Impact Of Uk Litigation Funding Regulations On Arbitration Economics
1. Introduction
Third-party litigation funding (TPF) has become a critical feature of UK-seated arbitration, particularly in high-value commercial, energy, construction, competition, and group claims. Although arbitration is consensual and private, its economic viability is increasingly shaped by the UK’s regulatory and judicial treatment of litigation funding.
UK developments—especially concerning damages-based agreements (DBAs), funder control, recoverability of funding costs, and public policy—directly affect:
Whether claims are economically viable
Risk allocation between claimants, respondents, and funders
Settlement incentives
Cost recovery strategies in arbitration
2. UK Regulatory Framework Affecting Arbitration Economics
2.1 Distinction Between Litigation and Arbitration
Historically, UK regulation focused on court litigation, but judicial decisions have progressively extended funding principles into arbitration, particularly where:
Arbitrations are seated in England
English law governs the funding agreement
Enforcement or challenges arise before English courts
2.2 Key Economic Issues
Litigation funding regulations influence arbitration economics by affecting:
Enforceability of funding agreements
Cost recoverability
Funder return structures
Tribunal discretion on security for costs
Settlement leverage
3. Arbitration Economics: Where Funding Matters Most
Funding considerations are particularly influential in arbitration involving:
Capital-intensive claims (construction, energy, infrastructure)
Insolvent claimants
Group or mass arbitration
Investor-style commercial disputes
Funding regulation determines whether arbitration is accessible, scalable, and commercially rational.
4. Key Case Laws
Case 1: Arkin v Borchard Lines Ltd [2005] EWCA Civ 655
Principle:
A third-party funder may be liable for adverse costs to the extent of the funding provided (the “Arkin cap”).
Impact on Arbitration Economics:
This principle influences funder risk modelling in arbitration, making funding economically viable while limiting downside exposure. Tribunals and courts increasingly consider Arkin-style proportionality when assessing cost allocation.
Case 2: Excalibur Ventures LLC v Texas Keystone Inc [2016] EWCA Civ 1144
Principle:
Funders who exercise significant control over proceedings may be exposed to full adverse costs.
Impact on Arbitration Economics:
This decision discourages excessive funder control in arbitration, increasing compliance costs and shaping funding structures to preserve claimant autonomy.
Case 3: Essar Oilfields Services Ltd v Norscot Rig Management Pvt Ltd [2016] EWHC 2361 (Comm)
Principle:
Arbitration tribunals may treat third-party funding costs as “other costs” recoverable from the losing party.
Impact on Arbitration Economics:
This landmark ruling significantly altered arbitration economics by making funded arbitration more attractive, improving claimant cashflow prospects, and affecting settlement dynamics.
Case 4: R (on the application of PACCAR Inc) v Competition Appeal Tribunal [2023] UKSC 28
Principle:
Certain litigation funding agreements constituted damages-based agreements and were unenforceable unless compliant with DBA regulations.
Impact on Arbitration Economics:
Although focused on competition litigation, the decision created uncertainty for arbitration funding, forcing funders to restructure return models and increasing transaction costs.
Case 5: Davey v Money [2019] EWHC 997 (Ch)
Principle:
Courts scrutinise funding arrangements for fairness and proportionality, particularly regarding returns and control.
Impact on Arbitration Economics:
This judicial scrutiny influences arbitral cost assessments and security-for-costs applications, affecting the economic balance between parties.
Case 6: ChapelGate Credit Opportunity Master Fund Ltd v Money [2020] EWCA Civ 246
Principle:
Funding agreements are enforceable provided they do not offend public policy or champerty principles.
Impact on Arbitration Economics:
This case reinforced funder confidence in arbitration, supporting market stability and long-term funding strategies.
Case 7: Norscot Rig Management Pvt Ltd v Essar Oilfields Services Ltd [2016] EWHC 2361 (Comm)
Principle (Reaffirmed):
Tribunals have broad discretion over cost allocation under the Arbitration Act 1996.
Impact on Arbitration Economics:
This discretion allows tribunals to internalise funding costs into awards, materially influencing claim valuation and respondent risk exposure.
5. Effects on Key Aspects of Arbitration Economics
5.1 Claim Valuation and Case Selection
Funding regulation affects:
Minimum claim size
Risk-return thresholds
Jurisdictional attractiveness of England as a seat
5.2 Security for Costs
Respondents increasingly seek security where:
Claimants are funded
Funders are offshore
Enforcement risk exists
Tribunals balance access to justice against respondent protection.
5.3 Settlement Dynamics
The presence of funding:
Alters claimant reservation values
Increases respondent exposure
Can prolong proceedings if funder return thresholds are high
6. Public Policy and Arbitration Autonomy
English courts remain cautious not to over-regulate arbitration funding, recognising:
Party autonomy
Access to justice
England’s status as a leading arbitration seat
However, public policy boundaries—champerty, excessive control, and unfair returns—remain decisive.
7. Future Economic Implications
Recent judicial developments suggest:
Increased formalisation of arbitration funding agreements
Higher upfront legal costs
Greater tribunal scrutiny of funding arrangements
Potential legislative recalibration to preserve arbitration competitiveness
8. Conclusion
UK litigation funding regulation has a profound and measurable impact on arbitration economics. While English law remains broadly supportive of third-party funding, judicial intervention has reshaped:
Risk allocation
Cost recovery
Funding structures
Strategic behaviour in arbitration
The case law demonstrates a careful balancing act between commercial innovation and public policy discipline, ensuring arbitration remains both economically viable and legally principled.
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