Parties involved in international arbitration are increasingly looking for alternative methods of funding to manage risk and cash flow in relation to legal costs. One way of acheiving this is through the use of third party funding. Simply put, a third party investor will provide funding for some or all of the budgeted legal costs, in exchange for which they will take a share of any recovery achieved.

Third party funding is often described as “non-recourse”, meaning that in making the investment, the funder takes on the case risk. If the arbitral award is negative or if the award cannot be enforced, the funder loses its investment and is not entitled to any recourse against the Claimant. If a substantial recovery is made, the funder will be entitled to reimbursement of the funded amount, plus a success fee caluclated by reference to certain variables.

This article explores what factors may influence pricing of the funding success fee, looking at the different models used across the market and what can be done in order to reduce the net cost of a third party funding arrangement.


Third party funding arrangements are highly bespoke and individually negotiated, often using very different approahces to structure and pricing. However, as the market has matured, it has on the whole adopted several broadly accepted basic pricing methods. The two common elements of the typical funding success fees structure are (1) a multiple of the amount invested by the funder and (2) a percentage of the amount recovered by the Claimant.

Some funding agreements will be based solely upon one or other of these approaches, whilst others may use both elements, e.g. the funding fee is the gretaer of a prescribed multiple of funder’s investment or a percentage of damages recovered.

It is very uncommon (but not unheard of) for a funder to adopt an interest rate approach. Such a model would typically require some form of security to be given to the funder and would therefore move away from the notion of a non-recourse funding arrangement.


Even within the broad framework of multiples and percentages, there is extensive scope to tailor the arrangement to the specific features of a case and the Claimant’s requirements.

If the ratio of funding to damages has the potential to be very large, it may be possbile to agree a cap on the funder’s percentage share of damages. This may be an absolute cap or a diminishing percentage based upon level of recovery, e.g. 30% of the first $30m recovered, stepping down to 20% of recoveries exceeding $30m.

Similarly, a Claimant will sensibly feel that if the dispute can be settled swiftly before a significant proportion of the legal budget has been spent, it should rightly be paying a lower success fee to the funder who has not only spent less but also makes a quick return on investment. This effect can be acheived in a number of ways, such as for example having a multiple which increases over time, or a fixed multiple which attaches to incremental tranches of funding linked to different stages in the process. It may also be possible to have a multiple attach to the funds actually drawn down, as opposed to committed, but in this case expect the funder to be seeking the greater of its multiple or a percentage of recoveries to limit the risk of a nil return if a settlement is agreed immediately following inception of the funding agreement.


At the extremes, we have seen arrangements where the return to the funder is as little as 1x the funded amount (i.e. the funder gets its money back, plus a success fee of 1x the funded amount). At the other end of the spectrum, we have seen offers of funding where at its highest, the funding will cost the greater of 50% of the damages recovered or a very high multiple on investment. Where an arrangement for a specific case will sit in this range is dependent upon a number of numerical variabes, such as:

The starting point in any funding arrangement is to ask how much needs to be funded. Double the budget and you should expect to double the funder’s target return.

Project Plan
As important as the aggregate budget figure is the rate at which capital will be deployed. Unless a quick return is expected, a deal where the funder is asked to immediately pay out the majority of the budget (e.g. to reimburse sunk costs) is likely to cost more, and be less attractive, than an arrangement where the funding will be gradually dripped into a case over a period of years with the possibility of a settlement in the meantime, even if the aggregate funding commitment in both scenarios is identical.

On one view it shouldn’t matter how much the Claimant is ultimately likely to recover, as the cost of capital should be the same whether the claim is for $10m or $100m. However, in reality it is relevant. If funding is crucial in helping a Claimant to unlock a potentially significant claim, the funder will inevitably be looking for a healthy return on investment.

The profitability of an arrangement is as much a product of how long the capital is out as it is of the return on investment. A low return on investment acheived within 6 months may produce much better IRR for the funder’s investors than a large return on an investment made after 4 years.

Whilst numbers are key, there are also other factors which are less easy to quantify, but which may nevertheless be very relevant to the question of pricing.

Risk is inherently a subjective and ethereal concept and funders typically do not adopt insurer-style actuarial risk analysis. However, a funder may well be able to justify to investors a more speculative investment if the returns are likely to be exceptionally good.

Bargaining Power
For example, a well-resourced but risk averse corporate may view external funding as a possible option which would be considered only if it makes economic sense in the context of alternative methods of financing available. A funder that wants to invest in this case will have to offer a competitive deal in order to secure the business. However, an investor that has lost everything following state misappropriation of an asset may have no alternative but to use external funding and therefore be in a weaker position to negotiate. However, as outlined below, there may be other ways to improve bargaining position.

Different Funders
This article has focussed on what features of a case or funding opportunity may influence price; however, it must be bourne in mind that different funders will price the same case very differently. This can be the product of a whole host of factors, ranging from the funder’s target IRR, investor profile, track record, previous experience of similar cases and of course the inherently subjective view on how attractive an investment opportunity may or may not be to the individual or committee making the investment decision.

Getting a Good Deal
Taking everything into account, there are some important pointers which can be taken away and which may assist in securing a good deal.

Firstly, there is no better way of knowing whether or not a deal is good than comparing that deal to one or more alternatives. Securing indicative offers of funding from multiple sources before tying into a particular funder will invariably give useful comfort that the offer selected is competitive.

Secondly, it should always be possible to have at least some limited negotiation on the funding terms. Like any commercial transaction, the opening offer may not be the best offer and testing the funder’s appetite to negotiate the commercial terms of the arrangement may well produce significant savings in terms of the Claimant’s net recovery. We have seen examples of funders keen to win business agreeing to significant modifications to the funding terms in order to secure an agreement.

Consider ways of reducing the funding commitment and laying off risk. Third party funding is one of a number of ways of financing arbitration. Depending upon the seat of the arbitration, there may be insurance products available which can hedge legal costs risk at relatively low cost. The legal team may also be amendable to a discussion about taking some limited risk by way of a part contingent/conditional fee arrangement. Considering the full range of options available may reveal ways of reducing the amount of funding needed and therefore directly reducing the net cost of the funding arrangement.

Also bear in mind that funding does not need to be “all or nothing”. Funders often welcome a Claimant being willing to put its own capital at risk. Committing to a fixed contribution to the overall budget or agreeing a pro rata sharing of the costs with a funder will both demonstrate the Claimant’s belief in the case and produce savings in terms of the ultimate funding fee.

If you or your clients would be interested in litigation funding or insurance for arbitration, don’t hesitate to contact us.