How to approach third-party funding for a Hong Kong arbitration

An award is only as good as the route to the assets. Before a claimant in a Greater China or cross-border dispute commits to the cost of a full arbitration, the question of how the proceedings will be financed – and where the resulting award will be enforced – belongs in the same conversation. Third-party funding makes that calculation possible for many principals who would otherwise carry the entire litigation risk on their own balance sheet.

Third-party funding for a Hong Kong arbitration is expressly permitted under the Arbitration Ordinance (Cap. 609), which codifies both the legality of the arrangement and the disclosure obligations that govern it. The regime applies to arbitrations seated in Hong Kong and to related court proceedings. The funder provides capital in exchange for a share of the award or a return tied to the outcome; the claimant retains the conduct of the case through its own counsel.

This guide sets out the decision, the sequence, and the gates at each step – with particular attention to the cross-border enforcement angle that determines whether the exercise is worth running at all.

What is the decision the reader actually faces?

Third-party funding is not a default. It is a financing choice, and like any financing choice it has a cost, conditions, and a counterparty with its own commercial interests. The first decision is whether to seek external funding at all – and that question cannot be separated from the enforcement analysis.

Consider the position honestly. A claimant with strong liquidity may conclude that external funding is unnecessary and that retaining the full award upside is worth self-funding the process. A claimant with a meritorious claim but constrained capital, or one that wishes to ring-fence litigation risk from its operating entities, may find that a funding arrangement is the right structure. A claimant whose counterparty has no attachable assets in a jurisdiction where the award can be registered is a different case again – no amount of external funding changes that endgame.

In our cross-border practice, we regularly advise at this fork. The first question we put is not "can we fund this?" but "where do the counterparty's assets sit, and what is the enforcement route from a Hong Kong award to those assets?" The funding decision follows that answer, not the other way around.

The principal options are: self-funding; third-party funding under the Arbitration Ordinance regime; a hybrid arrangement combining partial self-funding with a funder covering defined cost tranches; and, in some matters, insurance-backed structures that cap downside without providing capital. Each has a different risk profile, a different disclosure posture, and different implications for the conduct of the case.

How does the Hong Kong legal regime govern third-party funding?

The Arbitration Ordinance (Cap. 609) is the governing instrument. It provides a clear statutory basis for third-party funding of Hong Kong-seated arbitrations and of related court proceedings, including enforcement steps before the Court of First Instance. This resolved a question that had previously caused concern: whether funding arrangements were tainted by the common-law doctrines of maintenance and champerty. The Ordinance addresses that directly. A funding agreement that complies with the statutory requirements is not void, unenforceable, or otherwise affected by those doctrines.

The Ordinance also establishes disclosure obligations. A funded party must disclose the existence of a funding agreement to the arbitral tribunal and to every other party to the arbitration. The disclosure covers the fact of funding; it does not require disclosure of the commercial terms. This matters because the tribunal may need to consider the funding position when addressing questions such as security for costs.

The HKIAC Administered Arbitration Rules, effective 1 June 2024, sit alongside the statutory regime. They contain express provisions dealing with disclosure and with the tribunal's power to address funding in the context of costs and security. Where the arbitration is administered by the HKIAC – the position in the majority of institutional arbitrations seated in Hong Kong – the Rules and the Ordinance operate together.

What the regime does not do is regulate the commercial terms of funding agreements, set caps on funder returns, or prescribe an approved-list of funders. That position may evolve; parties should verify the current position before acting. For now, the commercial negotiation with a funder is conducted on market terms, subject to the statutory disclosure floor.

What is the sequence, and where are the gates?

The sequence runs in five stages. Each stage has a gate – a condition that must be satisfied before the next stage is commercially viable or legally effective.

Stage 1: Enforcement mapping. Before any conversation with a funder, map the enforcement route. Identify where the counterparty's assets are situated. If assets are in the Mainland, the relevant mechanism is the Mainland Judgments (Civil and Commercial Matters) (Reciprocal Enforcement) Ordinance (Cap. 645, in force 29 January 2024), which allows registration of effective Hong Kong judgments in the Mainland and Mainland judgments in Hong Kong, subject to the statutory exclusions. For an arbitral award, the relevant route is the 1999 Arrangement and the 2020 Supplemental Arrangement between the Mainland and the HKSAR on mutual enforcement of arbitral awards. If assets are in BVI, Cayman, or another offshore centre, the enforcement analysis turns on the applicable common-law recognition regime in that jurisdiction. The gate here is a realistic enforcement route: if none exists, the funding analysis stops.

Stage 2: Merits and damages review. A funder will conduct its own assessment of the claim. In practice, funders look at three things: the legal merits of the claim (typically assessed at above a threshold probability of success); the quantum recoverable; and the ratio of anticipated costs to likely recovery. A claim that is legally strong but produces a modest net recovery after costs and the funder's return may not clear the commercial gate. Prepare a clear merits memorandum and a realistic damages model before approaching funders.

Stage 3: Funder approach and term-sheet. Once the enforcement and merits analysis is in order, approach funders. The term-sheet will set out the capital commitment, the tranches in which it is deployed, the funder's return (typically expressed as a multiple of funded costs or a percentage of the recovery), control provisions, and termination rights. The control provisions deserve careful attention. A funder's right to withdraw funding if the claim profile changes materially is standard; a funder's right to direct settlement decisions is not – and any such provision should be resisted. Counsel and the claimant retain conduct of the case.

Stage 4: Disclosure. Once a funding agreement is executed, the obligation under the Arbitration Ordinance to disclose the existence of the agreement to the tribunal and all parties is triggered. This step is not optional and is not timed to the claimant's preference. Make the disclosure promptly. The tribunal will then have the information it needs to address any security-for-costs application that the respondent may bring.

Stage 5: Security for costs – the live gate. A funded claimant is a target for a security-for-costs application. The respondent's argument is straightforward: if the claimant loses, the funder may not stand behind a costs award. The tribunal has discretion under the HKIAC Rules to order security. How the claimant and funder address this – whether through a costs undertaking, a letter of credit, or other mechanism – needs to be agreed before proceedings commence, not after a security application lands. This is a gate that catches parties by surprise when the funding agreement has not addressed it.

The sequence matters because reversing it is expensive. A claimant that approaches a funder before the enforcement analysis is done, or that fails to address security for costs before the first procedural hearing, has already incurred avoidable cost and tactical disadvantage.

The standard position above describes the general route. Your matter turns on the documents, the jurisdictions actually engaged, and the order of steps – which is where the route is won or lost. To discuss how this sequence applies to your cross-border position, contact info@lockhartyip.com.

What does the cross-border element change?

The cross-border dimension affects every stage of the sequence, but it affects Stage 1 most acutely. A Hong Kong-seated arbitration produces a Hong Kong award. That award needs to be enforced where the assets are. The enforcement route – and its realism – is the variable that a funder will price.

For Mainland assets, the 2020 Supplemental Arrangement on mutual enforcement of arbitral awards is the primary route. Since the amendment that came into effect in 2021, simultaneous enforcement applications in both Hong Kong and the Mainland are permitted, which materially changes the asset-preservation dynamic. A funder analysing a Mainland-enforcement matter will assess that route, the risk of challenge at the recognition stage, and the time horizon. These are not abstract legal questions; they affect the funder's commercial return and its appetite to commit capital.

For offshore assets – BVI, Cayman, Singapore – the enforcement route is typically through the common-law recognition regime of the relevant jurisdiction. Hong Kong awards are generally well-regarded in these centres, but the specific steps, timelines, and the risk of asset dissipation in the interim are live considerations. In our cross-border practice, we often advise clients to consider interim-relief applications in parallel with the main arbitration where offshore assets are at risk.

Where the counterparty has assets in multiple jurisdictions, the funding structure may need to reflect a multi-enforcement strategy. Funders that specialise in cross-border matters will have experience of this; generalist funders may not. That distinction is worth making when selecting a funder.

One structural point that foreign principals sometimes miss: the interim-measures Arrangement (in force since 1 October 2019) allows a party to a Hong Kong-seated arbitration to apply to the Mainland courts for interim measures before or during the arbitration. This is a powerful tool for asset preservation where Mainland assets are at risk of dissipation. It is available regardless of whether a funding agreement is in place. Its availability should be factored into the enforcement map at Stage 1.

What do principals get wrong, and how does the route avoid it?

The most common error is treating third-party funding as a last resort rather than a planning decision. A claimant that approaches a funder after proceedings have begun, after costs have been incurred, and after the enforcement map has not been considered, is a weaker candidate for funding – and has already weakened its negotiating position on the term-sheet.

The second error is conflating the funder's interests with the claimant's interests. They are aligned on outcome but not identical on process. A funder has a portfolio of claims; your matter is one position in that portfolio. Decisions about settlement, procedural steps, and cost commitments will be viewed through that lens. The funding agreement needs to address how those tensions are managed – and counsel needs to be instructed independently of the funder's preferences.

The third error is a disclosure failure. We have seen matters where a funding agreement was in place but the disclosure obligation was overlooked or deferred. That creates a procedural complication that is entirely avoidable. The obligation arises on execution of the agreement; it is satisfied by a formal disclosure to the tribunal and the other parties. Do it promptly.

A less visible but equally damaging error is funding a claim without a realistic damages model. A funder's return is drawn from the recovery. If the recoverable amount is lower than modelled – because the damages analysis was optimistic, or because enforcement costs were not factored in – the net return to the claimant may be materially less than expected. The damages model needs to include enforcement costs as a line item.

Finally, foreign principals with limited Hong Kong arbitration experience sometimes assume that a strong claim is sufficient to attract funding on favourable terms. In practice, the enforcement route is at least as important as the merits. A meritorious claim against a counterparty with no attachable assets in any accessible jurisdiction is a poor funding candidate. The converse – a moderate claim with clear, accessible assets and a well-established enforcement route – may be a strong one.

If an earlier structure or enforcement attempt produced a stalled or adverse result, a second read of the enforcement map and the funding options can identify what remains open. To discuss that position, write to info@lockhartyip.com.

How does this connect to the broader arbitration and enforcement strategy?

Third-party funding is one element of a broader dispute strategy. In our cross-border practice, the funding decision sits within a wider analysis that includes the choice of arbitral rules and seat, the constitution of the tribunal, the interim-measures strategy, and the post-award enforcement plan.

For matters with a Greater China dimension, the HKIAC is the institutional choice that most funders recognise and most Mainland enforcement authorities will process without procedural objection. The HKIAC Administered Arbitration Rules (effective 1 June 2024) introduced clarifications relevant to funded parties, including on disclosure and on the tribunal's approach to costs. Understanding those provisions before drafting the arbitration agreement in the underlying contract – not after the dispute arises – is the structural point that foreign counsel and in-house teams sometimes miss.

The interaction with the private wealth and holding-structure layer also matters. Where a claimant is a BVI or Cayman holding entity, the standing of that entity to bring the claim in Hong Kong proceedings, and its enforceability as a judgment debtor in the counterparty's jurisdiction, are live questions. We regularly advise on the holding-structure angle in parallel with the dispute strategy. Those two threads – see our analysis of shareholder and joint venture disputes involving BVI structures – need to be pulled together before the arbitration agreement is invoked.

For Mainland-connected debt-recovery matters, the enforcement route and the asset-tracing step are often as important as the arbitration itself. Our work on cross-border debt recovery and enforcement against offshore debtors reflects the same underlying principle: the award is the beginning, not the end, of the enforcement exercise.

Decision checklist before approaching a funder

This checklist is a prompt, not a substitute for legal analysis. Work through it with cross-border counsel before the first funder conversation.

• Enforcement map completed? Identify every jurisdiction where the counterparty holds material assets. Confirm the enforcement route from a Hong Kong award or judgment to each jurisdiction. If a route is unclear, resolve that first.
• Merits memorandum prepared? A clear, honest assessment of the legal merits – including the weakest points of the claim – is what a funder will commission in any event. Having it ready shortens the diligence process and demonstrates that the claimant has considered the claim critically.
• Damages model built with enforcement costs? The model should include the costs of the arbitration, the costs of post-award enforcement in each relevant jurisdiction, and a realistic estimate of timing. The funder's return comes from what remains.
• Interim-measures strategy considered? Where Mainland assets are at risk, the interim-measures Arrangement provides a tool that operates independently of the funding arrangement. Assess whether an application is warranted before the arbitration is filed.
• Arbitration agreement reviewed? Confirm the seat, the institutional rules, and the governing law of the arbitration agreement. A poorly drafted arbitration clause is a problem that no amount of funding resolves.
• Disclosure obligations understood? Know in advance that the existence of any funding agreement must be disclosed to the tribunal and all parties on execution. Plan the disclosure step into the procedural timeline.
• Security for costs position assessed? Anticipate a security-for-costs application from the respondent. Agree with the funder in the term-sheet how that application will be addressed before it arrives.
• Control provisions reviewed? Confirm that the funding agreement preserves independent conduct of the case by the claimant and its counsel. Funder termination rights should be clearly defined and limited.

Related practices

• Disputes & Arbitration – cross-border arbitration, enforcement, and interim measures across Greater China and offshore centres
• Holding Structures – structuring and reviewing holding entities for dispute standing and enforcement readiness

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