1. Meaning and Introduction

Third-Party Funding (TPF) refers to an arrangement in which an independent person, company, investment fund or commercial entity finances the legal proceedings of another party in exchange for an agreed financial return, usually payable when the funded party successfully obtains compensation, damages or another monetary benefit.

The third-party funder is generally not a party to the original dispute. It provides financial assistance to a claimant or defendant who may lack sufficient resources to pursue or defend litigation or arbitration.

Third-party funding is increasingly important in:

Commercial litigation.

International commercial arbitration.

Investor-state dispute settlement.

Class actions and collective proceedings.

Insolvency and restructuring disputes.

Intellectual property litigation.

Competition law disputes.

Cross-border contractual disputes.

Example: A company has a contractual claim worth ₹100 crore against another corporation but cannot afford the litigation expenses. An investment fund agrees to finance the proceedings in exchange for 25% of the recovery. If the company wins, the funder receives its agreed return. If the claim fails, the funding agreement may require the funder to bear the financial loss.

Third-party funding therefore creates a relationship between three principal participants:

Funded party: The claimant or defendant receiving financial assistance.

Third-party funder: The independent entity providing financial resources.

Opposing party: The person or organisation against whom the legal proceedings are conducted.

2. Nature and Legal Characteristics

Third-party funding has several important legal characteristics.

A. Independent financial participation

The funder finances litigation without necessarily becoming a party to the underlying contract or legal dispute.

B. Conditional financial return

The funder's remuneration generally depends on the outcome of the proceedings. It may be calculated as a percentage of the recovery, a multiple of the investment or another agreed financial arrangement.

C. Commercial risk allocation

The funder assumes some or all of the financial risk associated with pursuing the litigation, depending on the agreement.

D. Access to justice

Funding can enable individuals, small businesses and financially distressed corporations to pursue legitimate legal claims against economically powerful opponents.

E. Contractual relationship

The rights and obligations of the funder and funded party are primarily governed by their funding agreement, subject to applicable legislation, public policy and professional obligations.

F. Potential influence over litigation

A significant legal concern arises when the funder attempts to influence:

Appointment of lawyers.

Litigation strategy.

Settlement decisions.

Withdrawal of claims.

Choice of experts.

Arbitration procedures.

The funded party and its legal representatives must retain appropriate control over the proceedings.

3. Major Theories Governing Third-Party Funding

1. Access to Justice Theory

This theory recognises that financial limitations should not prevent a party from seeking judicial remedies. Third-party funding can reduce economic barriers to litigation.

2. Risk Distribution Theory

Litigation involves uncertainty. Funding distributes financial risks between the claimant and an independent commercial funder.

3. Economic Efficiency Theory

Funding encourages the pursuit of legally meritorious claims that might otherwise remain unlitigated because of financial constraints.

4. Litigation Control Theory

This theory addresses the extent to which a funder may participate in strategic decisions without compromising the independence of the claimant or its lawyers.

5. Procedural Fairness Theory

Funding should not create unfair procedural advantages or disadvantages. Courts and tribunals must protect both funded and non-funded parties.

6. Transparency and Disclosure Theory

Disclosure may be necessary to identify conflicts of interest, understand security-for-costs applications and preserve the integrity of judicial and arbitral proceedings.

4. Major Categories of Third-Party Funding Disputes

5. Essential Legal Issues in Third-Party Funding

A. Enforceability of funding agreements

One of the most important questions is whether a litigation funding agreement is legally enforceable.

Historically, common-law jurisdictions applied doctrines such as maintenance and champerty to prevent improper interference in litigation.

Maintenance traditionally involved improper assistance in another person's litigation.

Champerty involved supporting litigation in return for a share of the proceeds.

Modern legal systems increasingly distinguish legitimate commercial funding from arrangements that improperly interfere with the administration of justice.

The enforceability of a funding agreement depends on the relevant jurisdiction, applicable legislation and contractual circumstances.

B. Funder liability for adverse costs

A central controversy concerns whether a third-party funder should pay the opposing party's legal expenses when the funded litigation fails.

Relevant considerations include:

The extent of the funder's financial involvement.

Whether the funder controlled or substantially influenced proceedings.

Whether the funder stood to benefit from the litigation.

Whether the funder agreed to bear adverse-costs liability.

Applicable procedural legislation.

Funding does not automatically make the funder liable for every expense incurred by the opposing party.

C. Security for costs

A defendant may request that a funded claimant provide financial security to protect against the possibility that the claimant will lose and be unable to pay an adverse-costs order.

However, the mere existence of third-party funding does not necessarily justify security for costs. Tribunals generally examine the financial circumstances and procedural conduct of the particular case.

D. Confidentiality and privilege

Funding negotiations may involve the disclosure of:

Legal opinions.

Case assessments.

Financial documents.

Litigation strategies.

Expert reports.

Settlement evaluations.

Disclosure of these documents can create confidentiality and legal professional privilege issues.

E. Conflicts of interest

A funder's financial interests may conflict with the interests of the funded party.

For example, a funder may prefer an early settlement because it wants to recover its investment, whereas the claimant may wish to continue litigation to obtain greater compensation.

F. Recovery of funding costs

Another important question is whether the successful claimant can recover the amount paid to the funder from the unsuccessful opposing party.

The answer depends on the governing procedural rules, arbitration agreement and applicable costs provisions.

6. Important Judicial Decisions and Case Laws

The following decisions illustrate the development of third-party funding law across Australia, England, India and international arbitration.

1. Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd (2006) 229 CLR 386

Australia – High Court

Background:

The dispute concerned a litigation funding arrangement involving a commercial funder that financed proceedings brought by tobacco retailers seeking recovery of licence fees.

The arrangement was challenged on the grounds that it constituted improper maintenance and champerty.

Legal issues:

Whether commercial litigation funding was unlawful.

Whether a funder could financially support collective proceedings.

Whether the funding arrangement improperly interfered with the administration of justice.

Judgment:

The High Court of Australia upheld the legitimacy of the funding arrangement in the circumstances. It rejected the proposition that litigation funding was automatically contrary to public policy.

Legal principles:

Commercial litigation funding is not inherently unlawful.

The existence of a financial interest in litigation does not automatically invalidate proceedings.

Courts must examine whether the arrangement constitutes an abuse of process.

Access to justice is an important consideration.

Funding arrangements must remain consistent with the proper administration of justice.

Significance: This is a foundational authority supporting the legitimacy of commercial third-party litigation funding.

2. Arkin v Borchard Lines Ltd [2005] EWCA Civ 655

England – Court of Appeal

Background:

The case involved a commercial funder, Mr Arkin, who financed litigation pursued by a claimant. The litigation failed, raising the question of whether the funder should bear the successful defendant's legal costs.

Legal issues:

Whether a third-party funder could be made liable for adverse costs.

Whether liability should be proportionate to the funding provided.

Whether funders should face unlimited financial exposure.

Judgment:

The Court of Appeal developed what became known as the Arkin Cap approach. Under that approach, a professional funder could, in appropriate circumstances, be liable for adverse costs up to the amount of funding provided.

Legal principles:

Third-party funders may face adverse-costs liability.

Funding participation can justify judicial scrutiny.

Costs liability should be assessed according to the circumstances.

The amount of funding may be relevant to the extent of liability.

Funding should not necessarily expose commercial funders to unlimited liability.

Significance: The case established an important historical framework for determining funder liability. The approach should not be treated as an inflexible universal cap.

3. Excalibur Ventures LLC v Texas Keystone Inc [2016] EWCA Civ 1144

England – Court of Appeal

Background:

Excalibur pursued substantial commercial claims relating to oil and gas interests. The litigation was supported by professional third-party funders.

The claims ultimately failed, and the court considered whether the funders should contribute towards the successful defendants' legal costs.

Legal issues:

Whether funders could face adverse-costs orders.

Whether funders should be protected by the Arkin Cap.

Whether the reasonableness of funding decisions was relevant.

Judgment:

The Court of Appeal upheld adverse-costs liability against the funders and emphasised that professional funders could be exposed to costs consequences when the litigation they supported failed.

It also clarified that the Arkin approach was not an automatic limitation on the court's power to award costs.

Legal principles:

Funders may be responsible for adverse costs.

Funding decisions should be evaluated in light of the circumstances.

Commercial funders cannot automatically escape costs consequences.

The court may examine the nature and extent of funding participation.

The Arkin Cap is not an absolute rule.

Significance: The decision strengthened judicial control over commercial litigation funding and funder accountability.

4. Essar Oilfield Services Ltd v Norscot Rig Management Pvt Ltd [2016] EWHC 2361 (Comm)

England – Commercial Court

Background:

Norscot initiated ICC arbitration against Essar concerning contractual disputes. Because of its financial difficulties, Norscot obtained third-party funding from Woodsford Litigation Funding.

The funder advanced approximately £647,000. Under the funding agreement, Norscot became liable for a substantially greater payment upon success.

The arbitrator included approximately £1.94 million in funding costs in the award against Essar.

Essar challenged the award, arguing that the arbitrator had exceeded his powers.

Legal issues:

Whether third-party funding expenses constituted arbitration costs.

Whether funding costs could be recovered from the unsuccessful party.

Whether the arbitrator exceeded his jurisdiction.

Judgment:

The English High Court dismissed Essar's challenge. It held that the expression "other costs" under Section 59(1)(c) of the Arbitration Act 1996 could include third-party funding costs.

Legal principles:

Funding expenses may qualify as recoverable arbitration costs.

The tribunal's interpretation of its costs powers is important.

Funding costs are not automatically recoverable in every arbitration.

The circumstances giving rise to the funding arrangement matter.

The tribunal retains discretion concerning costs allocation.

Significance: This case is particularly important for international arbitration because it recognises that funding expenses may, in appropriate circumstances, be recoverable from the unsuccessful party.

Bailii+2

5. RSM Production Corporation v Saint Lucia, ICSID Case No. ARB/12/10, Decision on Security for Costs (13 August 2014)

International Investment Arbitration

Background:

The dispute concerned an investment claim brought by RSM Production Corporation against Saint Lucia. The respondent sought security for costs, relying partly on the claimant's funding arrangements and its financial circumstances.

Legal issues:

Whether third-party funding justified security for costs.

Whether a claimant's financial position was relevant.

Whether procedural conduct could justify protective measures.

Judgment:

The tribunal ordered security for costs in exceptional circumstances. The claimant's history of non-compliance with procedural obligations and its financial circumstances were significant considerations.

Legal principles:

Third-party funding may be relevant to security-for-costs applications.

Funding alone does not automatically justify security.

Procedural misconduct may influence the tribunal's decision.

Financial circumstances must be assessed in context.

Security for costs is an exceptional procedural protection.

Significance: The decision illustrates the balance between protecting respondents from unrecoverable legal expenses and preserving claimants' access to international arbitration.

6. EuroGas Inc and Belmont Resources Inc v Slovak Republic, ICSID Case No. ARB/14/14, Procedural Order No. 3 (23 June 2015)

International Investment Arbitration

Background:

The dispute involved investment claims against the Slovak Republic. Questions arose concerning the claimant's third-party funding arrangements and the respondent's request for security for costs.

Legal issues:

Whether the existence of third-party funding established an inability to pay costs.

Whether funding arrangements justified security for costs.

Whether the tribunal should require additional financial protection.

Judgment:

The tribunal did not consider the mere existence of third-party funding sufficient to justify security for costs.

Legal principles:

Funding is not conclusive evidence of insolvency.

A funder's involvement does not automatically establish an inability to satisfy adverse-costs orders.

Security applications require case-specific evidence.

The tribunal must balance procedural fairness and financial protection.

Third-party funding should not automatically prevent access to arbitration.

Significance: This decision demonstrates that tribunals distinguish between the existence of funding and evidence of genuine financial risk.

The Institute for Conflict Management+1

7. Tomorrow Sales Agency Pvt Ltd v SBS Holdings Inc & Others, 2023 SCC OnLine Del 3191

India – Delhi High Court

Background:

The dispute arose out of arbitration proceedings involving SBS Holdings and other parties. Tomorrow Sales Agency had provided third-party funding to a party pursuing the arbitration.

Following the arbitral award, questions arose about whether the funder could be subjected to enforcement-related directions and made responsible for obligations arising from the award.

Legal issues:

Whether a third-party funder could be held liable for an arbitral award.

Whether the funder could be required to disclose its assets.

Whether security-related directions could be issued against a non-party funder.

Whether funding itself established liability for the funded party's obligations.

Judgment:

A Division Bench of the Delhi High Court set aside the directions requiring the funder to disclose its assets and restricting dealings with its immovable property.

The court emphasised that a funder should not be subjected to liability for obligations it had neither undertaken nor been legally directed to discharge.

Legal principles:

A third-party funder does not automatically become liable for an arbitral award.

A funding relationship does not itself establish privity of contract with the opposing party.

Liability must arise from an independent legal basis.

A non-party funder cannot automatically be subjected to enforcement proceedings.

Courts must distinguish between funding a claim and assuming liability for the claimant's obligations.

Significance: This is particularly important for Indian litigation funding law. It protects legitimate third-party funders from automatic liability while preserving the possibility of liability where an independent legal basis exists.

Chambers

8. International Litigation Partners Pte Ltd v Chameleon Mining NL [2012] HCA 45

Australia – High Court

Background:

The case concerned a litigation funding agreement involving Chameleon Mining and its funder, International Litigation Partners.

The dispute raised questions about the legal character and enforceability of the funding arrangement.

Legal issues:

Whether the funding agreement was subject to applicable financial-services regulation.

Whether a commercial litigation funding arrangement could attract statutory obligations.

Whether the funder could rely on contractual rights without complying with applicable legal requirements.

Judgment:

The High Court considered the statutory regulatory framework applicable to the funding arrangement and the consequences of non-compliance.

Legal principles:

Litigation funding is not necessarily exempt from financial regulation.

Funders must comply with applicable statutory requirements.

Contractual rights may be affected by regulatory non-compliance.

Funding agreements must be examined in their regulatory context.

Commercial funding cannot be separated from applicable financial-services legislation.

Significance: The decision demonstrates that the legality of a funding agreement involves not only procedural law but also financial regulation.

CMR University+1

7. Third-Party Funding under Indian Law

India has gradually developed a legal framework that accommodates third-party litigation funding, although there is no single comprehensive central statute exclusively regulating all forms of litigation funding.

A. Code of Civil Procedure, 1908

Order XXV addresses security for costs in certain circumstances.

Section 35 deals with the court's power concerning costs, while Section 35A addresses compensatory costs in specified situations.

These provisions are relevant when considering financial responsibility in funded litigation.

B. Indian Contract Act, 1872

The following provisions may become relevant:

Section 10: Validity of agreements.

Section 23: Lawful consideration and objects.

Section 37: Obligation to perform contractual promises.

Section 73: Compensation for loss or damage caused by breach.

Section 74: Compensation for breach where a penalty is stipulated.

A funding agreement must satisfy applicable requirements of contractual validity and public policy.

C. Arbitration and Conciliation Act, 1996

Section 18: Equal treatment of parties.

Section 19: Determination of procedural rules.

Section 31A: Regime for costs in arbitration.

Section 34: Setting aside arbitral awards.

Section 36: Enforcement of arbitral awards.

Section 31A is particularly relevant to disputes concerning the allocation of arbitration expenses.

D. Indian judicial approach

The decision in Tomorrow Sales Agency v SBS Holdings Inc establishes an important distinction between financing litigation and assuming legal liability for the funded party's obligations.

It reinforces the principle that a funder cannot automatically be treated as a judgment debtor merely because it financed the proceedings.

8. International Legal Framework

Third-party funding is also influenced by international arbitration rules and institutional practices.

The regulatory approach differs between jurisdictions. Singapore and Hong Kong, for example, have introduced specific statutory frameworks permitting third-party funding in defined arbitration-related circumstances.

9. Major Challenges in Third-Party Funding Disputes

1. Excessive funder returns

Funding agreements may impose substantial success fees, creating disputes over commercial fairness and enforceability.

2. Lack of transparency

Non-disclosure of funding arrangements may create conflicts of interest or complicate procedural decisions.

3. Interference in litigation

A funder may attempt to influence settlement, strategy or the appointment of legal representatives.

4. Adverse-costs exposure

Disputes arise when defendants seek to recover their litigation expenses from funders.

5. Uncertain regulatory treatment

Different countries adopt different rules concerning licensing, disclosure, permissible funding arrangements and funder liability.

6. Confidentiality problems

Sharing privileged documents with funders may create disputes concerning confidentiality and privilege protection.

7. Insolvency of funders

If a funder becomes insolvent during proceedings, the funded party may lose the financial support necessary to continue litigation.

8. Cross-border enforcement

Enforcing funding agreements and costs orders across jurisdictions can create additional contractual and procedural complications.

10. Remedies Available in Third-Party Funding Disputes

Depending on the jurisdiction and nature of the dispute, the following remedies may be available:

Declaration concerning the validity of a funding agreement.

Damages for breach of funding obligations.

Specific performance where legally appropriate.

Injunctions against improper interference.

Orders concerning disclosure of funding arrangements.

Security-for-costs orders.

Adverse-costs orders against legally responsible funders.

Recovery of reasonable arbitration or litigation expenses.

Termination of funding agreements.

Settlement or restructuring of funding obligations.

11. Comparative Legal Analysis

12. Future Development of Third-Party Funding Law

The future development of this field is likely to involve:

Mandatory disclosure standards for funding arrangements.

Regulation and registration of professional litigation funders.

Clearer rules on adverse-costs liability.

Protection against excessive funding charges.

Standardised funding agreement requirements.

Stronger safeguards against funder interference.

Improved confidentiality and privilege protections.

International cooperation concerning cross-border funding.

AI-assisted assessment of litigation risks and funding eligibility.

Special regulatory protections for consumers and small businesses.

13. Critical Analysis

Third-party funding creates an important connection between commercial finance and the administration of justice.

Its strongest justification is that it allows parties with legitimate claims to obtain legal remedies even when they cannot independently afford litigation.

However, it also creates significant concerns. Commercial funders may prioritise financial returns over the interests of claimants. Excessive funding charges can reduce the compensation ultimately received by successful litigants. Furthermore, funder involvement may create conflicts of interest and additional procedural complications.

The correct legal approach is therefore neither to prohibit third-party funding entirely nor to permit unrestricted commercial interference.

Instead, legal systems should establish a balanced framework based on transparency, contractual fairness, accountability, procedural independence and access to justice.

14. Conclusion

Third-party funding disputes represent an important developing area of commercial litigation and international arbitration law.

The decisions in Fostif, Arkin, Excalibur, Essar, RSM Production, EuroGas, Tomorrow Sales Agency and International Litigation Partners demonstrate how courts and arbitral tribunals have addressed the legitimacy of funding arrangements, funder liability, security for costs, recoverability of funding expenses and contractual enforceability.

The central legal principle is that financing litigation does not automatically make a funder a party to the underlying dispute or liable for every obligation of the funded party.

At the same time, funders cannot assume that their financial participation will always protect them from adverse-costs consequences or regulatory obligations.

Ultimately, a sound third-party funding framework must balance three objectives:

Access to justice for financially disadvantaged litigants.

Protection of opposing parties against unfair financial and procedural risks.

Accountability of funders without compromising judicial independence.

Research note: The cases discussed come from different jurisdictions and legal contexts. Their principles should be applied subject to the governing legislation and procedural rules; they do not establish one universal international rule.