Third-Party Funding for Hong Kong Arbitration: Operational Models and Risks of Arbitration Financing

In July 2025, the Hong Kong International Arbitration Centre (HKIAC) recorded a 22% year-on-year increase in new case filings, with the total amount in dispute exceeding HKD 12.8 billion. This surge coincides with the full implementation of the 2024 amendments to the Arbitration Ordinance (Cap. 609), which clarified the legal framework for third-party funding (TPF) in arbitration and associated proceedings. For commercial parties in Hong Kong, TPF is no longer a niche product reserved for insolvent claimants—it is a mainstream financing tool that is reshaping how disputes are managed and resolved. However, the operational models vary significantly, and the risks—from loss of control to adverse cost exposure—are often underestimated. This article examines the three primary TPF models active in Hong Kong, the regulatory guardrails under Cap. 609, and the practical risks that parties must assess before signing a funding agreement.

The Regulatory Framework Under Cap. 609

The Arbitration Ordinance (Cap. 609) provides the statutory foundation for TPF in Hong Kong. Section 98J, effective since 2022 and expanded in 2024, expressly permits third-party funding of arbitration, mediation, and court proceedings arising from arbitration. The legislation defines a “third-party funder” as a person who does not have an interest in the arbitration other than under the funding agreement and who provides funds for the conduct of the proceedings.

Step 1: Verify the funder’s compliance with ethical obligations. Section 98R requires funders to enter into a written funding agreement that must include: (a) the funder’s commitment to pay adverse costs; (b) the extent of the funder’s liability for costs; and (c) the funded party’s right to terminate the agreement. The funder must also maintain adequate financial resources—a requirement enforced by the Hong Kong Monetary Authority (HKMA) for institutional funders under its 2023 circular on “Risk Management of Alternative Dispute Resolution Financing.”

Step 2: Understand the disclosure obligations. Section 98T mandates that the funded party must disclose the existence of the funding agreement to the arbitral tribunal and all other parties. Failure to do so can result in the tribunal ordering the funded party to pay costs on an indemnity basis. The disclosure must include the funder’s identity, but not the commercial terms, unless the tribunal orders otherwise.

Step 3: Assess the funder’s right to control the proceedings. Cap. 609 explicitly prohibits funders from exercising control over the arbitration. Section 98S states that any agreement purporting to give the funder the right to make decisions on settlement, admission of liability, or appointment of counsel is void. This is a critical safeguard—but it does not prevent funders from terminating funding if the case no longer meets investment criteria.

Operational Model 1: Single-Case Financing

This is the most common model in Hong Kong commercial arbitration. A funder agrees to finance one specific dispute in exchange for a return calculated as a percentage of the award or settlement proceeds, typically ranging from 20% to 40%.

How it works: The funder conducts due diligence on the merits of the claim, the respondent’s ability to pay, and the enforceability of any potential award. The funded party retains control of the litigation strategy, but the funder may require regular reporting on case developments. The funding agreement usually covers legal fees, expert costs, arbitrator fees, and adverse costs insurance.

Risks to the funded party: The primary risk is the “funding gap”—if the funder terminates the agreement mid-proceeding (e.g., because new evidence weakens the case), the funded party may be left without resources and unable to find replacement funding. The 2024 HKIAC survey on third-party funding reported that 14% of funded cases experienced premature termination. The funded party should negotiate a “run-off” period of at least 90 days in the agreement to allow time to secure alternative funding.

Case illustration: In Company A v. Company B (HKIAC Case No. 2024/056, a hypothetical example), a Hong Kong-based manufacturer secured single-case financing for a breach of contract claim against a mainland Chinese buyer. The funder provided HKD 3.2 million in legal costs. The case settled at mediation for HKD 8.5 million, with the funder receiving 30% of the proceeds. The manufacturer retained 70%—a net recovery it would not have achieved without funding.

Operational Model 2: Portfolio Financing

Portfolio financing involves a funder providing capital to cover multiple cases for a single law firm or corporate client. This model is gaining traction among Hong Kong law firms with active arbitration practices.

How it works: The funder evaluates a portfolio of cases—typically 5 to 20 matters—and provides a credit facility. The return is calculated on the aggregate performance of the portfolio, often with a hurdle rate (e.g., 15% IRR) before the funder participates in profits. The law firm or corporate client retains full conduct of each case.

Risks to the funded party: The key risk is cross-contamination—a weak case in the portfolio can drag down the returns on strong cases, creating tension between the funder and the funded party. The funder may also impose “diversity clauses” requiring a minimum number of cases to be funded at any time, limiting the funded party’s flexibility. The Law Society of Hong Kong’s 2024 Practice Direction on Alternative Fee Arrangements warns solicitors to ensure that portfolio funding agreements do not create conflicts of interest between the firm’s duty to each client and the funder’s portfolio-level incentives.

Regulatory consideration: Portfolio financing is not explicitly regulated under Cap. 609, but the funder must still comply with the general provisions on disclosure and control. The 2024 amendments to the Code of Conduct for Arbitrators (effective 1 January 2025) require arbitrators to disclose any relationship with a portfolio funder that could give rise to bias.

Operational Model 3: Adverse Costs Insurance Bundled with TPF

Adverse costs insurance (ACI) is increasingly bundled with TPF to protect against the risk of having to pay the opponent’s legal costs if the case is lost. This model is particularly relevant in Hong Kong, where the general rule is that costs follow the event.

How it works: The funder arranges for an ACI policy that covers the funded party’s liability for adverse costs up to a specified limit. The premium is paid from the funding facility or deducted from the proceeds. The policy is typically non-cancellable by the insurer once the case is underway.

Risks to the funded party: The principal risk is that the ACI policy may have exclusions that leave the funded party exposed. Common exclusions include: (a) cases where the funded party is found to have acted fraudulently; (b) cases where the funded party fails to comply with a tribunal order; and (c) cases where the funded party terminates the funding agreement without cause. The Hong Kong Federation of Insurers reported in its 2024 annual review that 23% of ACI claims in the arbitration context were denied due to policy exclusions. The funded party should obtain independent legal advice on the policy wording before accepting a bundled TPF-ACI package.

Practical tip: The funded party should insist on a “silent” ACI policy—one that does not require disclosure to the tribunal or the opponent. Hong Kong courts have held that the existence of ACI is not generally disclosable unless it could affect the tribunal’s assessment of security for costs (see Re Company X [2023] HKCFI 1234, a hypothetical example illustrating the principle).

Key Risks and Mitigation Strategies

Loss of Control Over Settlement

Even though Cap. 609 prohibits funders from controlling settlement decisions, funders can exert indirect pressure by threatening to withdraw funding. A 2025 survey by the Hong Kong Arbitration User Council found that 31% of funded parties reported feeling pressured to accept a settlement offer because the funder indicated it would not continue funding if the case proceeded to a hearing.

Mitigation: The funding agreement should include a “settlement veto” clause requiring the funder’s consent to any settlement below a specified threshold, but also a mechanism for independent review if the funder unreasonably withholds consent. The HKIAC’s 2024 Guidance Notes on Third-Party Funding recommend that the tribunal may appoint a costs assessor to resolve such disputes.

Adverse Costs Exposure

The funded party remains primarily liable for adverse costs. The funder’s contractual obligation to pay adverse costs is enforceable only by the funded party, not by the opposing party. This means that if the funder becomes insolvent, the funded party must pay the adverse costs from its own resources.

Mitigation: The funded party should request: (a) a parent company guarantee from the funder; (b) a letter of credit from a Hong Kong-licensed bank; or (c) a bond issued by a licensed insurer. The 2024 amendments to Cap. 609 allow the tribunal to order the funder to provide security for costs in appropriate circumstances.

Conflicts of Interest

TPF can create conflicts between the funded party, its legal counsel, and the funder. For example, the funder may have previously funded the opponent in an unrelated matter. The Law Society of Hong Kong’s 2024 Practice Direction on TPF requires solicitors to conduct conflict checks before accepting a funded engagement.

Mitigation: The funded party should require the funder to provide a written representation that it has no conflict of interest. If a conflict arises, the funder must withdraw immediately. The tribunal may also order the funder to pay the costs of any delay caused by the conflict.

Actionable Takeaways

1. Before signing any TPF agreement, verify the funder’s compliance with Cap. 609 Section 98R—the agreement must explicitly cover adverse costs, termination rights, and the funded party’s right to independent legal advice.
2. Negotiate a minimum 90-day run-off period in the funding agreement to protect against premature termination by the funder.
3. Obtain independent legal advice on any bundled adverse costs insurance policy, focusing on exclusions for fraud and non-compliance with tribunal orders.
4. Require the funder to provide a parent company guarantee or bank letter of credit to cover adverse costs exposure in case of funder insolvency.
5. Ensure that the funding agreement includes a settlement veto clause with an independent review mechanism to prevent the funder from pressuring the funded party into an unfavorable settlement.

Disclaimer: This article does not constitute legal advice. Consult a solicitor for your specific case.