Third-Party Funding in Investment Arbitration: Costs and Reforms

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Summary

• Investment arbitration has become prohibitively expensive, prompting the rapid growth of third‑party funding (TPF) as both a financial lifeline and a source of new regulatory and ethical challenges.
• This Article evaluates recent EU and UNCITRAL developments, proposes reforms to strengthen the TPF framework, and argues that funding can play a more constructive role if industry obstacles are systematically addressed.
• It further advances innovative proposals—including enhanced advisory centers and funder involvement in dispute settlement—to reduce costs and improve accessibility within the investment arbitration system.

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Abstract

The high costs of investment arbitration are no longer a surprise; they have become the norm, with cases frequently recognized as expensive endeavours. This development has contributed to the rapid expansion of the third-party funding (TPF) industry, which has positioned itself as a key mechanism for alleviating financial pressures associated with arbitration, although it has also attracted criticism for potentially driving up overall costs. The expansion of this industry has also introduced new challenges for arbitrators and concerns related to funding arrangements. Key questions arise: What strategies can effectively mitigate the high costs of investment arbitration? The answer to this question would be particularly beneficial for the parties to the investment arbitration. If TPF is considered a viable solution, what obstacles does this industry encounter, and what measures can address these challenges? The answers to these questions can offer valuable insights for funders, as well as for policymakers shaping legal frameworks related to TPF.

This Article makes a unique contribution by offering innovative and bold proposals on TPF, addressing three critical aspects of investment arbitration and its intersection with funding practices. First, this Article examines recent developments, including the European Parliament’s adoption of a text on responsible private funding of litigation and the implications of recent decisions by the European Court of Justice. These developments are analysed in comparison with the proposals put forward by the United Nations Commission on International Trade Law (UNCITRAL) Working Group III. The EU dimension is particularly significant to the central argument that (i) TPF already plays a critical role in the investment arbitration regime and (ii) holds even greater promise provided that existing industry challenges are effectively addressed to unlock its full potential. This Article introduces a comparative framework that highlights recent progress in the regulation of TPF. Second, this Article offers fresh perspectives on tackling cost-related barriers through an in-depth analysis of the advisory centres proposed by Working Group III, advocating for an expanded and more strategic role for these centres beyond their initial mandate. Last, this Article explores the potential for third-party funders to play a constructive role in settling investment arbitration disputes, offering a pathway to significantly reduce arbitration costs.

This Article begins by addressing the issue of the high costs associated with investment arbitration. These costs are high compared to domestic litigation in many jurisdictions, and even in relation to commercial arbitration or other alternative dispute resolution mechanisms. This poses a challenge for parties involved in investment arbitration, as it makes the process less accessible and potentially less attractive. This Article then explores the role of third-party funders as a potential solution to mitigate these expenses. Adopting a critical perspective, this Article then delves into the concerns surrounding the TPF industry, along with the challenges it confronts. Finally, this Article examines the solutions proposed by the UNCITRAL Working Group III and the European Union. This Article explores potential roles third-party funders can play in addressing the challenges associated with the costs of investment arbitration.

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I. Introduction

Investor-State Dispute Settlement (ISDS) is costly, a concern that has been consistently highlighted in the literature. According to a comprehensive empirical study that examined 400 investment arbitration cases up to May 31, 2021, the average costs of investors are $6.4 million, and the average costs of respondent states are $4.7 million. The role of the third-party funding (TPF) has also been widely discussed in the literature. This Section first examines the emergence of TPF in investment arbitration and its established role. The subsequent Section then explores recent developments in TPF to assess the status quo and future trajectory. The overarching argument of this Article is that TPF holds untapped potential beyond its current application. This can be achieved with the greater acceptance of TPF practices in domestic laws. The greater the legal certainty available to funders, the more widely this practice can be applied. To support the development of the funding industry and its role in arbitration, both regulatory frameworks and arbitral decision-making should be aligned in favour of this potential rather than restricting it. This Article further explores what that potential entails and how it can be effectively realised.

While TPF stays controversial, its value as a tool in investment arbitration is acknowledged. To ensure its long-term viability and effectiveness within the legal framework, the TPF industry must address these concerns to facilitate more consistent practice. To address concerns, a trend is globally shared, and that is the increasing regulation and rules for third-party funders. Various jurisdictions brought TPF legislation around the globe. Even more jurisdictions are expected to bring TPF legislation. Importantly, ICSID brought disclosure rules in Article 14 and a rule in security for costs specific to TPF in Article 57/4. Other arbitration institutions also brought TPF rules. Thus, we can conclude that arbitration institutions and national legislation are bringing more rules on TPF. The future of TPF seems to be more transparent and regulated than before.

II. Recent Developments

The first funded ISDS case that is ever known was in 2007. Because not all investment arbitration cases are publicly disclosed, and mandatory disclosure rules were not in place at the time, it is possible that another case may have received TPF prior to this one without becoming publicly known. Therefore, this case should be regarded as the first publicly known instance of TPF in investment arbitration. With this first publicly known funded case, TPF started receiving positive comments from the tribunal in investment arbitration, where the tribunal acknowledged its significance for access to justice, stating that “it is very unlikely that many of the Claimants would individually be in a position to initiate and conduct ICSID arbitration, if they had to finance the arbitration themselves.” From this positive attitude in investment arbitration, while TPF’s role in access to justice is acknowledged in other cases as well, TPF also began facing explicit criticism from some tribunal members. Dr. Griffith described TPF as follows: “Such a business plan for a related or professional funder is to embrace the gambler’s Nirvana: Heads I win, and Tails I do not lose.” In some treaties, TPF is not permitted. Similarly, scholars uttered different opinions about the positive and negative effects of TPF. Therefore, we can conclude that in investment arbitration, the role of TPF has been controversial among arbitrators, scholars, and states.

Following the rise of TPF worldwide, we now enter a transitional phase. This transition marks a move away from the current ISDS system, which has attracted a range of criticisms. While excessive costs are a significant concern, particularly in terms of access to justice and procedural fairness, many of the more fundamental critiques relate to broader structural and normative issues. These include claims that the regime undermines the global energy transition and reflects a systemic bias against developing states. The proposed reforms aim not only to reduce costs but also to create a more balanced and transparent system, one that treats the rights of investors and states with equal weight, responds effectively to global challenges such as climate change, and ensures that arbitrators interpret international treaty obligations in a way that reflects both investment protections and the regulatory autonomy of states. Excessive costs are issues “in relation to both party costs (fees and expenses of counsel, experts, and witnesses) and tribunal costs (fees and expenses of arbitrators and arbitral institutions).” At this stage, we also witnessed some developments that brought more regulations and rules related to TPF. It is important to note that the TPF market is a multibillion-dollar market. In 2024, the litigation funding investment market is estimated at approximately $17.5 billion, and by 2037, the market is projected to reach $67.2 billion, reflecting a compound annual growth rate (CAGR) of over 11.1% during the forecast period from 2025 to 2037. This Section covers the recent developments and methods parties can employ to keep the costs of investment arbitration under their control and the role of TPF while doing so.

A. The Impact of Cost Problem in Investment Arbitration

As the numbers show above, average respondent and claimant costs are several millions of dollars. Considering the losing party will potentially pay all these costs plus tribunal costs, an average of above $10 million in total costs is a significant number for investors of every size. For small-size foreign investors, it can even be a “costs-based barrier to access to justice.” Thus, the impact of costs on claimants is significant. The impact of costs for respondents is also severe, as the average costs for respondent states are $12.4 million for claims exceeding $1 billion. There are several factors affecting the costs of investment arbitration.

B. Mitigation Strategies by the Parties

Under the ICSID Arbitration Rules Article 3, the tribunal and the parties have the general duty to “conduct the proceeding in good faith and in an expeditious and cost-effective manner.” Other arbitration centres also have similar rules to ensure arbitrations are conducted in a cost-effective and expeditious manner. While parties have this general duty in investment arbitration rules, these rules are not enough to keep the costs of the arbitration proceedings at a reasonable level. Parties should employ different strategies to maintain control.

There are various mitigation strategies that can be employed by the parties. The UNCITRAL Secretariat published a note on investment dispute prevention and mitigation. While this transition is happening, there are certain cost mitigation strategies parties in ISDS can employ to tackle the high costs of investment arbitration.

Addressing the high costs of investment arbitration requires significant efforts from all stakeholders involved. These costs present a serious challenge primarily for the disputing parties—states and investors—who ultimately bear the financial burden. In contrast, other actors in the arbitration process, such as lawyers, arbitrators, experts, and funders, are not burdened by these costs; rather, they benefit from them, as they are the recipients of the associated fees. Funders, in particular, may benefit further from the system’s inaccessibility, as parties become more dependent on TPF to proceed with their claims. Because third-party funders provide financial support to claimants, and investment arbitration cases are typically initiated by investors against states, funders generally support investors who may either struggle to cover the substantial costs of arbitration or prefer to avoid assuming the financial risks associated with pursuing such claims. As a result, the cost problem disproportionately affects the parties to the dispute, namely, states and investors.

This study treats the issue of cost as a systemic “problem” in investment arbitration, particularly from the perspective of states. States are not only users of the ISDS system but also its primary architects, having created the framework through the conclusion of bilateral investment treaties (BITs), multilateral investment treaties (MITs), and membership in conventions such as ICSID. Without state consent, the entire ISDS framework would not exist. If the cost issue remains unaddressed, states may lose interest in the current ISDS system or states might submit “proposals for strengthening alternative dispute settlement mechanisms” as “[a]lternative dispute settlement mechanisms are described in a Submission as a means to reduce duration and cost of proceedings.” TPF can also help to keep the costs under control. Now, the next section elaborates on the role of TPF in investment arbitration.

III. The Role of TPF in Investment Arbitration

TPF holds significant potential in the context of investment arbitration. Given the high costs associated with investment arbitration and the absence of international legal aid mechanisms, TPF serves as the closest functional equivalent to domestic legal aid systems at the international level. Just as legal aid enables individuals who cannot afford litigation to access domestic courts, TPF enhances access to investment arbitration for claimants who may otherwise be excluded due to financial constraints. Moreover, TPF goes beyond the traditional role of legal aid by appealing to a broader group of potential claimants, those who may have the financial means but are unwilling to assume the risks associated with costly and uncertain arbitration proceedings. By shifting or sharing the financial risks, TPF makes investment arbitration a more viable option for a wider range of parties. For this reason, TPF is widely seen as a mechanism that facilitates greater access to justice in the international investment regime.

TPF, like any other business, is not without its challenges. Funders encounter obstacles both at the domestic and international levels, which arise periodically as part of the normal course of their operations. For example, in the United States, “[c]ompanies that finance U.S. commercial lawsuits in exchange for a cut of any recoveries committed $2.7 billion to new financing transactions last year, down from $3.2 billion in 2022, [according to] litigation finance advisory firm Westfleet Advisors.” Another example is the United Kingdom, where a recent Supreme Court decision has introduced new challenges for funders operating in the country, prompting some to consider relocating their activities outside the United Kingdom. But these challenges are likely to be temporary, as it is common for any business to encounter periods of difficulty. As noted above, the global TPF market continues to grow over the medium to long term.

TPF can play a significant role in helping to keep investment arbitration costs under control by introducing greater financial discipline and scrutiny into the proceedings. Funders typically conduct thorough due diligence before agreeing to finance a case, which often leads to a more realistic assessment of claims and encourages efficient case management. Moreover, because funders have a vested interest in the outcome, they often work with parties to ensure that resources are used strategically and that unnecessary legal expenses are avoided. This external oversight can help prevent inflated billing, streamline legal strategies, and promote settlement where appropriate, ultimately contributing to more cost-effective arbitration. Given these positive effects of TPF, it is important to create an environment in which funders can thrive, while also establishing appropriate safeguards to protect the interests of those who rely on TPF.

Naturally, TPF comes with its own set of concerns. MD Khairul Islam points out,

Financing in an international arbitration is not philanthropy in most cases, but rather a well-reasoned and evidence-based profit-making venture. . . .
. . . .
There are mixed consequences of recognizing funding fees as an arbitration cost. . . . The recognition of the funding fee as an arbitration cost may invite unnecessary participation of third-party funders and develop a risk of transferring public money to private funders. However, the acceptance of funding fees as an arbitration cost will encourage the parties to a funding agreement to disclose the funding agreement before the tribunal.
Nieuwveld and Sahani argue that ISDS is a controversial procedure, and TPF made the ISDS system even more controversial. Thus, we can see that TPF stays in a controversial position in ISDS, and making a decision has multifaceted effects.

One-sided funding is a significant criticism directed at third-party funders, particularly in the context of investment arbitration. This critique highlights the concern that funders typically support only claimants, rather than respondents such as states, thereby creating an imbalance in access to financial resources. As a result, respondents may find themselves at a disadvantage, especially in high-cost disputes where they must bear their legal expenses without similar external support. This perceived asymmetry raises questions about fairness and equality of arms in arbitration proceedings. Critics argue that such a funding model could incentivize frivolous or speculative claims, potentially burdening states and undermining the legitimacy of the dispute resolution system. Addressing this concern may require exploring mechanisms to enable or encourage more balanced funding opportunities.

The choice that needs to be made is “a choice of policy either to opt for TPF and enable more disputants to access justice with the help of TPF companies, or by not allowing this capitalization, preventing them from this opportunity.” Ultimately, TPF plays a facilitative role in the ISDS system, and in order to fully understand and define this role, it is essential to first clarify what TPF entails.

A. Definition and Mechanisms of TPF

TPF is defined as various ways. UNCITRAL Working Group III acknowledges this fact:

The Working Group may wish to consider the following issues when developing the elements in a definition of third-party funding:

• Funding provided by the counsel of the disputing party under a pro bono, contingency fee, or conditional fee arrangement;

• Different forms of insurance policies, including after-the-event insurance;

• Equity investments by third-party funders.
  Thus, it is evident that the Working Group adopted a broad approach in defining TPF. But for the purposes of this Article, the focus is specifically on professional funders who invest in cases with the intention of making a profit, excluding other forms of financing such as law firm funding or pro bono support. This definition is adopted as it reflects the more common practice of TPF and aligns with the general understanding of the TPF industry.

B. Benefits of TPF

TPF offers several notable benefits in the context of investment arbitration, including financial support, risk-sharing, and enhanced access to justice. By providing the necessary capital to cover legal fees and related costs, funders enable claimants—particularly those who lack sufficient resources—to pursue legitimate claims they might otherwise be unable to afford. TPF also allows parties to shift the financial risks of arbitration to the funder, thereby reducing their own exposure and allowing them to allocate resources more efficiently. Most importantly, it promotes broader access to arbitration by opening the doors to a more diverse range of claimants, contributing to a fairer and more inclusive dispute resolution process.

1. Access to Justice

TPF offers clear and substantial benefits, particularly by providing essential financial support to parties involved in arbitration. First, TPF increases easy access to the investment arbitration mechanism. TPF “provid[es] a tool through which impecunious claimants (or claimants who simply prefer to externalize their arbitration costs) can fund their claims and therefore avoid a costs-based barrier to access to justice.”

Given the high costs associated with arbitration proceedings, TPF significantly enhances access to justice for those who might otherwise be unable to afford it. Moreover, by sharing both the financial risk and legal fees with funders, parties can pursue their claims with reduced economic burden and greater confidence.

The notion of access to justice through TPF invites further discussion, particularly regarding whom it truly benefits. While claimants are typically the primary recipients of TPF, this does not inherently mean that the system favors one side. As commercial entities, funders are not bound to support only claimants; they are equally capable of funding respondent states, should the legal and financial conditions align, such as in cases where states bring claims against investors or offer products based on defense funding. Therefore, the perceived imbalance is less a flaw of the funding model itself and more a reflection of the broader structure of the ISDS mechanism. Any critique on this front should focus on the asymmetries within the arbitration system, rather than on the neutrality or intentions of the funders. Enhancing rights and access to them is not a flaw that requires correction. If the balance of rights favours investors over states, it is the systemic imbalance that must be addressed, not the tools that parties use to navigate that imbalance.

IV. Concerns about TPF

A. Confidentiality

TPF raises several concerns. One valid concern is regarding the confidentiality of investment arbitration proceedings. Although investment arbitration is generally more transparent than commercial arbitration, many documents and procedural details remain inaccessible to the public. In this context, the involvement of a third-party funder, who may require access to sensitive case materials to assess the merits and monitor the case, raises questions about whether such disclosure constitutes a breach of confidentiality. While confidentiality obligations typically bind all parties involved, including funders through non-disclosure agreements, the potential for misuse or inadvertent disclosure remains a contentious issue. This concern has been highlighted in various discussions, including in UNCITRAL Working Group III debates and academic scholarship. Thus, the question of whether TPF compromises confidentiality is not only valid but continues to be a topic of legal and policy debate.

In my view, this is not a breach of confidentiality. We can compare the TPF application with any other application a party may make. When seeking a loan, for instance, you are required to share specific documentation with the bank or lender to demonstrate your financial standing. Similarly, in the context of TPF, sharing case documents with the funder is a necessary step for them to assess the merits of the case and determine whether to invest. This process is no different from sharing documents with lawyers, experts, or arbitrators—parties who are involved in the dispute resolution process and who must have access to certain information to perform their roles effectively. Just as confidentiality is maintained when sharing documents with legal counsel or experts, sharing with a funder is also a necessary part of initiating and pursuing the case, not a breach of confidentiality. Moreover, the specific details of funding arrangements do not need to be disclosed, just as lawyer–client or loan agreements that are not central to the substance of the dispute are typically not subject to disclosure. At most, disclosure of only the existence of TPF and the identity and credentials of the funders may be disclosed, where such disclosure is mandated by the applicable arbitration rules.

B. Data and Use of Artificial Intelligence

TPF raises significant concerns about the large volume of data that funders have access to during the arbitration process. As funders evaluate the viability of a case, they are provided with a vast array of information, which can include sensitive legal strategies, financial data, and personal details. This raises questions about how such data is used, stored, and protected. Funders may employ advanced tools, including artificial intelligence (AI) and data analytics, to assess the merits of a case, predict potential outcomes, and make more informed investment decisions. While these methods can enhance efficiency and accuracy, they also present risks regarding data privacy and security, especially if the data is not properly safeguarded or is used for purposes beyond the initial assessment of the case. These concerns highlight the need for clear guidelines and ethical standards to ensure that the data is handled responsibly and transparently.

The use of AI in TPF is advancing rapidly, and if harnessed effectively, it has the potential to give funders a competitive edge by allowing them to analyze extensive datasets acquired through their business operations. As funders engage with a variety of cases and clients, they naturally gain access to diverse information that can enhance their decision-making processes. Some funders have already begun integrating AI into their operations. For example, Burford Capital has adopted AI tools, and its Vice Chair has noted that “AI is currently most effective in early-stage issue-spotting and identifying and assessing elements of the underlying cause of action. However, it lacks the experiential data set required to make investment decisions.”

C. Transparency

Transparency is a significant concern in the context of ISDS, but I would like to present a different perspective: whether funders themselves are required to be transparent. Funders often possess large amounts of data, some of which may directly or indirectly influence their decision to accept or reject a funding application. This raises the question of whether funders have an obligation to be transparent with the parties seeking funding regarding how their decisions are made. While funders are undoubtedly bound by confidentiality obligations and must protect sensitive information, this transparency issue presents a unique challenge that warrants further exploration. It is crucial to consider whether and to what extent funders should disclose their decision-making processes and the factors that influence their choices.

A responsible funder might consider seeking approval from the document owner before sharing any documents with the party that would benefit from accessing them. This approval would ensure that the confidentiality of the information is respected, while also maintaining transparency and accountability in the funding process. By obtaining consent from the document owner, the funder can mitigate potential concerns about the misuse of sensitive data and uphold ethical standards in the decision-making process. This would further enhance the transparency in the investment arbitration regime and build upon the efforts initiated by the Mauritius Convention. If achieved, whether through individual funders or, preferably, a more systematic approach, TPF could contribute an additional positive dimension to the investment arbitration regime.

D. Non-payment of Cost Awards

Finally, an issue faced in practice, traditionally concerning TPF, is the failure of the funded parties to pay cost awards. This issue arises when a claimant, typically an impecunious investor, relies on TPF to initiate arbitration but lacks the financial means to satisfy an adverse costs award should the respondent state prevail. As the funder is not formally a party to the arbitration, enforcement against them is typically not an option, creating a gap in accountability and in the enforcement of the cost order against such funded parties.

This scenario has indeed become a recurring feature in ISDS, raising concerns about fairness and procedural balance, particularly for respondent states. Tribunals have historically been reluctant to grant security for costs, often citing the need to preserve the claimant’s access to justice. But this reluctance is increasingly being reevaluated considering mounting scholarly and practical criticism. Recent reforms and jurisprudence suggest a growing willingness to address this imbalance. Notably, the amended ICSID Arbitration Rules explicitly recognize TPF as a relevant consideration when deciding whether to order security for costs. This development reflects a shift towards greater procedural realism, acknowledging that access to justice must be balanced with the right of states to recover their legal costs when claims are unsuccessful.

Moreover, empirical evidence shows that funders, especially in cases they deem meritorious, are often willing to provide security for costs. This undermines the assumption that ordering such security would universally bar access to justice and instead suggests a more nuanced approach is both feasible and desirable. Another approach is to have After-the-Event/Before-the-Event insurance in place to cover any potential adverse cost orders. Similarly, empirical evidence shows that funders, especially in cases they deem meritorious, are often willing to pay for such insurance. If the funded party holds such insurance, there would be no need to order security for costs, as it eliminates the risk of the state being unable to recover its adverse costs should it prevail in the case.

In light of these developments, it is important to assess all relevant factors, such as the funded party’s financial condition and the existence of insurance to cover potential adverse costs, before deciding whether to order security for costs. This decision should strike a balance between protecting states from the risk of non-recovery and preserving access to justice for funded claimants.

V. Regulation Suggestions

Lawyers are bound by professional conduct rules, whereas arbitrators and third-party funders are currently not subject to any formal professional standards or regulatory frameworks. This Paper argues that both arbitrators and funders should adhere to specific ethical and professional standards. But for the purposes of this discussion, the focus will be placed on outlining potential regulatory approaches and standards applicable to third-party funders.

In investment arbitration, an advisory centre was suggested to be established “following the model of the Advisory Centre on WTO Law (ACWL)” and it “would be tasked to provide legal advice on investment law before a dispute arises and act as counsel when there is a dispute.” This is not a regulation per se, but surely it will help states as the “centre could also help States in capacity-building and the sharing of best practices.”

Arbitrators should act independently and impartially. In the context of TPF, a key consideration is the issue of who should bear the costs of the funder’s fees. In a traditional TPF arrangement, these costs are typically borne by the funded party. But this might not always be a fair solution. If a party had no other option but to pursue arbitration after exhausting all efforts to negotiate and settle the dispute, it may not seem just to burden that party with the costs of TPF. Instead, it could be argued that the responsibility for these costs should lie with the party that consistently rejected settlement attempts and forced the other party into arbitration to secure what they are legally entitled to. In such cases, similar to some domestic litigation rules, it would be more equitable for the party who refused negotiation or settlement to bear the costs of initiating the arbitration. Whether this needs to be codified in regulations is debatable. Arbitrators should have the flexibility to rule based on their judgment, but establishing guidelines might help steer their decisions more effectively.

TPF regulations are increasingly being adopted globally, with further developments anticipated in the near future. The following section explores the efforts of UNCITRAL Working Group III in this area.

A. UNCITRAL Working Group III

UNCITRAL Working Group III work involved TPF.

The reform options discussed . . . include: (i) prohibiting third-party funding entirely in ISDS; and (ii) regulating third-party funding by, for example, introducing mechanisms to ensure a level of transparency including through disclosures (which could also assist in ensuring the impartiality of the arbitrators), by imposing sanctions for failure to disclose, and by providing rules on third-party funders and on when they could provide funding. . . .
. . . .
. . . [The] prohibition of third-party funding would need to be accompanied by a legal aid mechanism, in order to address possible impact on access to justice, particularly for small and medium-sized enterprises.
Thus, it seems that UNCITRAL Working Group III’s work presents two possible options.

Some states accepted the benefits of TPF. Morocco, for example, stated:

Third-party funding is an important tool used by many investors—particularly those without sufficient financial resources to cover the costs of arbitration—to bring claims against host States.
. . . .
Pending the adoption of international rules governing third-party funding, consideration could be given to prohibiting such funding as part of the current reform of the ISDS regime.
Costa Rica submitted an “indicative list of solutions by category of concern” and listed TPF under the costs and duration of ISDS. Costa Rica is not alone in this view. The governments of Chile, Israel, and Japan have also expressed similar positions in their submissions. While some states appear to view TPF as a factor in increasing costs and prolonging ISDS proceedings, the evidence presented in this Paper suggests such concerns may be unfounded. The European Union also stated, “The EU and its Member States are open to including, in the option outlined below, solutions to issues related to TPF should the Working Group decide that reform is desirable.” Thailand also supports regulation.

B. EU Regulations on TPF

The European Union is particularly important because “[o]n 13 September 2022 the European Parliament adopted a resolution on responsible private funding of litigation, which called the Commission to propose legislation that would regulate TPLF in the EU.” The European Parliament adopted this resolution with recommendations to the Commission on Responsible private funding of litigation. According to the text, “if not properly regulated, it could lead to excessive economic costs and to the multiplication of opportunity claims, problematic claims and so-called ‘frivolous claims.’” European Law Institute (ELI) also published principles governing the Third Party Funding of Litigation (TPFL).

Four core objectives for effective TPFL—facilitating access to justice, addressing valid TPFL concerns, levelling the international playing field, and informing regulatory or legislative response—offered guidance in the drafting of the resulting core Principles which cover Promotional Materials, Transparency, Avoidance and Management of Conflicts of Interest, Capital Adequacy of Funders, Funders’ Fees, Confidentiality, Case Management (Control), Termination of Third Party Funding Agreements, and Dispute Resolution and Review by Courts or other Authorities.
Therefore, we can see that in the European Union, TPF raised some concerns that needed to be addressed, and these principles and recommendations were prepared to alleviate those concerns.

The European Union has been pursuing TPF regulation for a long time. This has spanned several years, continuing since 2020. The European Parliament Resolution of 13 September 2022 provided recommendations to the Commission on responsible private funding of litigation. There are important recommendations regarding TPF. For example, the resolution recommends that “funders be obliged to respect a fiduciary duty of care requiring them to act in the best interests of a claimant.” The recommendations also impose a limit on funder’s success fee. According to the Introduction, “only under exceptional circumstances should arrangements between litigation funders and claimants depart from the general rule that a minimum of 60% of the gross settlement or damages is paid to the claimants.” It also brings disclosure and transparency requirements for funders.

The resolution also defines litigation funder:

‘[L]itigation funder’ means any commercial undertaking that enters into a third-party funding agreement in relation to proceedings, even though it is neither a party to those proceedings, nor a lawyer nor other legal professional representing a party to such proceedings, nor a provider of regulated insurance services to a party in such proceedings, and which has the primary aim of receiving a return on an investment it makes by providing funding in relation to those proceedings or of obtaining a competitive advantage in a specific market.
The resolution also brings authorization system within the Union, and conditions for authorization. Other important recommendations include capital adequacy, investigation and complaint procedure, content of TPF agreements, termination of TPF agreements, disclosure of TPF agreement, and responsibility for adverse costs. The regulations are comprehensive and introduce important safeguards for users of TPF. None of the provisions in the resolution appear unreasonable or unduly restrictive for funders. Their application should bear these principles in mind, too. Then, their aim to promote a responsible and fair TPF framework can be achieved—one that protects users while still allowing funders the flexibility to innovate and adapt to the evolving needs of the industry.

European Commission Directorate-General for Justice and Consumers also published a comprehensive dossier mapping third-party litigation funding in the European Union. In conclusion, the regulation of TPF in the European Union remains incomplete, and further developments in the form of new regulations or recommendations can be expected in the coming years.

C. The Role of Third-Party Funders in Settlement

TPF can play a positive role in both facilitating settlements and managing arbitration costs. When funders are incentivized through the funding agreement to support early resolution, they may actively promote settlement, as it allows them to secure their return more quickly, without having to wait for the entire arbitration and enforcement process to conclude.

It is true that third-party funders accept only a small fraction of funding applications, typically after a rigorous assessment. Once a case is funded, it indicates that an objective third-party—alongside their legal advisors—has analyzed the claim and deemed it likely to succeed. This can send a strong signal to the opposing party, prompting them to reassess their position and consider settlement. In this way, TPF can serve as a catalyst for settlement. Whether the broader market is responding in this manner remains an area to watch closely.

It is important to remember that third-party funders operate with the aim of making a profit. To encourage funders to support early settlement, funding agreements can be structured to offer them a satisfactory return even if the case settles before reaching a final award. If the funded party has independent legal counsel advising on TPF, as they ideally should, that counsel should consider this approach. This approach could form part of broader policy considerations and regulatory frameworks governing funders. Because early settlements often require less financial outlay, they can still yield attractive returns for funders. Whether the cost associated with such funding should be shifted to the non-funded party remains a topic worthy of further discussion.

England and Wales have developed noteworthy case law recognizing funders’ fees as part of arbitration costs, with English courts upholding and enforcing such awards. If other arbitral tribunals follow this trend, it could be argued that TPF contributes to increased arbitration costs. But this increase primarily affects the losing party as the funder’s fees would then be included in the cost award. So far, investment arbitration tribunals have not taken TPF agreements into account. In all relevant cases, the non-funded party argued that, because the funded party did not personally incur the costs of bringing the claim, those costs having been paid by the funders, they should not be recoverable. Nonetheless, the tribunals ordered the costs to be paid to the prevailing funded party. But there is no record of a request by funded parties to recover the success fee of the funder. This Article claims that if the circumstances justify, such as if the states did not respond to any alternative dispute resolution requests, and the funded party had no option but to use TPF to bring the claim, then the investment arbitration tribunals should be able to grant such success fees as happened in some commercial arbitration cases and enforced by English courts.

Another aspect of cost allocation that remains untested in investment arbitration is the recoverability of success fees, as seen in English court cases. In investment arbitration, where the facts of the case justify it, similar to the two commercial arbitration cases referenced, tribunals should also consider ordering the losing party to pay the success fee. Importantly, TPF is not an inherent cost of bringing a claim; however, it is a cost borne by the winning party and therefore warrants consideration. Moreover, TPF can help keep arbitration costs under control.

In fact, there is no conclusive evidence that TPF increases the overall cost of arbitration. On the contrary, funders tend to allocate their resources efficiently, ensuring that spending is tightly controlled and that the funded party avoids unnecessary financial exposure. Funders actively monitor the progress of the case to ensure their investment is used efficiently. This oversight can enhance the overall dispute resolution process and help reduce the costs of the proceedings.

D. Future of TPF

It appears that the TPF is headed towards more regulation in the future. More jurisdictions are publishing reports to tackle the concerns the industry raises, while accepting the need for such a market and the benefits it creates.

As TPF increasingly comes under regulatory scrutiny, the goal should be clear: a well-regulated framework that protects users from abuse while preserving the flexibility funders need to innovate and compete. The ideal regulatory approach must (i) safeguard users to ensure transparency, fairness, and accountability to prevent exploitation; (ii) encourage innovation to allow funders the freedom to develop creative solutions and adapt to market demands; and (iii) foster healthy competition to maintain a dynamic market where funders can thrive without compromising ethical standards. Striking this balance will not only strengthen confidence in TPF but also secure its role as a viable and sustainable tool in dispute resolution. Flexibility must be stressed in the regulatory approach.

VI. Conclusion

TPF is a multi-billion-dollar industry that continues to grow despite recent challenges. As more jurisdictions recognize its benefits, they are increasingly embracing TPF to remain competitive and attract litigation financing opportunities. This Paper contends that the sector’s full potential has yet to be realized and will unfold in the years ahead with increasing regulations explicitly accepting the practice of TPF. TPF has the potential to deliver significant benefits to a wider range of stakeholders, including small- and medium-sized enterprises (SMEs) and respondent states. It can also serve as a form of legal aid, offering access to justice for claimants who have no viable alternative but to rely on TPF, particularly when arbitrators include funders’ success fees in cost awards, eliminating financial burdens for funded parties. To foster this evolution, arbitrators should exercise greater boldness in rendering such decisions where fairness and reasonableness permit.

TPF is poised to become increasingly regulated, but such regulation must strike a careful balance: encouraging its growth while ensuring adequate safeguards. Even as the ISDS system evolves, whether into a court-based mechanism or another model, the role of funders will remain critical. Their expertise and financial support are indispensable in high-stakes investment disputes, which often involve claims worth billions.

Given the immense costs and risks of these disputes, parties will continue to seek robust backing from funders. The lucrative potential of TPF ensures that investors will remain willing to assume substantial risks in exchange for proportionate returns. While the form of funding may adapt to new dispute resolution frameworks, its underlying value, enabling access to justice and risk-sharing, will endure. Key Principles for Effective Regulation are (i) flexibility, (ii) transparency, and (iii) continuity.

• (i) Flexibility: Rules should accommodate diverse funding models without stifling innovation.
• (ii) Transparency: Safeguards must protect against conflicts of interest and abuse.
• (iii) Continuity: Funders’ experience should inform future systems, ensuring efficiency and fairness. TPF is not merely a trend but a transformative force in dispute resolution. Its regulation must reflect both its risks and its potential. To ensure the effective and sustainable growth of TPF, regulators and industry stakeholders should adopt clear guidelines while maintaining a framework for continuous improvement. Given TPF’s evolving nature, guidelines must be regularly reviewed and refined to address emerging concerns, balance flexibility and safeguards, and align with dispute resolution trends. A dynamic, iterative approach will allow TPF regulation to support its benefits, enhancing access to justice and risk-sharing, while mitigating concerns.

Dr. Eken gratefully acknowledges Jonathan Bonnitcha, Catherine Titi, and the other organisers of the Academic Forum on ISDS 2025 Conference, held at the European University Institute on April 29–30, 2025. He also thanks his panel moderator, Simon Batifort, and all participants for the engaging discussions and valuable feedback throughout this stimulating event.

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Endnotes

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Author

Can EKEN

Dr. Can Eken, FCIArb, Assistant Professor at Durham Law School, Durham University, and Visiting Academic, Faculty of Law, University of Oxford, the United Kingdom.  Dr. Eken is admitted to practice as an attorney in...

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Author

Can EKEN