Introduction: Third-party funding (TPF) refers to an arrangement under which an external funder pays the costs of an arbitration or litigation, with the funder’s return linked to success on the merits or to actual recovery; most structures are “no win, no fee.” In other words, a company partially transfers the funding burden of a case and the downside risk of an adverse outcome to the funder and insurers, while sharing proceeds upon a successful award and recovery as agreed.
For Chinese enterprises, TPF is shifting from a “new buzzword” to a routine tool that can be incorporated into annual budgets and project decision-making. Especially for enterprises going overseas with substantial foreign operations, the value of TPF lies not in “having or lacking cash,” but in converting a large, uncertain litigation outlay into an expenditure that is predictable, manageable, and hedgeable—while simultaneously amplifying bargaining leverage and broadening settlement options in dispute dynamics.
I. Why TPF merits attention now
Amid volatility in global politics and trade, “going global” more readily exposes enterprises to overseas disputes concerning contract performance, regulatory change, compliance investigations, and payment and settlement—turning cross-border cases from episodic events into a new normal. For Chinese companies, this entails more frequent legal spending, longer periods of uncertainty, and tighter cash constraints. Especially where multiple jurisdictions are implicated in parallel, several major disputes may accumulate within a single fiscal year, and a cost overrun in any one matter can crowd out capital needed for core operations.
Against this backdrop, the practical value of TPF becomes particularly tangible. First, it transforms legal costs—often amounting to millions of U.S. dollars and difficult to forecast—into an expenditure structure aligned with case milestones, capable of phased management, and fit for inclusion in an annual budget. In other words, companies no longer need to repeatedly debate “how much to invest up front and when further injections may be needed.” Clear timelines and cash planning can balance case progression with day-to-day business priorities. For enterprises expanding capacity overseas, conducting investments or M&A, or undertaking large projects, cost certainty often carries greater managerial significance than the abstract question of “whether the case can be won.”
More importantly, TPF alters the balance of power at the negotiating table. In cross-border disputes, the financially stronger party often deploys delay and procedural elongation to erode the counterparty’s stamina, forcing early concessions under cash pressure. Once the financially weaker party brings in external funding, the matter’s “burn rate” no longer directly consumes the company’s own capital, and the advantage of time no longer automatically accrues to the deeper-pocketed side. This blunts the effectiveness of stalling tactics and encourages both parties to consider earlier, more rational settlements.
Another “hidden dividend” of introducing TPF is that it pushes case management from “reactive defense” to “investment-style governance.” Funders require, at the assessment stage, a clear evidentiary chain, an explicable damages model, well-defined legal issues, and a viable path to enforcement and recovery. This in turn prompts the company to assemble key facts, contractual communications, and witness testimony early; to standardize loss metrics and calculation methodologies; and to map potential enforcement venues and the counterparty’s asset footprint in advance. Viewing a case through an investment lens is not only about securing funding—it is also about concentrating resources on disputes with higher merits prospects and stronger recoverability, and avoiding the embarrassment of a “paper victory” with no cash outcome.
Finally, the legal resources and networks that accompany third-party funders often become an additional shield for enterprises “going overseas.” High-quality funders typically have deep expertise in specific jurisdictions and maintain stable collaborations with top local law firms, expert witnesses, investigative firms, and enforcement consultants. These networks help companies rapidly stand up case teams in unfamiliar legal environments and accurately identify key inflection points and latent risks. For enterprises, this means access not only to capital, but also to a legal ecosystem with long-term overseas operating experience—professionals familiar with procedural norms, the tendencies of courts and arbitral institutions, and the practicalities of quickly identifying attachable assets during enforcement. This “legal capital network” reduces the learning curve in cross-border contests, accelerates responsiveness, and strengthens negotiation posture.
Accordingly, paying attention to TPF now is not about encouraging more litigation. It is about equipping companies with an additional set of controllable tools amid unavoidable external uncertainty: turning uncertain costs into budgetable expenditures; converting negotiating disadvantages into manageable variables; front-loading the likelihood of success and the certainty of recovery; and weaving together scattered, unfamiliar overseas legal know-how and relationships into a network the company can deploy on demand. For Chinese enterprises pursuing globalization, this is a pragmatic choice that balances steady operations with risk hedging.
II. What kinds of cases are “worthy” of TPF
Not every case is suitable for funding. Assuming a baseline of reasonable prospects of success, funders apply a fairly stable screening logic centered on two core metrics: economics and enforceability.
First, economics. A straightforward yardstick is a “budget/ potential recovery ≥1:10.” That is, if legal fees are expected to be USD 10 million, the potential recovery should ideally be in the USD 100 million range. While not a hard rule, it is widely observed. Commercial arbitrations with amounts in dispute above USD 10 million more readily attract attention; investment arbitration (investment arbitration), given its longer duration and higher costs, typically faces a higher threshold. Return structures commonly include “percentage of proceeds,” “multiple of invested capital,” or hybrids. It is critical to distinguish whether returns are calculated on amounts actually deployed versus the committed facility, as this can materially affect outcomes.
Second, enforceability. Funders are highly pragmatic: a “paper win” without a recovery path is worth zero. Accordingly, due diligence focuses on the respondent’s asset information, the friendliness of jurisdictions where assets are located, the types and liquidity of assets that may be frozen, and potential sovereign immunity issues and defenses.
Finally, prospects of success require the funded party to present a persuasive legal assessment: key grounds for success and risks of failure, potential counterclaims and defenses by the opponent, the reliability of critical evidence, witness availability, and the impact of the arbitral seat on procedure and costs.
III. Process and timing: How to accelerate from first contact to funding
The TPF process can be summarized in four stages: initial discussions, term sheet, due diligence, and investment committee approval with execution of the litigation funding agreement (LFA). Initial discussions typically conclude within one to two weeks and cover an NDA, conflicts checks, and a preliminary screen of pre-investment materials. If the case appears to be a fit, the funder may issue an indicative term sheet within two to four weeks, outlining the return structure, budget range, scope of diligence, and whether an exclusivity period is required. Due diligence follows, with timing driven by the speed and quality of materials provided; complex matters or multi-jurisdictional enforcement plans typically take longer. After diligence, the funder’s investment committee considers the case, and the parties negotiate the LFA details. Overall, a well-prepared commercial arbitration can potentially close within two months. Where evidence is disorganized, budgets are vague, or enforcement paths are unclear, the process is prone to delay.
IV. Selecting a funder: Criteria for assessing reliability
Choosing a funder is not fundamentally different from selecting a bank lender or an M&A fund: assess the source and reliability of capital; review track record and professionalism; evaluate whether key terms are negotiable and fair; and gauge whether the funder’s style is compatible and low-friction.
First, capital strength and sources. Can the funder demonstrate capacity to finance the matter over the next 36 months? Is the capital ring-fenced for the case, with contingency reserves for overruns or unforeseen events? Are there audited financials, and are principal investors transparent and compliant?
Second, track record. Has the funder been criticized by courts or tribunals, or delayed payment of third-party cost orders? Does it have successful cases in the jurisdictions and sectors relevant to the enterprise?
Third, risk sharing. Does the funder provide downside protection for adverse costs, whether via ATE insurance or a direct indemnity?
Fourth, intervention and reporting style. Most funders adopt a financial-investor, hands-off approach—monthly or quarterly reports and milestone communications—so as not to burden counsel’s day-to-day work. Others prefer greater involvement. Suitability depends on regulatory constraints, project scale, and the company’s tolerance for management overhead.
Fifth, negotiability of key terms. Are returns calculated on deployed capital or total committed capital? Can a lower fee tier be set for early settlement? How are budget overruns handled, and if the funder declines to top up, will a pathway be available for replacement financing?
Sixth, confidentiality and conflicts. How does the funder conduct conflicts checks? Will information be shared with affiliates or reinsurers? Does the NDA cover information silos and post-termination handling?
V. Control and settlement: Avoid both “being led by the nose” and “gridlock”
A common concern is whether accepting funding allows the funder to “choke” decision-making at critical junctures. The practical solution is to embed mechanisms contractually rather than relying on informal understandings.
A typical approach in the LFA is to state that day-to-day strategy and settlement authority rest with the party to the dispute. For major milestones that could materially affect economics (e.g., substantial budget deviations, adding or abandoning claims, changes of counsel, or acceptance of an evidently low settlement), the funder has rights to be informed and to give reasonable consent. If settlement deadlock arises, the parties can adopt a fast, independent recommendation process: a pre-agreed senior barrister or seasoned mediator issues a written view on the case and the offer, serving as a “quasi-determination” on whether to accept a given proposal. This prevents the funder from “overreaching,” while also guarding against decisions being driven by emotion or short-term considerations.
For budgeting and reporting, “templating and cadence” are advisable. Monthly or quarterly briefings, with detailed reports at key milestones, enable the funder to monitor risk and plan cash flows without imposing unnecessary burden on counsel. Budgets should be built from the ground up, include contingencies, and address “what happens if we overrun” in the term sheet stage: Can funds be reallocated across phases? How long will top-up decisions take? If a top-up is refused, can replacement funding be bridged in?
Conclusion: Treat TPF as a dual engine—financial tool plus dispute tool
For a growing number of Chinese companies going overseas, TPF is not a stopgap for cash shortages, but a long-term mechanism to hedge uncertainty with external capital and specialist capability. It can transform matters from a legal cost center into risk-adjusted assets that finance and investment committees can evaluate; it can also grant companies more time and bargaining resilience in cross-border contests. The real determinant of TPF outcomes is not which funder is selected, but whether the company, adopting an investor’s perspective, has prepared the evidence, quantification, and enforcement pillars in advance—and whether it has engineered budgets, disclosures, insurance, and key terms to be clear and controllable. If these are in place, TPF will not be an “all talk, no substance” novelty, but a practical and powerful engine within the company’s global disputes management system.
