Reading the risk in third-party funding

A well-founded claim can still stall when the claimant cannot carry the litigation cost across a multi-year arbitration. Third-party funding – where an independent funder finances the proceedings in exchange for a share of the recovery – has changed that arithmetic. For cross-border groups with claims arising out of Greater China or the principal offshore centres, Hong Kong sits at the precise intersection where the funding question, the arbitration rules and the enforcement endgame converge.

Third-party funding for arbitration seated in Hong Kong is permissible under the Arbitration Ordinance (Cap. 609), which governs the seat and the conduct of proceedings; the critical risk is not legality but calibration – the funder's share, the disclosure obligations, and the enforceability of the resulting award in the jurisdiction where the assets actually sit.

This analysis covers four layers: the commercial stake, the governing regime, the cross-border read, and the risk allocation question that most funded parties get wrong. Practitioners advising cross-border groups will find the enforcement angle the most consequential.

What is actually at stake commercially?

Third-party funding converts a contingent asset – a claim of uncertain value – into a funded proceeding without drawing on the claimant's balance sheet. That transformation is commercially significant for two reasons. First, it equalises resource asymmetry in complex cross-border disputes where a well-capitalised respondent can sustain a long defence. Second, it disciplines the claim: a professional funder's due diligence often reveals weaknesses in the legal theory or the enforcement route that internal counsel did not flag.

For our desk, the commercial question is rarely "can we fund this?" It is "where does the money land, and how quickly?" A funded claimant who wins an award but cannot enforce it against the respondent's assets has paid a funder's return on a hollow victory. That is the central risk, and it is a cross-border risk in almost every case we encounter.

Consider the pattern. An Asian manufacturing group holds its claim through a BVI vehicle. The respondent is a Mainland enterprise. The arbitration is seated in Hong Kong. The funder is based in Europe or Australia. The award, when made, needs to land in the Mainland – where substantially all of the respondent's assets sit. Each link in that chain introduces a separate legal question, and the funder's economic analysis will only be as good as the answer to the last one.

How does the governing regime work in Hong Kong?

The Arbitration Ordinance (Cap. 609) – modelled on the UNCITRAL Model Law – provides the statutory foundation for arbitration in Hong Kong, including the express provision that permits third-party funding for arbitration proceedings. That permission was not always in place. Hong Kong introduced the enabling amendments after a law-reform process that distinguished between funding for court litigation (still generally restricted by the doctrines of maintenance and champerty, which are the common-law prohibitions on intermeddling in litigation for profit) and funding for arbitration and related proceedings.

The distinction is important. A funder and a funded party who structure their arrangement as arbitration funding – rather than litigation support for parallel court proceedings – operate within the permitted zone. Where the funded party seeks to extend the arrangement into ancillary court applications, such as enforcement proceedings or applications for interim relief before the Court of First Instance, the position requires separate analysis. The Ordinance does not automatically extend the arbitration-funding permission to every downstream court step.

The HKIAC Administered Arbitration Rules (2024 edition, effective 1 June 2024) layer additional obligations on top of the Ordinance. Parties using the HKIAC rules – which most institutional Hong Kong arbitrations do – are required to disclose the existence of a third-party funding arrangement to the other parties and to the arbitral tribunal. That disclosure triggers the tribunal's obligation to assess whether any relationship between the funder and a tribunal member gives rise to a conflict of interest. The 2024 Rules sharpen the timing and content of that disclosure obligation relative to earlier versions.

What does the disclosure actually require? The Rules call for identification of the funder and, where relevant, confirmation of its interest. The arrangement's financial terms – the share or return the funder receives – are not ordinarily disclosed to the tribunal. That distinction matters: a respondent who knows a funder is involved gains procedural awareness but not the leverage that would come from knowing the funder's return hurdle.

The sequence above describes the standard position. Your matter turns on the specific terms of the funding agreement, the arbitration clause, and the jurisdictions actually engaged – which is where the enforcement route is won or lost.

For a structured assessment of your arbitration claim, the funding structure and the enforcement route across the relevant jurisdictions, write to us at info@lockhartyip.com.

How does the cross-border interface change the analysis?

The cross-border interface is where the risk concentrates. A purely domestic Hong Kong claim against a Hong Kong respondent with Hong Kong assets is a relatively contained exercise. Almost no funded claim that comes across our desk has that profile. The typical pattern involves a Hong Kong or offshore claimant, a Mainland or mixed respondent, and assets spread across the Mainland, Hong Kong, and the offshore centres.

Take the enforcement leg first. For a Hong Kong-seated award to be enforced in the Mainland, the route runs under the Arrangement between the Mainland and the HKSAR on Reciprocal Recognition and Enforcement of Arbitral Awards (the 1999 Arrangement and the 2020 Supplemental Arrangement). Since the amendment that permitted simultaneous enforcement applications in both jurisdictions, a funded claimant can, in principle, pursue Mainland assets and Hong Kong assets in parallel rather than sequentially. That changes the funder's recovery model, because the simultaneous route accelerates the realisation timeline – and funders price on time as well as probability.

The interim-measures dimension is equally significant. Under the Arrangement on Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings (in effect since 1 October 2019), a Hong Kong-seated arbitration may apply to Mainland courts for interim measures – asset preservation orders, in particular – before the award is made. For a funded claim, this is a structural advantage. A funder extending capital into a proceeding against a Mainland respondent whose assets are mobile benefits materially if an asset-preservation order can be obtained early in the proceedings. The window between filing the arbitration and the respondent becoming aware of the claim is often the window in which assets move.

There is a parallel question about the law governing the funding agreement itself. The funding contract is a separate agreement – separate from the arbitration agreement and from any seat-specific procedural rules. Funder counterparties based in common-law jurisdictions will generally choose English law or the law of their home jurisdiction. Hong Kong law is also used. The governing law of the funding agreement determines, among other things, what happens to the agreement if the award is set aside, whether the funder can withdraw mid-proceedings, and what costs exposure the funded party carries in an adverse costs order.

That last point – adverse costs – is a specific cross-border trap. Arbitral rules, including the HKIAC Rules, generally allow the tribunal to award costs against the losing party. A funded claimant who loses may face a costs award, and the funder may or may not have agreed to cover that liability. If the funding agreement does not address adverse costs clearly, the funded party bears the exposure alone. In cross-border matters where the respondent's costs are themselves substantial, this is not a theoretical risk.

Where does the risk actually sit for a funded party?

Risk in third-party funded arbitration is asymmetric in a way that funders understand and funded parties sometimes do not. The funder's downside is its capital outlay; its upside is capped by the funding agreement. The funded party's downside is potentially uncapped – it includes adverse costs, any liability for the funder's return on a recovery that covers the claim but not the costs tail, and the reputational exposure of a failed enforcement attempt on the public record of a foreign court.

In our cross-border practice, we identify the following four concentrations of risk for funded parties.

Enforcement mismatch. The funding agreement is structured around a Hong Kong award, but the majority of the respondent's assets are in a jurisdiction where that award cannot be registered or enforced directly. The funder's due diligence covered the arbitration merits and the Hong Kong enforcement route; the Mainland or offshore enforcement leg received less scrutiny. By the time the award is made, the route to assets is more expensive or more uncertain than the funder modelled. The funded party, not the funder, bears the strategic cost of an enforcement gap.

Disclosure timing and conflict risk. A funded party that delays disclosure of a funding arrangement to the tribunal risks an adverse ruling on procedural regularity. In a Hong Kong-seated arbitration under the HKIAC Rules, the obligation is clear and the timing is early. A conflict identified after the tribunal is constituted creates a difficult situation – particularly if the conflict arises between the funder and an arbitrator in a specialist community where relationships are concentrated.

Funder withdrawal. Most funding agreements give the funder termination rights if the case materially changes – for example, if new evidence emerges that lowers the probability of recovery, or if the respondent successfully challenges the arbitral tribunal's jurisdiction on a ground that the funder had not modelled. A funded party whose funder withdraws mid-arbitration faces a stark choice: continue self-funded (which may not be possible), seek a replacement funder (who will price on worse terms with full knowledge of what has happened), or settle on unfavourable terms. The governing-law and termination provisions of the funding agreement are therefore as important as the economic terms.

Set-aside risk and its downstream effect. If a Mainland court or another enforcement court sets aside or refuses recognition of the award, the funding agreement's provisions on that scenario govern what happens next. Does the funded party owe the funder any payment? Does the funder have an obligation to fund further proceedings? In cross-border matters, the risk of an enforcement refusal – rather than a full set-aside – is more common. Refusal in one jurisdiction does not necessarily prevent re-enforcement in another, but the funder's modelling may not have priced a multi-round enforcement campaign.

If an earlier funding arrangement, enforcement attempt or arbitration produced a stalled or adverse result, a second read can identify the strategic error and the routes still open. Email info@lockhartyip.com to discuss the position.

How does the comparative read work across the two systems?

Hong Kong and the Mainland present a contrast in their treatment of third-party funding that reflects their respective legal traditions.

Hong Kong, as a common-law jurisdiction with a fully developed arbitration sector, has moved deliberately to permit and regulate third-party funding for arbitration. The HKIAC, as an internationally recognised institution, has built the disclosure and conflict infrastructure into its rules. The courts – operating under the common-law system – have a body of case experience on the maintenance and champerty boundaries, and the statutory carve-out for arbitration is well-established.

Mainland China's position is different in structure. There is no equivalent statutory permission for third-party funding in Mainland arbitration or litigation. That does not mean funding arrangements are entirely unknown in practice; it means the legal infrastructure is less developed and the treatment by courts and institutions is less predictable. For a cross-border group running a Hong Kong-seated arbitration against a Mainland respondent, the funder's comfort derives from the Hong Kong seat and the HKIAC framework – not from any Mainland acceptance of the funding model.

What the Mainland does have – and what matters enormously for the funded party – is the interim-measures arrangement, the reciprocal-award enforcement regime, and the developing body of practice before the people's courts on recognition of Hong Kong awards. The funder's model should be built on a realistic read of Mainland enforcement practice, not just on the technical availability of the enforcement route.

Singapore presents a different comparative point. Singapore also permits third-party funding for international arbitration, and many funder counterparties operate across both Hong Kong and Singapore. The choice-of-seat question – Hong Kong or Singapore – is sometimes presented as equivalent from a funding perspective. It is not. The enforcement routes diverge materially for Mainland China exposure, because the Hong Kong–Mainland arrangements (for both awards and interim measures) have no Singapore equivalent. A Singapore-seated arbitration seeking Mainland enforcement follows the New York Convention route without the interim-measures advantage. For claims where Mainland assets are the target, the Hong Kong seat carries a structural enforcement advantage that a funder should price.

What do funded parties and their advisers typically get wrong?

The most common error, in our experience, is treating the funding agreement as a financial arrangement rather than a legal document that shapes the entire proceeding. A funder's term sheet is drafted by experienced counsel acting for the funder. The funded party's review of that document – including the termination rights, the cost-coverage terms, the governing law, the adverse-costs provisions, and the return calculation in a partial recovery scenario – requires equal seriousness.

The second error is treating the enforcement route as a problem to be solved after the award. It is not. The enforcement route should be mapped before the arbitration is commenced, because the strategy of the proceeding – the choice of interim measures, the attachment points for an asset-preservation order, the sequencing of the award-registration applications – depends on where the assets sit and what the enforcement route requires. A funder who has not modelled the enforcement route is not a fully informed partner.

A third error, specific to the cross-border context, is assuming that a Hong Kong-seated award with a well-drafted arbitration agreement will enforce cleanly in every jurisdiction the respondent operates in. It will not. The enforceability of a Hong Kong award in a Gulf Cooperation Council jurisdiction, for example, follows a different legal route from the Mainland enforcement Arrangement. A funded claim with assets in multiple enforcement jurisdictions requires a jurisdiction-by-jurisdiction analysis, and that analysis should inform the funding agreement's scope and the funder's return modelling.

Finally, the disclosure obligation under the HKIAC Rules is not optional and is not a formality. Counsel on our desk regularly see the disclosure step treated as an administrative item to be addressed late in the process. The timing of disclosure – relative to the constitution of the tribunal – is a substantive procedural point, and a misstep on it can create challenges that damage the proceeding as a whole.

Where is this heading? Our read on the risk environment now

The third-party funding market for Hong Kong arbitration is more mature than it was five years ago. More funders operate in the market. The HKIAC Rules have been updated. The cross-border enforcement architecture – the Mainland–HK reciprocal-award arrangements, the interim-measures regime – is better understood. For a funded claimant with a strong Mainland-exposure claim, the toolset has improved.

What has not improved – and what is, if anything, more complex – is the risk environment at the enforcement end. Mainland courts' engagement with the recognition of Hong Kong awards has produced a richer body of practice. That practice is not uniformly favourable. There are grounds for non-recognition that are applied with some regularity, and the procedural requirements for a successful registration application are demanding. A funder who has not engaged seriously with current enforcement practice – not just the treaty route in theory – is operating on an incomplete model.

There is also a structural shift in the funder market. As the market matures, funders are becoming more selective and more sophisticated in their due diligence. The standard of analysis required in a funding memorandum – the document that presents the claim to a potential funder – has risen. A funded party that approaches funders with a claim memorandum that does not address enforcement, governing-law risk and the cross-border asset picture in depth will find the process longer and the terms harder than it expects.

For groups working through the decision whether to seek third-party funding for a Hong Kong arbitration, the window question is real. Funders price on time, and the elapsed time between the dispute crystallising and the funding application being made affects the case's attractiveness. A claim that is two years old with no interim steps taken looks different from a claim where the arbitration agreement has been invoked and the procedural calendar is set.

We regularly act on cross-border arbitration matters of this kind – both in structuring the proceeding for a potential funded party and in advising on the enforcement strategy that underpins the funder's analysis. The interaction between the HKIAC process, the interim-measures architecture and the Mainland enforcement route is the analytical core of most of the matters we see. For a preliminary read on your arbitration claim and the enforcement route, email info@lockhartyip.com.

Related practices

Disputes & Arbitration – cross-border arbitration, enforcement and interim relief across Greater China and offshore centres
Holding Structures – structuring holding and intermediate entities for claims and corporate protection

Frequently asked questions

How does the cross-border element affect third-party funding for a Hong Kong arbitration?

The cross-border element affects third-party funding for a Hong Kong arbitration primarily through the enforcement route. A funder's return model depends on the probability and speed of recovery, and both are determined by where the respondent's assets sit and which enforcement regime applies. For Mainland China exposure, the reciprocal award enforcement arrangement and the interim-measures arrangement – available specifically for Hong Kong-seated arbitrations – are the operative mechanisms. For assets in other jurisdictions, the analysis varies. A funder who has not mapped the enforcement route by jurisdiction is working from an incomplete model, and a funded party who does not understand that gap carries the residual risk.

Which jurisdiction's law applies to third-party funding for a Hong Kong arbitration?

Third-party funding for a Hong Kong arbitration is governed by multiple layers of law simultaneously. The Arbitration Ordinance (Cap. 609) and, where applicable, the HKIAC Administered Arbitration Rules govern the arbitration proceedings and the disclosure obligations. The funding agreement itself is a separate contract; its governing law is a matter for negotiation between the funder and the funded party. Common-law jurisdictions – including Hong Kong, England and Wales, and Singapore – are frequently chosen. The law governing the funding agreement determines termination rights, adverse-costs liability and what happens in a partial-recovery scenario. These are not interchangeable choices.

What is the first step in third-party funding for a Hong Kong arbitration?

The first step in third-party funding for a Hong Kong arbitration is preparing a funding memorandum that presents the claim, the legal merits, the quantum, the enforcement route and the cross-border asset picture in a form a professional funder can evaluate. That document drives the funder's due diligence and its pricing decision. Before the memorandum is prepared, the claimant's advisers should have assessed the arbitration agreement, identified the applicable enforcement regime for each asset jurisdiction, and mapped the interim-measures options. A claim presented without a completed enforcement analysis will face a longer and more difficult funding process than one where the full picture is clear from the outset.

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This publication is general information and does not constitute legal advice. For advice on your situation, contact info@lockhartyip.com.

Reading the risk in third-party funding for a Hong Kong arbitration