explanation of risks, an experienced legal team and a realistic settlement assessment. Funders do not only finance claims; they assess them commercially.

15. Claim Valuation and Quantum

Funding depends heavily on quantum: the claim value must justify the cost and risk. A funder will examine the damages methodology, expert evidence, causation, mitigation, interest, legal recoverability, discount factors, settlement value and enforcement value. A claimant may believe the claim is worth a large amount, but funders will usually discount for risk — for jurisdictional uncertainty, weak evidence, speculative damages, enforcement difficulty, political risk, procedural delay, respondent insolvency, adverse-costs exposure and settlement pressure.

Legal teams should prepare quantum analysis early. Without credible quantum, funding is difficult to obtain.

16. Enforcement Risk

A funded claim is only valuable if the award can be enforced. Funders will ask where the respondent's assets are, whether they are state-owned or sovereign, whether they are immune from enforcement, whether they sit in New York Convention jurisdictions, whether there are parallel proceedings, whether the respondent is solvent, whether assets could be moved, whether there are injunction risks, whether settlement is more realistic than enforcement, and whether enforcement costs are funded.

Enforcement strategy should begin before the arbitration. For claimants this is critical: winning an award without recovery may not justify the cost of arbitration. For funders, enforcement risk may determine whether the case is funded at all.

17. Funding Agreement Key Terms

A third-party funding agreement should be reviewed carefully. Key terms may include the amount of funding and the covered costs; staged funding, the funder return and the payment waterfall; claimant and counsel obligations, reporting duties and budget approval; termination, settlement and control provisions; confidentiality and privilege protection; adverse costs, security for costs and insurance; conflicts; governing law and dispute resolution; assignment and enforcement funding; funder liability; and anti-money-laundering and sanctions compliance.

The funding agreement is not a side document — it can influence the entire arbitration, and a claimant should obtain independent advice before signing.

18. Termination of Funding

Funding agreements often allow termination in certain circumstances: a deterioration of merits, new adverse evidence, increased costs, a change in law, the loss of a jurisdictional basis, claimant breach, counsel withdrawal, settlement refusal, fraud or misrepresentation, sanctions risk, adverse-cost exposure, or enforcement becoming unrealistic.

Termination can create serious problems. If the funder terminates during proceedings, the claimant may be unable to continue. The agreement should address when termination is allowed, the notice period, the consequences of termination, accrued funder rights, continuing confidentiality, responsibility for unpaid costs, the impact on adverse costs, whether replacement funding is permitted, and whether counsel fees remain funded. A claimant should understand the risk of mid-case funding withdrawal.

19. Portfolio Funding

Portfolio funding involves financing multiple claims or matters together. It may be attractive for companies with several disputes, for law firms managing multiple arbitration claims, for insolvency estates, for groups with recurring claims, for investors with related treaty or commercial disputes, and for businesses seeking to monetise legal assets. Portfolio funding may reduce risk for funders because returns are spread across multiple cases, and it may give claimants more flexible financing.

However, it raises additional issues: case selection, cross-collateralisation, the priority of returns, the settlement of individual claims, conflicts between claims, reporting obligations, the allocation of costs, confidentiality across matters and termination mechanics. Portfolio funding should be structured carefully, and the claimant should know how one claim affects another.

20. Funding and Insolvency

Third-party funding can be important in insolvency or distressed situations, where a company or insolvency estate may have valuable claims but lack resources to pursue them. Funding may allow recovery for creditors, the pursuit of fraudulent-transfer claims, the enforcement of commercial claims, arbitration against solvent counterparties, the monetisation of legal assets and the continuation of proceedings after insolvency.

However, insolvency introduces additional issues: the authority of the insolvency office-holder, court approval where required, creditor interests, the assignment of claims, the priority of funder return, the distribution waterfall, conflicts of interest, adverse costs, settlement approval and transparency. Funding in distressed cases should be reviewed with insolvency counsel, and the structure should not undermine creditor interests or create later challenges.

21. Ethical and Professional Responsibility Issues

Third-party funding raises ethical questions, including counsel independence, funder control, conflicts of interest, confidentiality, privilege, settlement pressure, disclosure, access to justice, abuse of process, frivolous claims, adverse costs and transparency. Lawyers must remain loyal to the client. The funder may be commercially important, but counsel's professional duties are owed to the client, not the funder, unless a separate professional relationship exists. The funding structure should not compromise legal independence, and a well-drafted agreement should respect professional responsibility.

22. Funding and Arbitration Rules

Arbitration rules increasingly address third-party funding in some form. Depending on the institution and applicable rules, parties may need to disclose the existence of funding, the identity of the funder, information relevant to conflicts, and funding arrangements where relevant to costs or security applications. The extent of disclosure varies, so parties should review the institutional rules, tribunal orders, seat law, applicable treaty, procedural directions, professional guidance and case law.

Funding strategy should be aligned with procedural obligations. Failure to disclose when required can damage credibility and create procedural complications.

23. Respondent Strategy in Funded Claims

Respondents should also understand third-party funding. Where a claimant is funded, a respondent may consider disclosure applications, conflict checks, security for costs and requests for adverse-costs protection, alongside settlement strategy and enforcement analysis; it may weigh whether funding signals claim strength, whether the claimant is financially distressed, whether the funder's identity affects strategy and whether the funding agreement should be disclosed.

A funded claim is not automatically stronger or weaker, but funding changes the procedural environment. Respondents should not overreact; they should identify how funding affects costs, risk, settlement and enforcement.

24. Türkiye, Northern Cyprus and Cross-Border Relevance

Third-party funding may be relevant for parties connected with Türkiye and Northern Cyprus in several contexts: Turkish companies in international commercial arbitration; foreign investors with Türkiye-related investment disputes; construction and infrastructure disputes; energy and concession disputes; shareholder disputes involving cross-border structures; maritime and trade disputes; the enforcement of foreign awards; distressed companies with valuable claims; Northern Cyprus-related investment or property disputes; Türkiye–UK arbitration matters; and companies seeking to preserve liquidity while pursuing claims.

Parties connected to Türkiye or Northern Cyprus may arbitrate in London, Paris, Geneva, Singapore, Dubai or other seats while needing enforcement or evidence in another jurisdiction. Funding should therefore be assessed within a wider dispute strategy. A claimant should ask where the arbitration will take place, where the assets are, which law governs the dispute, which institution applies, whether interim protection can be obtained, whether enforcement will be practical, whether funding affects settlement leverage, and whether there are reputational or regulatory concerns. Funding is not a substitute for strategy; it is one part of strategy.

25. A Practical Checklist for Claimants

A claimant considering third-party funding should ask whether the claim is legally strong and whether its value is large enough; whether quantum is supported by evidence; whether the respondent can pay and where assets are located; whether enforcement is realistic; what the arbitration will cost and whether expert fees are required; whether adverse-costs exposure is covered and whether security for costs is likely; whether funding must be disclosed and whether conflicts could arise; what information must be shared with funders and whether privilege is protected; who controls settlement and whether the funder can terminate; what the funder's return is and what the claimant receives under different outcomes; whether sanctions or anti-money-laundering checks are needed; and whether independent legal advice has been obtained.

26. A Practical Checklist for Companies and Boards

A company or board reviewing arbitration funding should consider whether funding preserves company liquidity and improves risk management, and whether the arrangement affects financial reporting; whether the claim is a strategic asset and whether the board has reviewed merits and enforcement; whether directors are comfortable with the funding terms and whether the company is giving up too much of the recovery; whether settlement decisions are protected and whether confidentiality and privilege are preserved; whether reputational issues are considered and whether insurers are involved; whether the legal team is experienced in funded arbitration; whether the funding agreement is aligned with corporate governance; whether the arrangement requires shareholder approval; and whether conflicts and disclosure obligations are managed.

Frequently Asked Questions

What is third-party funding in international arbitration?

Third-party funding is an arrangement where an external funder finances the costs of arbitration in exchange for a financial return if the claim succeeds.

Is third-party funding used in investment arbitration?

Yes. Third-party funding is often discussed in investment arbitration because investor-state cases can be expensive and lengthy, and funding may raise transparency, ethical and procedural questions.

Does third-party funding need to be disclosed?

Disclosure depends on the applicable arbitration rules, tribunal orders, seat law, treaty provisions and circumstances. At minimum, disclosure of the funder's identity may be relevant for arbitrator conflict checks.

Can a funded claimant be ordered to provide security for costs?

Yes, in some cases. Funding may be relevant to security-for-costs applications, especially if the claimant appears unable to satisfy an adverse-costs order. However, funding alone should not automatically justify security.

Who controls a funded arbitration?

The claimant should retain control of the arbitration. The funding agreement may allow funder monitoring and consultation, but excessive funder control may create ethical and procedural concerns.

Is third-party funding suitable for every claim?

No. Funders usually look for strong merits, credible quantum, realistic recovery, enforceable awards and a favourable cost-to-value ratio.

Can funding support settlement?

Yes. Funding may strengthen a claimant's ability to negotiate, but settlement control and economic consequences should be clearly addressed in the funding agreement.

Why is enforcement important to funders?

Funders invest in recovery, not only awards. If the respondent has no assets or enforcement is unrealistic, funding may be difficult even if the claim has strong merits.

Conclusion

Third-party funding has changed international arbitration. It can give claimants access to justice, preserve liquidity, support meritorious claims and allow companies to treat disputes as strategic assets rather than pure costs. But funding also introduces complexity: disclosure, conflicts, security for costs, funder control, privilege, confidentiality, settlement, adverse costs, enforcement and ethics must all be considered carefully.

For claimants, the question is not simply whether funding is available; the better question is whether funding improves the dispute strategy without compromising control, confidentiality or recovery. For respondents, the existence of funding should be analysed calmly and strategically. For boards and investors, funded arbitration should be assessed like any serious financial and legal decision — by looking at merits, risk, cost, timing, recovery and governance. Third-party funding is not a shortcut; used properly, it is a sophisticated tool for managing the economics of high-value international disputes.

How Terziolu & Partners Can Assist

Terziolu & Partners advises businesses, investors, entrepreneurs and private clients on Türkiye, Northern Cyprus and cross-border legal matters. Our work may include advising on international arbitration strategy; assessing the suitability of third-party funding; preparing claims for funder review; coordinating with arbitration counsel and funding specialists; reviewing funding agreements; advising on disclosure, conflicts and security for costs; assessing enforcement and asset-recovery strategy; supporting settlement and recovery planning; advising Turkish, Northern Cyprus and cross-border clients on funded-arbitration issues; and coordinating with counsel, experts and funders where appropriate.

Discuss third-party funding, arbitration strategy or a cross-border dispute with our team.

This article is provided for general informational purposes only and does not constitute legal advice. Third-party funding and arbitration strategy may vary significantly depending on the applicable law, arbitration rules, seat, institution, treaty, funding agreement, parties, evidence, quantum, costs, conflicts, disclosure obligations, security-for-costs risk, enforcement prospects and timing of advice. No action should be taken or withheld solely on the basis of this publication. Specific legal, financial, regulatory and arbitration advice should be obtained before entering into a funding agreement, commencing arbitration, disclosing funding arrangements, seeking security for costs, settling a funded claim or enforcing an award. Submission of an enquiry to Terziolu & Partners does not create a lawyer-client relationship unless and until the engagement is formally accepted in writing.