Third-Party Funding of Construction Disputes: An Overview of Litigation and Arbitration Finance

By Ian Meredith, Benjamin T. Mackinnon, K&L Gates, London


Over the last decade, financing for commercial and investor-state arbitration / litigation claims has grown into a significant industry in certain jurisdictions with hundreds of cases now being funded by specialist investment funds (known as ‘third-party funders’). The benefits of third-party funding go well beyond solely the provision of funds to claimants who may otherwise be unable to bring worthy claims, and many commercial parties now use third-party funding as a means of managing risk. The increased availability of third-party funding and the potential to negotiate tailored solutions means that it is now becoming a routine issue for consideration at the outset of disputes and often before they even exist.

Over the course of several articles, we will examine some of the specific issues relevant to determining whether third-party funding is appropriate for your dispute, how best to approach third-party funders, and some of the issues that can arise during the course of a claim being supported by a third-party funder.

This article will provide an overview of third-party funding and highlight why it is becoming increasingly relevant for in-house lawyers dealing with construction disputes. The next articles in the series will examine some of the specific issues that can arise in respect of third-party funding and how best to approach funders.

What Is Third-Party Funding?

Put simply, third-party funding is where a party that does not have an existing interest in a dispute provides finance for some or all of a claimant’s legal costs and disbursements in return for part of any recovery whether via settlement or judgment / arbitration award. If the funded party is unsuccessful in the claim, then they will not be required to reimburse the third-party funder for their costs (i.e., it is “non-recourse funding”).

Traditionally, third-party funding is used by claimants that have strong claims but lack the available resources to fund the claims themselves (often as a result of the same circumstances that give rise to the claims—most notably investment claims arising from expropriatory acts)). Third-party funding provides such claimants with the ability to bring claims that would otherwise have remained unsatisfied.

More recently, third-party funding has developed to a far broader and more sophisticated offering including funding options for defendants, portfolio financing, and financing that goes beyond merely legal costs and disbursements/expenses. In addition, third-party funders offer the potential to use litigation assets as collateral for general business financing. This has meant that, in recent years, not only financially weak parties have turned to third-party funders but also financially strong major global companies.

Increasing Relevance to In-House Counsel Dealing with Construction Disputes

In addition to the obvious scenario of using third-party funding to bring a claim where resources would otherwise not be available to do so, there are two main reasons why it should be considered more routinely in construction disputes as well as other commercial disputes: (1) risk management, and (2) resource management.

There are risks involved with any form of dispute resolution and even what appears to be the strongest of claims may eventually not lead to the expected recovery or require an increased investment to achieve it. With third-party funding, this risk need not be borne entirely (or potentially at all). A Third-Party Funder may be willing to fund part or all of a dispute in return for some of the damages recovered under a subsequent award / judgment or settlement. This may be of particular interest in respect of less clear-cut cases where the risks involved may be too large to bear entirely for a company alone but may be acceptable to a third-party funder in full or in part. In addition, the assessment process undertaken by a third-party funder may provide a valuable independent insight into whether the claim is worthy of being pursued.

Third-party funding can also assist with resource management. Litigation / arbitration can tie up significant resources for an indefinite period of time, and legal expenses can potentially be difficult to absorb within existing legal budgets. Third-party funding can assist in reducing or eliminating the immediate and direct legal costs of a claim. In addition, funders now offer the potential of using a claim as collateral for financing. This can mean that in addition to resources not being tied up, it may not be necessary to wait until a judgment or award has been successfully enforced to have access to funds.

In the coming posts on third-party funding we will look at some of the specific issues that can arise and how best to approach funders.

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