Third-Party Funding in International Arbitration: Regulation, Risks, and the Indian Position

Introduction

International arbitration has emerged as the preferred mechanism for resolving cross-border commercial disputes, owing to its neutrality, enforceability, and procedural flexibility. The global enforceability of arbitral awards under the New York Convention, 1958 has significantly contributed to its widespread acceptance. However, despite these advantages, arbitration has increasingly been criticized for its escalating costs, which often restrict access to justice, particularly for small and medium enterprises and financially constrained claimants.

In response to these financial barriers, third-party funding (TPF) has emerged as a transformative development in international arbitration. TPF enables a non-party to finance the costs of arbitration proceedings in exchange for a share in the proceeds of a successful award. While this mechanism enhances access to justice and enables meritorious claims to be pursued, it simultaneously raises complex legal, ethical, and procedural concerns.

The growing global acceptance of TPF, coupled with ongoing discussions in international forums, has intensified the need for regulatory clarity. In India, although judicial developments have recognized the permissibility of third-party funding, the absence of a comprehensive regulatory framework continues to create uncertainty. This article critically examines the concept of TPF, evaluates global regulatory approaches, analyses the associated legal risks, and assesses the Indian position in light of judicial and policy developments.

This article argues that while third-party funding is essential for enhancing access to justice, its unregulated expansion in India risks undermining arbitral integrity, thereby necessitating a calibrated regulatory framework.

Conceptual Framework of Third-Party Funding

Third-party funding is essentially a risk-allocation mechanism whereby an independent funder agrees to finance the legal costs of arbitration on behalf of a party. These costs typically include arbitrators’ fees, institutional charges, legal representation, and expert witness expenses. In return, the funder receives a pre-agreed percentage of the damages awarded or settlement amount. If the claim fails, the funder bears the financial loss.

The rise of TPF can be attributed to several structural changes in arbitration. Modern arbitration proceedings have become increasingly complex, involving extensive documentation, expert testimony, and prolonged hearings. Consequently, the financial burden associated with arbitration has increased substantially. TPF enables claimants to shift this financial risk to specialized funding institutions, thereby facilitating access to dispute resolution.

Beyond its financial dimension, TPF introduces a third stakeholder into the arbitration process. This alters the traditional bilateral structure of arbitration and raises important questions regarding control, influence, and accountability. As such, TPF is not merely a financing tool but a development with significant legal implications.

Global Regulatory Landscape

The regulation of third-party funding varies significantly across jurisdictions, reflecting divergent legal traditions and policy priorities.

In the United Kingdom, TPF is permitted and primarily governed through self-regulatory mechanisms, such as the code of conduct issued by the Association of Litigation Funders. This approach emphasizes flexibility while maintaining ethical standards.

In contrast, jurisdictions such as Singapore and Hong Kong have adopted a more structured regulatory approach. Both jurisdictions have expressly legalized TPF and introduced statutory frameworks mandating disclosure of funding arrangements. These measures aim to prevent conflicts of interest and enhance transparency in arbitration proceedings.

At the international level, institutions and forums have increasingly acknowledged the importance of regulating TPF. The UNCITRAL Working Group III has emphasized the need for disclosure of funding arrangements, particularly in investor-state dispute settlement. Similarly, arbitral institutions have begun incorporating TPF-related provisions into their procedural rules.

Despite these developments, there is no uniform global framework governing TPF. This lack of harmonization creates uncertainty in cross-border disputes, where parties may be subject to differing regulatory standards. The absence of consistency underscores the need for a balanced and coherent approach to regulation.

• Legal Risks and Challenges

While TPF offers substantial benefits, it also introduces a range of legal and ethical challenges that must be carefully addressed.

• Conflict of Interest

One of the most significant concerns relates to arbitrator independence and impartiality. Arbitrators are required to disclose any circumstances that may give rise to justifiable doubts regarding their neutrality. The involvement of third-party funders increases the likelihood of undisclosed relationships between arbitrators and funders, thereby creating potential conflicts of interest.

The lack of mandatory disclosure requirements in several jurisdictions exacerbates this issue, making it difficult to identify and manage such conflicts effectively.

The importance of disclosure in maintaining arbitral impartiality has been emphasized in international jurisprudence. In Halliburton Co. v. Chubb Bermuda Ins. Ltd.,[1]the UK Supreme Court underscored that arbitrators have a legal duty to disclose circumstances that might give rise to justifiable doubts regarding their impartiality. Although the case did not directly concern third-party funding, its reasoning is highly relevant in TPF contexts, where undisclosed relationships between arbitrators and funders may compromise neutrality. The decision reinforces the argument for mandatory disclosure of funding arrangements to safeguard the integrity of arbitral proceedings.

• Influence on Arbitral Proceedings

Third-party funders, by virtue of their financial stake, may seek to influence key strategic decisions, including the selection of counsel, procedural tactics, and settlement negotiations. This raises concerns regarding party autonomy, a foundational principle of arbitration.

If funders exercise excessive control, the arbitration process may no longer reflect the genuine interests of the funded party, thereby undermining the legitimacy of the proceedings.

• Confidentiality Concerns

Confidentiality is a defining feature of arbitration. However, TPF arrangements often require the disclosure of sensitive information to funders during due diligence and case assessment. This creates a risk of confidentiality breaches, particularly where funders are involved in multiple disputes.

• Security for Costs

The presence of a third-party funder frequently leads to applications for security for costs, where the respondent seeks financial protection against the risk of non-payment of adverse costs. Tribunals may consider the existence of funding as a relevant factor in granting such applications, thereby affecting procedural balance.

Arbitral tribunals have increasingly considered the presence of third-party funding in determining applications for security for costs. In RSM Production Corporation v. Saint Lucia.,[2]the tribunal granted security for costs, taking into account the claimant’s financial instability and the existence of third-party funding. The tribunal observed that funding arrangements may be indicative of a claimant’s inability to satisfy adverse cost orders, thereby justifying protective measures. This case highlights how TPF can materially influence procedural decisions and underscores the need for clear standards governing security for costs in funded arbitrations.

Ethical and Public Policy Concerns

Critics argue that TPF contributes to the commercialization of justice, transforming dispute resolution into a profit-driven enterprise[3]. There is also a concern that funders may encourage speculative or frivolous claims to maximize returns.

These concerns highlight the need for a regulatory framework that balances access to justice with the preservation of ethical standards.

Indian Legal Position

The legal position on third-party funding in India remains permissive but under-regulated.

The Arbitration and Conciliation Act, 1996 does not contain any provisions specifically addressing TPF. Consequently, funding arrangements are governed by general principles of contract law.

The Supreme Court of India, in Bar Council of India v. A.K. Balaji,[4]clarified that while advocates are prohibited from funding litigation, third-party funding by non-lawyers is permissible. This judgment implicitly recognizes the legality of TPF in India.

The permissibility of third-party funding in India is further supported by earlier judicial precedents. In Ram Coomar Coondoo v. Chunder Canto Mookerjee,[5] the Privy Council recognized that litigation funding agreements are not per se illegal, provided they are not extortionate, unconscionable, or opposed to public policy. This principle was reaffirmed in G, Senior Advocate, In re.,[6] where the court clarified that while advocates are restricted from engaging in champertous agreements, third-party funding by non-lawyers is not inherently unlawful. These decisions establish that Indian law adopts a qualified permissibility approach, allowing TPF subject to fairness and public policy considerations.

Additionally, certain states such as Maharashtra, Gujarat, and Madhya Pradesh have recognized the validity of funding arrangements in civil litigation. Although these provisions are not arbitration-specific, they indicate a broader acceptance of TPF within the Indian legal system.

However, the absence of a comprehensive regulatory framework presents several challenges:

• Lack of mandatory disclosure requirements
• Absence of conflict-of-interest guidelines
• No regulation of funder conduct
• Uncertainty regarding security for costs

This regulatory vacuum creates unpredictability and may deter international parties from choosing India as a seat of arbitration.

Despite such recognition, India lacks arbitration-specific jurisprudence on third-party funding, particularly in relation to disclosure obligations and funder liability. This absence creates a disconnect between judicial permissibility and practical enforceability.

• Need for a Regulatory Framework in India: As arbitration continues to play a crucial role in India’s commercial ecosystem, there is an urgent need to establish a structured regulatory framework for third-party funding.
• Mandatory Disclosure: Parties should be required to disclose the existence of funding arrangements at the outset of proceedings. This would enable arbitrators to assess potential conflicts of interest and ensure transparency.
• Regulation of Funder Conduct: Clear guidelines should be introduced to regulate the role of funders, particularly in relation to decision-making authority. This would safeguard party autonomy and prevent undue influence.
• Confidentiality Safeguards: Rules should be established to protect confidential information shared with funders, including restrictions on its use and dissemination.
• Security for Costs: Indian arbitration law should provide clarity on the circumstances under which security for costs may be granted in funded arbitrations. This would enhance procedural predictability.

Institutional Reforms: Arbitral institutions in India should incorporate TPF-related provisions into their rules. This would align Indian practice with global standards and strengthen its credibility.

Critical Evaluation

Third-party funding represents a significant evolution in international arbitration. Its ability to enhance access to justice and facilitate complex claims is undeniable. However, its unregulated expansion poses serious risks to procedural fairness and institutional integrity.

A comparative analysis reveals that jurisdictions adopting balanced regulatory approaches have been more successful in integrating TPF into their legal systems. India, by contrast, remains at a transitional stage, characterized by judicial acceptance but legislative ambiguity.

The current Indian approach reflects a reactive rather than proactive regulatory philosophy. In the absence of clear guidelines, tribunals may adopt inconsistent approaches, thereby undermining predictability—an essential feature of arbitration.

In Essar Oilfields Services Ltd v. Norscot Rig Management Pvt Ltd.,[7] the English High Court upheld an arbitral award that included third-party funding costs as part of recoverable costs. This marked a significant development in the acceptance of TPF within commercial arbitration, as it recognized funding costs as legitimate expenses. However, the decision also raised concerns regarding potential cost inflation and the shifting of financial burdens onto the losing party. It illustrates that while TPF enhances access to justice, it may simultaneously complicate cost allocation and fairness in arbitral proceedings.

The challenge lies in striking an appropriate balance. Over-regulation may stifle innovation and limit access to funding, while under-regulation may lead to abuse and undermine confidence in arbitration. A principle-based regulatory framework, emphasizing transparency and accountability, is therefore essential.

Conclusion

Third-party funding has emerged as a transformative mechanism in international arbitration, addressing the critical issue of cost and expanding access to justice. At the same time, it introduces complex challenges relating to conflicts of interest, procedural fairness, and ethical integrity.

Globally, there is a clear trend towards regulated acceptance of TPF, with jurisdictions implementing disclosure requirements and governance standards. India, despite recognizing the legality of third-party funding, has yet to develop a comprehensive regulatory framework.

As India aspires to position itself as a global arbitration hub, it must address this regulatory gap. By introducing structured guidelines that ensure transparency, fairness, and accountability, India can effectively harness the benefits of TPF while safeguarding the foundational principles of arbitration.

Ultimately, the future of third-party funding in India will depend on its ability to strike a careful balance between innovation and regulation, ensuring that arbitration remains both efficient and equitable in an increasingly complex global legal landscape.

[1] Halliburton Co. v. Chubb Bermuda Ins. Ltd. , [2020] UKSC 48.

[2] RSM Prod. Corp. v. Saint Lucia ICSID Case No. ARB/12/10

[3] Catherine A. Rogers, Ethics in International Arbitration, 23 Geo. J. Legal Ethics 341 (2010).

[4] Bar Council of India v. A.K. Balaji AIR 2018 SC 1382

[5] Ram Coomar Coondoo v. Chunder Canto Mookerjee (1876) LR 2 IA 186 (PC)

[6] G, Senior Advocate, In re AIR 1954 SC 557

[7] Essar Oilfields Servs. Ltd. v. Norscot Rig Mgmt. Pvt. Ltd.[2016] EWHC 2361 (Comm)