Third-party funding for a Hong Kong arbitration

Third-party funding for a Hong Kong arbitration is permissible under the Arbitration Ordinance (Cap. 609), which removed the common-law prohibition on maintenance and champerty (the historic rules against third-party involvement in litigation for profit) for arbitration and related court proceedings. The regime is built around mandatory disclosure and conduct requirements rather than licensing of funders. For a foreign principal with a strong merits case but constrained balance sheet – or one that prefers not to allocate litigation capital internally – a well-structured funding arrangement can unlock an arbitration that would otherwise sit in the strategic drawer.

This page sets out how we structure and manage that process, where the cross-border angle changes the picture, and what decisions remain squarely with the client.

When does a foreign principal actually need third-party funding for a Hong Kong arbitration?

The trigger is rarely pure impecuniosity. In our cross-border practice, the decision to approach a funder arises in three distinct situations.

The first is capital allocation. A group with a well-capitalised treasury may nonetheless conclude that underwriting its own arbitration against a counterparty in the Mainland, across Central Asia, or in the Middle East is an inefficient use of that capital. Shifting the litigation risk to a professional funder frees the balance sheet for core operations. The merits must still clear a funder's threshold, but the conversation is a commercial one, not a distress one.

The second is enforcement horizon. Where the anticipated award will be enforced across the Mainland–Hong Kong boundary – using the arbitral-award mutual-enforcement Arrangements that have been in effect since 1999 and extended through a 2020 Supplemental Arrangement – a funder's due-diligence process often surfaces asset questions that the claimant has not yet pressed. That process has value beyond the capital it provides.

The third is leverage in settlement. A funded claimant signals that the merits file has been reviewed by a commercial institution prepared to put money behind it. In our experience, a credibly funded claim frequently accelerates the counterparty's approach to negotiation.

None of these triggers makes funding automatically appropriate. The governing instrument sets out conduct requirements that shape every engagement.

The governing instrument: what the Arbitration Ordinance actually requires

The Arbitration Ordinance (Cap. 609) – modelled on the UNCITRAL Model Law on International Commercial Arbitration – is the statutory basis for third-party funding in Hong Kong arbitrations. Alongside it, a code of practice for third-party funders issued under the Ordinance sets out the baseline conduct standards any funder operating in this context must meet.

The critical requirement for the client is disclosure. A funded party must disclose the existence of a funding agreement to the arbitral tribunal and to every other party. The disclosure obligation arises at the outset and continues: any material change to the funding arrangement must be disclosed. What the client does not have to disclose is the commercial terms – the funding percentage, the return cap, the priority waterfall. Those remain confidential.

The Ordinance also restricts a funder's ability to control the proceedings. The funding agreement may not give the funder control over the conduct of the arbitration or authority to direct the claimant's legal strategy. In practice, funders exercise contractual rights through information and approval rights over settlements above a defined threshold – but the line between those rights and prohibited control is one the funding agreement must draw carefully.

The HKIAC Administered Arbitration Rules – in their 2024 version, effective 1 June 2024 – address third-party funding directly. The tribunal has express power to order disclosure and to take the existence of a funding arrangement into account when making cost orders. That cost-order power is material: it creates a direct line of sight between the funder's involvement and the eventual award of costs against or in favour of a funded party.

The sequence above describes the standard position. 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 the Ordinance's requirements apply to your cross-border position, contact info@lockhartyip.com.

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

The cross-border dimension is not peripheral to third-party funding – it is often the reason the funder says yes or no.

A funder underwriting a Hong Kong arbitration is underwriting the enforcement route as much as the merits. Where assets are located in the Mainland, the relevant enforcement channel is the arbitral-award mutual-enforcement Arrangement between the Mainland and the HKSAR. Under the 2020 Supplemental Arrangement, claimants may file simultaneous enforcement applications in both Hong Kong and the Mainland – a mechanism that was not available under the original 1999 Arrangement. Funders familiar with Greater China exposure price this positively: dual-track enforcement increases the probability of actual recovery, which is the only metric that matters to the capital model.

Where assets sit outside the Mainland – in Singapore, the United Arab Emirates, the United Kingdom, or a European jurisdiction – enforcement runs through the New York Convention. Hong Kong is a signatory jurisdiction; awards from HKIAC-seated proceedings have a well-tested enforcement record across New York Convention states. The enforcement route through the New York Convention is, in our view, one of Hong Kong's strongest structural advantages as a seat.

The complication arises when the respondent's assets span multiple jurisdictions in real time. A Mainland operating entity with a BVI holding company and a UAE trading subsidiary presents an enforcement map that requires coordination across at least three legal systems. The funder will model each recovery route separately. Our cross-border desk works through that map with both the client and the prospective funder during the funding origination stage.

A second cross-border point concerns interim measures. Where the arbitration is seated in Hong Kong, the Interim-Measures Arrangement (the arrangement for Mainland courts to grant interim relief in support of HKIAC-seated arbitrations) has been in effect since 1 October 2019. The existence of funded proceedings does not of itself affect the availability of interim measures, but the funder's involvement in the cost of pursuing those measures is a term to address explicitly in the funding agreement.

For cross-border recognition questions involving court judgments, our briefing on recognising court judgments across jurisdictions addresses the parallel position under the judgment-recognition regime.

The route we run: step by step

Our role begins before any funder is approached. That sequencing is deliberate.

The first step is a merits and recoverability assessment. A funder will conduct its own assessment, but it will do so faster and with greater confidence if the claimant presents a structured file: a clear theory of the claim, the arbitration agreement, the relevant documents, and an initial view on asset location. We prepare that file with the client. For merits questions touching Hong Kong law – the governing law of many commercial contracts using Hong Kong as a seat – we work alongside locally licensed Hong Kong firms at this stage.

The second step is funder identification and approach. Funders operating in the Asia-Pacific market vary significantly in their sector focus, their funding capacity, their return requirements, and their appetite for enforcement-stage risk. We identify a shortlist based on the specific matter profile – the claim quantum, the jurisdiction of the assets, and the likely duration of the arbitration – and manage the initial approach.

The third step is the term sheet and funding agreement. This document is the client's most consequential decision in the process. The principal negotiating points are: the funding commitment (amount and timing of drawdowns); the return mechanism (a multiple of capital deployed, a share of recovery, or a combination); the approval rights over settlement; and the termination provisions. The termination clause deserves close attention: under what conditions can the funder exit, and what happens to the claim if they do? We review the term sheet and the full agreement before execution. Where the agreement is governed by Hong Kong law, we coordinate the review with locally licensed counsel.

The fourth step is disclosure to the tribunal and the other parties. This is not a discretionary step. We prepare the disclosure notice and file it at commencement or at the point the funding agreement is executed, whichever is earlier.

The fifth step runs in parallel with the arbitration itself: ongoing funder relationship management. This means keeping the funder's information rights current, flagging any material developments that trigger the approval rights in the agreement, and managing the interface between funder communications and the legal-professional-privilege position.

The sixth step is the award and the enforcement sequence. A funded arbitration does not end at the award. The funder's recovery depends on actual enforcement. We structure the enforcement plan from the outset – identifying the registration or recognition procedure in each target jurisdiction, the timing for applications, and the interaction with any interim measures already in place. Our practice on this is set out in more detail across the disputes and arbitration practice page.

The documents and decisions the client must own

A funded arbitration involves a layer of documentation that is entirely separate from the arbitration file itself. Clients sometimes underestimate this.

The funding agreement is the primary document. It governs the relationship with the funder for the entire life of the matter. It is not a standard-form document; every material term is negotiable. The client's instruction to enter it, on the agreed terms, is a decision that belongs to the client alone. No adviser can or should make it.

The disclosure notice is a procedural document with a substantive consequence. Failing to file it – or filing it late – gives the tribunal grounds for an adverse cost order and potentially for drawing inferences about the funded party's conduct of the proceedings. The client must confirm the fact and timing of funding to us before commencement.

The settlement approval mechanism requires the client's active management. If a settlement offer arrives during the arbitration, the funder's approval right kicks in where the offer falls below the threshold in the agreement. The client negotiates that threshold before execution. If the threshold is set too high, the client loses the ability to settle pragmatically; if too low, the funder effectively controls the endgame. This is a commercial decision with legal consequences, and it needs to be made carefully at the term-sheet stage, not at the moment a settlement offer lands.

A micro-scenario from our desk illustrates the point. A European manufacturing group brought a substantial contract claim against a Mainland counterparty under an HKIAC arbitration clause (winter 2025). The client had strong documents and a clear merits position but did not want to fund a multi-year arbitration from its own resources while managing ongoing Mainland operations. We prepared the merits file and approached three funders in the Asia-Pacific market. Two declined on enforcement grounds – the counterparty's known assets were domestic-Mainland and the enforcement route was considered uncertain. The third funder agreed, on the basis that the client had identified a BVI holding entity of the counterparty with assets susceptible to New York Convention enforcement through a third-country seat. The negotiation of the settlement approval threshold in the funding agreement – ultimately set at a figure that reflected the BVI enforcement risk – was the central commercial decision of the funding origination stage. The arbitration is proceeding.

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

What foreign counsel typically miss about the Hong Kong third-party funding regime

The most common error we see from non-Hong Kong-based advisers is treating the Hong Kong regime as identical to the English or Australian model. It is not.

The disclosure obligation in Hong Kong attaches to the existence of the funding agreement, not merely to a funding arrangement in the broad sense. A commitment letter or heads of terms that meets the definition of a funding agreement under the Arbitration Ordinance triggers disclosure. Advisers accustomed to jurisdictions where disclosure attaches only to executed agreements may mistime this step.

The second point of divergence concerns funder regulation. Hong Kong does not impose a licensing requirement on funders themselves. Funders operating in the market are subject to the code of practice but are not regulated entities in the sense that insurance carriers or banks are. This changes the counterparty-due-diligence exercise: the client must satisfy itself as to the funder's financial standing and institutional capacity, because the regulatory architecture does not do that work for it.

The third point is cost exposure. Under the HKIAC Administered Arbitration Rules, the tribunal may make a cost award directly against a funder in defined circumstances. This possibility – which does not exist in all funding jurisdictions – affects the funder's risk model and, in turn, the terms on which it will fund. It also affects the claimant's negotiating position: a funder pricing in this tail risk will seek a higher return than one operating in a jurisdiction without this exposure.

A second scenario from our desk. A CIS-based holding group with a Hong Kong-seated claim approached us after its first external counsel – unfamiliar with the Hong Kong disclosure timing rule – had filed a disclosure notice late, after the first procedural hearing. The respondent had raised a cost objection. We reviewed the position with locally licensed counsel, assessed the tribunal's likely approach under the 2024 HKIAC Rules, and prepared a remediation submission. The matter continued; the late disclosure was addressed in the costs allocation at the award stage. The lesson is straightforward: the timing of disclosure is a firm obligation, not a best-efforts standard.

Decision matrix: which situation points to which approach

Not every funded-arbitration situation looks the same. The right approach depends on the intersection of four factors: the nature of the claim, the location of the assets, the funding market's appetite for the enforcement route, and the client's own commercial objectives in relation to settlement.

Where a client has a strong documentary record, a clear quantum, and counterparty assets in a New York Convention enforcement jurisdiction, the matter is well-suited for the mainstream Asia-Pacific funding market. The funding origination process is direct. The term-sheet negotiation focuses on the return multiple and the settlement threshold.

Where the assets are in the Mainland and enforcement runs through the arbitral-award Arrangements, the funding market is more selective. Funders will want detailed evidence of the counterparty's asset position in the Mainland – not a general assertion of Mainland operations, but identifiable assets against which a Mainland people's court can enforce. The origination process takes longer, and the funder's due-diligence requests will be more granular.

Where the enforcement target is a BVI or Cayman holding entity with liquid assets – cash, listed securities, receivables – the funding market is generally positive. These are assets with defined liquidity and a clear enforcement path through the common-law courts of the offshore jurisdiction. The risk is information risk: knowing that the assets are there and remain there.

Where the client's primary objective is settlement rather than a final award, third-party funding remains a valid tool but the settlement approval mechanism in the funding agreement becomes the dominant negotiating point. In this situation, the client should resist a tight approval threshold at the term-sheet stage and should model the settlement range before it enters the funding agreement, not after.

Where the claim involves a cross-border element that engages both the arbitration and a separate court proceeding – a parallel Mainland litigation, for example, or an insolvency filing against the counterparty – the funding structure must address all limbs. A funder funding only the arbitration but not the court proceeding creates a coordination problem at the enforcement stage. This is a structural point to resolve before execution, not at the moment the parallel proceeding materialises.

Self-assessment: is your matter ready for a funding approach?

Before approaching any funder, a client should be able to answer the following questions clearly.

First: is there a valid, enforceable arbitration agreement? A funder will not underwrite a claim whose arbitration agreement is ambiguous as to scope, seat, or institution. The agreement should be reviewed and any challenges to its validity assessed before origination begins.

Second: where are the counterparty's assets, and in what form? The answer must be specific. "Operations in China" is not an asset map. The client should identify the legal entities, their registration jurisdictions, and the nature of their assets – real property, bank accounts, receivables, shareholdings. The enforcement route follows the asset map.

Third: what is the realistic quantum range? Funders in the Hong Kong market generally focus on claims with a minimum expected recovery that justifies the cost of funding. The client's quantum assessment must account for the full range of scenarios – a partial award, an adverse cost order, a discounted settlement.

Fourth: what is the timeline? Funders model their return on a deployment period. An arbitration that the client expects to resolve in eighteen months and that actually runs for four years changes the funder's capital model materially. The client should be realistic about timeline at the origination stage, not optimistic.

Fifth: is the client willing to provide information rights to the funder on a sustained basis? A funder has no role in conducting the arbitration, but it has a contractual right to information. That information flow must be managed consistently with the legal-professional-privilege position. If the client's internal compliance or governance structure makes that flow difficult, the funding structure needs to address it upfront.

If the client cannot answer these questions with confidence, the origination stage will surface the gaps – at cost, and sometimes at the cost of the funder's confidence in the matter. We work through these questions before any funder is approached.

Related practices

• Holding Structures – structuring offshore and Hong Kong holding entities for cross-border asset protection and enforcement readiness
• Tax Positions – assessing Hong Kong territorial tax and treaty implications that arise in funded cross-border dispute contexts

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• Disputes Arbitration
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• New York Convention Enforcement Route Through Hong Kong 5

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