Scenario: a European company holds a fairly strong ISDS file, but its board refuses to burn several million USD of cash over four years. A litigation fund offers to pay all costs in exchange for a share of any recovery. That is third-party funding (TPF) — the litigation-finance tool reshaping the ISDS balance. This article explains how TPF works, when to use it, its true price, and the risks to manage before signing.
What is third-party funding?
TPF is an arrangement where an unrelated funder (a specialist fund or litigation-finance company) pays the costs of pursuing the claim — counsel, tribunal fees, experts — in exchange for a share of the recovery if the case succeeds. If the case fails, under the standard model the investor does not repay the funded costs (non-recourse). Funders appraise the file like an investment: they only back cases with sufficient win probability and realistic enforceability.
A less-noticed consequence: the funder’s due diligence is a free but ruthless quality test of your file. A funding refusal is often an early signal that the case is weaker than you think.
How much do funders take, and when should you use TPF?
Market references commonly put the funder’s share at around 20–40% of the actual recovery, or a multiple of capital deployed, depending on the deal structure — a commercial bargain negotiated case by case, not a statutory rate. TPF fits when: the file is strong but the company must preserve operating cash; the board wants litigation cost risk off the balance sheet; or the claim is large but will run for years.
Conversely, if the company is cash-rich and the file is a near-certain win, self-funding is usually cheaper — the funder’s cut of a large award can far exceed ordinary borrowing costs. TPF is a finance calculation, not an emotional decision.
Risks and disclosure duties to manage
- Funding disclosure: modern standards require revealing the existence of funding — the VIAC Rules 2026 (Article 16(7)) oblige the funded party to disclose the funding arrangement to the Centre and the tribunal; international regimes such as SIAC 2025 and ICC 2026 likewise manage the issue to check arbitrator conflicts;
- Adverse costs: if you lose, who bears the other side’s costs under the tribunal’s allocation? Clarify whether the deal includes after-the-event (ATE) insurance;
- Control rights: pin down who decides on settlement — a funder seeking early recovery may conflict with your long-term strategy;
- Confidentiality: documents shared for funder due diligence must sit inside a tight confidentiality structure so as not to weaken your litigation position.
Frequently asked questions
What is third-party funding for ISDS cases?
An unrelated fund or finance company pays the claim costs (counsel, tribunal, experts) in exchange for a share of any recovery; under the standard model the funding is non-recourse if the case fails.
When should third-party funding be used?
When the file is strong but cash must be preserved, when the board wants cost risk off the balance sheet, or when a large claim will run for years. Cash-rich claimants with near-certain cases usually find self-funding cheaper.
What percentage does the funder take?
Market references commonly cite 20–40% of the actual recovery, or a multiple of capital deployed — a negotiated commercial term, not a statutory rate. Model the total opportunity cost before signing.
What are the risks of third-party funding?
Four main risks: funding-disclosure duties (e.g. Article 16(7) of the VIAC Rules 2026); adverse costs on losing and the scope of ATE cover; settlement-control conflicts; and confidentiality leakage during due diligence.
This article has been quality-reviewed by the FLAW AI Legal Council