THE RISE OF THIRD-PARTY FUNDING IN INTERNATIONAL ARBITRATION: LEGAL ISSUES AND CONSIDERATIONS

A. Introduction

Third-party funding (“TPF”) has gained prominence in international arbitration in recent times. Historically, the practice was once treated with suspicion in many common law jurisdictions on account of the historic torts of maintenance and champerty, however, Third-party funding is now a recognised feature of the arbitral landscape, embraced by the parties to an arbitral proceeding, institutions and, increasingly, policymakers.

This article examines the nature of Third-party funding in international arbitration, the principal legal issues it raises, the institutional and legislative responses that have emerged internationally, and it also touches on the specific position under Nigeria's Arbitration and Mediation Act 2023 (“AMA”), before offering practical considerations for practitioners advising funded parties.

B. Understanding Third-Party Funding

Third-party funding in arbitration describes an arrangement under which an entity with no pre-existing interest in a dispute (the “funder”) provides financial assistance to a party, to cover the costs of pursuing or defending a claim, in exchange for a share of any award, settlement or other financial return. It is important to highlight that the funding is typically non-recourse, that is, if the funded claim fails, the funder bears the loss and ordinarily has no right to recover its funds from the funded party and this very element is what distinguishes a Third-party funding arrangement from a conventional loan. It is also distinct from contingency or conditional fee arrangements between a party and its own lawyers.

Third-party funding agreements vary considerably in structure, but commonly address the scope of costs covered, it usually covers beyond the legal professional fees and also includes tribunal charges, expert witness fees and even costs. It also covers areas such as the funder's return (which is usually a multiple of the sum invested or a percentage of proceeds, sometimes on a milestone basis linked to the stage at which recovery occurs), the funder's right to receive information about the progress of the case, and, controversially, the extent to which the funder may be consulted on or must approve key strategic decisions such as settlement, which is in itself an ethical grey area.

C. Drivers of the Rise in Third-Party Funding in International Arbitration

A number of factors have contributed to the rise of Third-party in International Arbitration in recent times across the globe. These factors include:

i. The escalating cost of international arbitration, particularly in complex, document-heavy commercial and investment disputes, which places meritorious claims beyond the reach of many claimants.

ii. The maturation of the litigation and arbitration funding industry, with dedicated funds, listed funders and increasing institutional investor appetite for uncorrelated returns.

Iii. The use of funding as a corporate finance and risk-management tool, allowing companies to monetise or de-risk contingent claims without impairing their balance sheets.

Iv. Legislative reforms abolishing or relaxing the common law doctrines of maintenance and champerty in a growing number of arbitration-friendly seats.

V. A genuine access-to-justice rationale, enabling impecunious claimants, including small and medium-sized enterprises, to pursue legitimate claims against better-resourced opponents.

D. The Nigerian Position: The Arbitration and Mediation Act 2023 in View

Nigeria's position on Third-party funding has undergone a fundamental shift. Under the repealed Arbitration and Conciliation Act 1988, and under the common law generally applicable in Nigeria, the twin torts of maintenance and champerty cast doubt on the enforceability of funding arrangements, leaving funders exposed and claimants without a reliable route to third-party finance. The Arbitration and Mediation Act, 2023 (‘AMA’) has reversed this position. It expressly abolishes the application of maintenance and champerty to third-party funding arrangements in respect of arbitrations seated in Nigeria and arbitration-related proceedings before Nigerian courts, placing funding on a clear statutory footing for the first time.

Section 91 of the Arbitration and Mediation Act, 2023 defines a third-party funder as an entity or person, unconnected to the dispute, that provides financial support toward part or all of the cost of the proceedings. The Act imposes a disclosure obligation requiring the identity and address of any funder to be disclosed before and/or during the arbitration, a safeguard directed principally at enabling arbitrators and parties to identify potential conflicts of interest. The Act also empowers the arbitral tribunal to fix, as part of the costs awarded in the final award, the cost of obtaining third-party funding, giving statutory recognition to the recoverability of funding costs. The Act's provisions on security for costs must now be read alongside its funding provisions, since a respondent's application for security founded on the claimant's use of Third-party funding is one of the more likely points of contest under the new regime.

These reforms ushered in by the Arbitration and Mediation Act 2023, calibrated Nigeria to be on the same path with established funding-friendly seats such as Singapore and Hong Kong and reinforced Nigeria's positioning as a preferred seat for commercial and investment arbitration in Africa. Notwithstanding the aforementioned successes, the statutory framework still leaves several matters to future practice and institutional guidance: the Act does not prescribe a code of conduct for funders operating in Nigeria, does not impose capital adequacy or licensing requirements, and offers limited express guidance on the protection of privilege in funder due diligence or on the permissible scope of a funder's involvement in the conduct of a Nigerian-seated arbitration. Nigerian arbitral institutions are well placed to address these gaps through best-practice guidance, pending the development of a body of Nigerian arbitral and curial practice under the new Act.

E. Comparative Analysis: The United Kingdom and Nigeria's Approach to Third-Party Funding

A comparison between the United Kingdom and Nigeria illustrates how different jurisdictions have approached the regulation of third-party funding in arbitration. While both jurisdictions now recognise the legitimacy of third-party funding, they have adopted different regulatory approaches that reflect the development of their respective legal frameworks and funding markets.

Although both Nigeria and the United Kingdom now recognise the legitimacy of third-party funding in arbitration, they arrived at that position through different regulatory paths. In Nigeria, the Arbitration and Mediation Act 2023 ("AMA") expressly abolished the application of the doctrines of maintenance and champerty to arbitration-related funding arrangements, providing immediate statutory certainty for funded arbitrations. By contrast, the United Kingdom's acceptance of third-party funding developed gradually through legislative reform and judicial evolution. The Criminal Law Act 1967 abolished maintenance and champerty as crimes and torts in England and Wales, removing the principal legal barriers that had historically discouraged commercial funding and laying the foundation for the sophisticated funding market that exists today.

The United Kingdom's regulatory model is largely self-regulatory rather than statute-driven. The Association of Litigation Funders (ALF) operates a voluntary Code of Conduct that requires participating funders to maintain adequate capital, act independently from legal representatives, and refrain from exercising undue control over litigation or arbitration strategy. Although compliance with the Code is voluntary, it has become an important market standard that promotes confidence among parties, counsel, and tribunals.

In contrast, Nigeria's approach is principally legislative. Sections 61 and 62 of the AMA provide statutory recognition for third-party funding in arbitration, define who qualifies as a third-party funder, require disclosure of the funder's identity and address, and empower tribunals to consider funding costs when allocating costs in a final award. However, unlike the United Kingdom, Nigeria has not yet introduced a dedicated code of conduct, capital adequacy requirements, licensing obligations, or institutional oversight specifically governing funders.

Disclosure obligations illustrate another area of convergence and divergence. In both jurisdictions, disclosure serves primarily to protect the integrity of arbitral proceedings by enabling tribunals to identify potential conflicts of interest. The United Kingdom's position is shaped largely by institutional rules, such as the ICC and ICSID Rules, together with best-practice expectations. Nigeria goes further by embedding disclosure within its statutory framework through the AMA, thereby making disclosure a legislative obligation rather than relying solely on institutional regulation.

The two jurisdictions also differ in the maturity of their jurisprudence. English courts have produced a substantial body of case law addressing issues such as funder liability for adverse costs, the permissible scope of funder involvement, and public policy concerns surrounding funding agreements. Nigeria's statutory regime remains relatively new, and many practical questions, including the extent of funder participation in settlement decisions, protection of privilege during funding due diligence, and responsibility for adverse costs, will likely be clarified through future arbitral practice and judicial interpretation.

Nigeria's current framework reflects many internationally accepted principles, while remaining less institutionally developed than the United Kingdom's approach. The comparison highlights areas in which further regulatory refinement may enhance certainty, transparency, and confidence in Nigeria's third-party funding regime and its broader arbitration framework.

F. Key Legal Issues and Considerations

a. Disclosure and Conflicts of Interest

The clearest and most widely regulated concern raised by Third-party funding is its potential to create undisclosed conflicts of interest, particularly where a funder has financial or personal connections to an arbitrator, a member of the tribunal-appointing institution, or opposing counsel. Because funders frequently invest across multiple cases and jurisdictions, an arbitrator sitting in one funded matter may unknowingly have a relevant connection to the funder in another. This has driven a steady trend toward mandatory or strongly encouraged disclosure of the existence and identity of any funder.

Institutional rules increasingly reflect this concern, though the scope of disclosure required differs. For instance, Article 11(7) of the ICC (International Chamber of Commerce) 2021 Arbitration Rules requires parties to promptly inform the Secretariat, the tribunal and other parties of the existence and identity of any funder with an economic interest in the outcome of the arbitration. Similarly, Rule 14(1) of the 2022 ICSID (International Centre for Settlement of Investment Disputes) Arbitration Rules goes further, requiring a party to file a written notice disclosing the name and address of any funder, to be updated if circumstances change. Similar obligations appear in the Hong Kong International Arbitration Centre (HKIAC) Rules and the Singapore International Arbitration Centre (SIAC) Rules. Also, Section 62 of the Arbitration and Mediation Act, 2023 makes provisions for the disclosure of Third-party funding. The principal point of divergence remains whether disclosure extends only to the funder's identity or also to the substance of the funding terms.

b. Confidentiality and Privilege

Another ethical concern which arises is that of confidentiality, because the process of securing third-party funding typically requires the prospective claimant to share privileged and commercially sensitive material with the funder during due diligence, and periodically thereafter. This raises the risk that legal professional privilege may be waived, or that confidentiality obligations owed to the opposing party or the tribunal may be breached. Some institutional rules address this directly: the HKIAC Rules expressly permit disclosure of confidential information for the purpose of obtaining or maintaining third-party funding, and the Chamber of Commerce Brazil-Canada (CAM-CCBC) Rules carve out comparable exceptions. Where the applicable rules or governing law are silent, parties and their counsel should rely on carefully drafted non-disclosure agreements and, where recognised, the common interest doctrine, to protect privilege in funder communications.

c. Security for Costs

Respondents in arbitral proceedings now frequently seek security for costs where they learn that a claimant is funded under a Third-party funding arrangement, on the theory that the presence of funding is itself evidence of the claimant's impecuniosity and inability to satisfy an adverse costs award. Funders, for their part, argue that a funder's rigorous due diligence is, if anything, evidence of the claim's merit rather than of the claimant's weakness. Tribunals have not adopted a uniform approach, and outcomes tend to be highly fact-specific, turning on the terms of the funding agreement, whether the funder has committed to cover adverse costs, and the overall financial position of the claimant. The interaction between funding disclosure and security for costs applications is therefore one of the most commercially significant, and most contested, issues in this area.

d. Costs Allocation and Adverse Costs Exposure

Because a funder is ordinarily not a party to the arbitration agreement or the proceedings, it generally falls outside the tribunal's jurisdiction and cannot, without more, be ordered to pay costs directly. This creates a potential enforcement gap where a funded party is unable to satisfy an adverse costs award and the funder itself bears no direct liability. Some legislatures have addressed the related but distinct question of recoverability, empowering tribunals to treat the cost of obtaining funding as a component of the recoverable costs of the arbitration in the final award. The question whether, and in what circumstances, a funder may be joined to costs proceedings or otherwise held liable for adverse costs remains a live and unsettled area of practice across jurisdictions.

e. Control, Autonomy and the Funder's Influence

Third-party funding agreements sometimes grant the funder rights of consultation over, or approval of, key decisions, including the choice of counsel, procedural strategy and, most sensitively, settlement. Considering the fact that party autonomy is a foundational principle of arbitration, excessive funder control may create tension with party autonomy and with counsel’s professional obligations.

f. Capital Adequacy and Ethical Regulation of Funders

Unlike lawyers, funders are, in most jurisdictions, subject to no licensing regime, minimum capital requirement or dedicated regulator, which raises concerns about a funder's ability to meet its own commitments, including any obligation to pay adverse costs it has undertaken to cover. Voluntary codes of conduct, such as that maintained by industry associations in England and elsewhere, seek to fill this gap through self-regulation, but adherence is not universal.

G. Practical Considerations for Practitioners

Looking forward in the ever-dynamic space of international arbitration, Practitioners are enjoined to consider the following:

i. Conduct due diligence on the funder itself, including its financial standing, portfolio, and any prior history of disputes with funded parties, before entering into a funding agreement.

Ii. Scrutinise control, consultation and approval clauses in the funding agreement to ensure the funded party retains real autonomy over strategy and settlement.

Iii. Address disclosure proactively and early, particularly in AMA-governed and other disclosure-mandatory proceedings, to reduce the risk of later conflict challenges or adjournments.

Iii. Protect privilege in funder communications through robust non-disclosure agreements and, where available, reliance on the common interest doctrine.

Iv. Anticipate and prepare for security for costs applications where funding is disclosed, including by considering whether the funder should commit, in terms visible to the tribunal, to meet any adverse costs award.

v. For Nigerian-seated matters, align the funding agreement and disclosure practice with Section 62 of the Arbitration and Mediation Act, 2023 from the outset, and factor the recoverability of funding costs into the overall costs strategy.

H. Conclusion and Recommendations

Third-party funding has become an established, and in many respects indispensable, feature of international arbitration, expanding access to justice while introducing a distinct set of legal and ethical questions around conflicts of interest, confidentiality, cost allocation and party autonomy. The international response has been incremental and institution-led, converging on disclosure as the primary regulatory tool while leaving deeper questions, including funder liability for adverse costs and capital adequacy, largely unresolved. Nigeria's Arbitration and Mediation Act 2023 marks a decisive and welcome step in this evolution, giving Third-party funding a clear statutory footing and enhancing Nigeria's credentials as a modern arbitral seat. Nigeria's framework provides a strong legislative foundation, but its long-term effectiveness will depend on the continued development of institutional practice and judicial interpretation.

To strengthen Nigeria's third-party funding regime and further enhance confidence in Nigerian-seated arbitrations, the following measures should be considered:

Develop institutional guidance or a code of conduct for third-party funders to establish best-practice standards on funder independence, ethical conduct, confidentiality, and involvement in strategic decision-making.

Introduce minimum capital adequacy or financial responsibility standards for funders operating in Nigeria, drawing lessons from the United Kingdom's self-regulatory framework to ensure that funders can honour their financial commitments.

Provide clearer guidance on privilege and confidentiality during funder due diligence to reduce uncertainty surrounding the disclosure of sensitive legal and commercial information.

Clarify the principles governing security for costs applications involving funded parties, whether through institutional rules or judicial precedent, to promote greater consistency in tribunal decision-making.

Encourage Nigerian arbitral institutions to issue practical guidance on disclosure obligations, conflicts of interest, and recoverability of funding costs while the jurisprudence under the AMA continues to develop.

By combining its statutory reforms with targeted institutional and regulatory improvements, Nigeria can build a more comprehensive third-party funding framework that aligns with international best practices while reinforcing its position as a leading arbitration hub in Africa. This is because the next stage of development, in Nigeria as elsewhere, will likely depend less on further legislation than on the guidance issued by arbitral institutions and the body of practice built up by tribunals applying these still-young and emerging provisions.