The Drawbacks of Third-Party Funding for Arbitration: A 2025 Guide for Foreign Companies (with Dubai & London Context)

Prepared for clients and friends of Tahmidur Remura Wahid (TRW) Law Firm — Dhaka • Dubai • London

Third-party funding (TPF) has moved from niche to mainstream in international arbitration. For many claimants, especially those with balance-sheet constraints or where counterparties have distorted the risk landscape, funding can be the only route to meaningful redress. But the story is not one-sided. Funding introduces cost, control, timing and disclosure dynamics that can materially affect strategy, valuation and outcomes. It can also complicate settlement, generate adverse procedural applications (such as security for costs), and raise regulatory and ethical questions that vary considerably by jurisdiction and institution.

This guide explains the practical drawbacks and hidden trade-offs of TPF for corporates, financial sponsors, and State-linked entities. It translates doctrine into board-level decisions, shows what to be careful of in Dubai and London, and gives you playbooks, checklists and decision trees to decide whether funding really serves your objectives—or whether a carefully designed, lower-cost self-funded arbitration is the better, faster, and ultimately cheaper path.

For a broader overview of our cross-border disputes practice, including international arbitration, enforcement and settlement strategy, start here: TRW Law Firm.

1) What third-party funding is—and what it changes

Under a typical TPF arrangement, a funder pays some or all of your legal fees and disbursements (and sometimes adverse cost cover via ATE insurance), in exchange for a contingent return (a percentage of proceeds or a multiple of invested capital) if you win or settle. If you lose, the funder loses its investment (subject to any agreed residual liabilities). Funding can be:

• Single-case (one dispute);
• Portfolio (multiple claims across one corporate group);
• Monetisation (advances against expected award value); or
• Hybrid (co-funding with conditional fee arrangements (CFA/DBA) from counsel).

What it changes: Incentives, governance, budget discipline, and control. A new economic actor—the funder—enters the room, with its own IRR targets, diversification logic and risk tolerances. That can be positive (discipline, independent case vetting), but it also introduces frictions described below.

2) The headline drawbacks at a glance

• Cost of capital: Funding economics are expensive versus self-funding; success often means sharing 20–40% (or a multiple) of recovered proceeds.
• Strategic disclosure: Growing institutional norms expect disclosure of funding and funder identity to manage conflicts; disclosure can trigger security for costs attempts and telegraph settlement leverage.
• Control and alignment risks: Even where the contract says “client controls”, the economic gravity of funding can shape tactics, experts, and settlement posture.
• Funding is hard to obtain: Only a small fraction of applications are funded; you can spend months preparing funding memos instead of moving the arbitration forward.
• Settlement headwinds: Funders typically model target returns; early, commercially sensible settlements may be discouraged or conditioned on terms that reduce your flexibility.
• Procedural friction: TPF can invite security for costs applications, disclosure skirmishes and timing fights, increasing cost and delay.
• Regulatory variance: Disclosure duties, recoverability of funding costs, champerty/maintenance legacies (still relevant in some forms), and code-of-conduct regimes differ by seat and institution.
• Exit and termination risk: Funding agreements usually contain walk-away or material adverse change clauses; if exercised at a sensitive stage, your case management can be destabilised.
• Portfolio cross-effects: In portfolio deals, the performance or risk profile of other claims can influence your case’s settlement window and pricing.

3) Cost: the invisible price tag on a “free” war chest

3.1 The arithmetic of expensive capital

Funding is not a loan; it’s non-recourse risk capital. That risk premium is high:

• Percentage-of-proceeds: commonly 20–40% of net recoveries (sometimes more in small/mid-value cases).
• Multiple-based: 2–4x invested capital from recoveries.
• Hybrids: Lower headline share plus premiums or milestones.

If your expected net recovery (after costs) is USD 30m, a 30% share to the funder is USD 9m, before tax, enforcement costs, and any success fees to counsel. Over multi-year timelines, the effective cost of capital can exceed typical corporate WACC by an order of magnitude.

3.2 Hidden cost multipliers

• ATE insurance premiums for adverse cost protection can be sizable.
• Uplifts in counsel success fees (if using hybrid CFAs/DBAs).
• Monitoring and reporting obligations consume internal time.
• Procedural skirmishes (security for costs, disclosure) add burn.

Bottom line: If you can structure a lean, staged budget and self-fund (or co-fund) the case—with calibrated risk controls—you often end up with more cash in hand even after paying legal fees.

4) Control, independence and ethical pressure points

4.1 Nominal vs practical control

Funding contracts typically say you retain control and the funder is a passive financier. In practice, budget vetoes, replacement rights (for counsel), and step-in triggers—if not drafted carefully—can tilt control:

• Expert selection: Funders may prefer “efficient” experts or lower scope to control cost, even where deeper work would boost credibility.
• Witness strategy: Pressures to streamline can reduce testimonial richness.
• Settlement thresholds: Funders often define acceptable ranges or require consent—slowing or complicating deals.

4.2 Conflicts and perceived influence

• Arbitral conflicts: Prior relationships between funder and arbitrator (or their chambers) can surface.
• Counsel conflicts: If counsel and funder have repeated dealings, optics matter; robust engagement letters and ethical walls are essential.
• Privilege and confidentiality: Sharing case assessments with funders risks arguments about waiver in some systems; structure common-interest protections carefully and manage the data room.

Practical guardrails: Tight control clauses (no veto on settlement below agreed thresholds), clear privilege architecture, and a communications protocol that channels funder interactions through counsel.

5) Disclosure duties and their tactical consequences

5.1 The new normal: disclosure of funder identity

Many tribunals and institutions now expect disclosure of the existence of funding and the identity of the funder to manage conflicts. In some regimes, disclosure is ongoing (if funding later enters the picture). Even if not required by statute, tribunals may order disclosure under their case management powers.

Consequence: Your opponent learns that cash constraints or risk preferences led you to funding. They may infer:

• You have less appetite for early discount settlements;
• You need a price floor to satisfy funder economics;
• Budget sensitivity could be exploited with procedural skirmishes.

5.2 Security for costs: the funder magnet

Disclosure can invite security for costs applications where the respondent alleges financial fragility or enforcement risk. Even if rejected, these applications consume time and money, and can lead to interim orders that disrupt cash flow.

Mitigations:

• ATE cover for adverse costs;
• Funder letters offering adverse cost undertakings (tribunals differ on weight);
• Early demonstration of solvency and enforcement readiness.

6) Settlement friction: IRR targets vs commercial pragmatism

6.1 Early settlement windows narrow

Funders model target returns over time; early settlements that are rational for you may miss funder hurdles. That can subtly or expressly shape negotiation posture:

• Hold-out incentives for later, bigger number;
• Resistance to structured settlements (e.g., mixed cash/credit solutions) if they reduce immediate headline returns;
• Tension when non-monetary relief (licenses, supply reinstatement) is strategically more valuable to you than cash.

6.2 Optics with State-linked counterparties

In concessions or regulated sectors, State counterparts may politically prefer settlement over large awards. A funder perceived as “pushing for maximisation” can harden the State’s position or route the dispute into protracted public-law channels.

Deal with it upfront: Bake settlement flexibility into the funding agreement (e.g., pre-agreed acceptance bands, mechanisms to buy down the funder’s share on early settlements).

7) Funding is hard to secure—and time is expensive

7.1 The pipeline math

Professional funders decline the vast majority of applications. Reasons include quantum too small, seat/law risks, counterparty insolvency, weak enforcement geography, dirty-hands risk, excessive sunk costs, or portfolio fit. Even strong cases are declined due to capacity constraints or concentration risk.

7.2 The opportunity cost

Preparing funding packs (counsel memos, budget models, expert scoping, enforcement planning) can take months. Meanwhile, limitation periods run, evidence ages, and early procedural advantages are lost. Many claimants discover that self-funding a lean first phase (to secure jurisdiction, liability foundations, or a damning interim measure) would have improved both the merits and the fundability—or made funding unnecessary.

Best practice: If funding is contemplated, stage your arbitration roadmap so that essential front-end work proceeds in parallel. Do not let the funding process park your case.

8) Recoverability of funding costs and adverse costs exposure

• Recoverability: Whether the cost of funding (premiums, uplifts) can be shifted to the losing party varies by rule and tribunal discretion. Many tribunals treat funding costs as non-recoverable, which means your net shrinks further even on success.
• Adverse costs: If you lose, you (not the funder) usually carry adverse costs risk unless covered by ATE or a specific funder undertaking. Some funders cap or exclude adverse-cost exposure.
• Cost sanctions: If the tribunal concludes funding prolonged the dispute or clouded settlement, it may reflect that in cost allocation.

Planning: Quantify worst-case adverse costs and line up ATE or reserve capacity. Do not assume funder protection covers everything.

9) Termination and funder exit risk

Funding agreements often allow funders to exit if:

• Case prospects materially worsen (after new evidence, adverse interlocutory rulings);
• You breach covenants (e.g., reporting, consents, cooperation);
• Budget blowouts occur without agreement;
• Counsel reports a revised probability below thresholds.

A mid-case exit forces emergency re-budgeting, counsel continuity issues (if the funder had replacement rights), and potential timing prejudice. Respondents sometimes game this by escalating procedural costs or delaying tactics to stress the funding arrangement.

Mitigations: Negotiate narrow exit triggers, cure periods, and notice requirements; keep a shadow plan for transitional financing or scope reduction if an exit occurs.

10) Portfolio funding: diversification with strings attached

For groups with multiple claims, portfolio funding can cheapen capital versus single-case deals. Drawbacks include:

• Cross-defaults: Weak performance of Claim A can constrain settlement latitude for Claim B.
• Allocation disputes: Internal debates over which claim consumes the budget headroom.
• Disclosure footprint: Portfolio structures can broaden the universe of disclosures about corporate disputes and strategy.

Governance tip: Ring-fence business-critical claims with bespoke terms, rather than dumping everything into one omnibus.

11) Dubai and the UAE: the regional realities foreign companies should anticipate

11.1 Free-zones vs onshore dynamics

Dubai offers DIFC and ADGM (Abu Dhabi) common-law courts and arbitration frameworks alongside onshore UAE courts and institutions. Funding arrangements may be viewed differently depending on seat, governing law, and forum (DIAC, ADCCAC, ICC, LCIA DIFC (legacy), ADGM Arbitration Centre use). While TPF is a known feature in the region’s international arbitration practice, court and tribunal attitudes can vary on:

• Disclosure scope for conflicts;
• Security for costs where a claimant is special-purpose or insolvent;
• Recoverability of funding costs;
• Public policy arguments (rare, but occasionally raised).

11.2 Practical risks and optics

• State-linked respondents: Ministries, State-owned enterprises, and regulators often scrutinize funding, particularly if they sense political or reputational leverage.
• Settlement posture: In regulated sectors (energy, telecoms, ports), policy objectives can drive settlement; a perceived “maximize at all costs” funder stance may be counter-productive.
• Security for costs: Respondents frequently test the waters, especially if your vehicle is thinly capitalized or offshore.

TRW Dubai playbook: We structure funding and disclosure to avoid unnecessary escalation, prepare a security-for-costs response kit (including ATE/undertakings), and align settlement architecture with public-law sensibilities while preserving your commercial goals. For an overview of our regional approach, see TRW Law Firm.

12) London and the UK: sophistication with discipline

12.1 Mature market, exacting tribunals

London is a global centre for both TPF and arbitration. The tribunal community is familiar with funding but expects clean conflicts, responsible disclosure, and uncluttered privilege footprints. Courts and tribunals maintain a firm line on security for costs when appropriate and are skeptical of overbroad confidentiality claims over funder communications.

12.2 Commercial consequences

• Early settlement: Experienced respondents read funding signals and may weaponize timing (e.g., discovery pressure before you lock ATE) or probe consent rights in your term sheet.
• Costs discipline: English-seated tribunals have a strong costs follow the event culture; sloppy conduct can lead to adverse cost awards that overwhelm your recovery if not insured.
• Recoverability: Funding costs are not routinely shifted; success fee uplifts and premiums may stay on your ledger.

TRW London playbook: We stage disclosure to manage conflicts while protecting strategy, structure ATE to match tribunal expectations, and draft settlement-flexible funding terms. Explore our cross-border services here: TRW Law Firm.

13) Decision framework: when is TPF actually the right tool?

Ask these ten questions before you go to market:

1. Net economics: After funder share, success fees, ATE premiums and enforcement, what is your net at realistic settlement values (not just best-case award)?
2. Time value: Is there a fast path to a dispositive issue (jurisdiction/liability) you could self-fund to boost leverage and slash funding cost—or make funding redundant?
3. Control: Are you willing to trade some strategic autonomy for risk transfer? If not, can you negotiate terms that hard-wire your settlement prerogatives?
4. Disclosure tolerance: Are you comfortable with the opponent knowing you are funded—and the likely follow-on applications?
5. Adverse costs: What’s your plan if security is ordered or if you lose? Is ATE available, affordable, and aligned with the case timetable?
6. Portfolio effects: Will portfolio funding mix mission-critical disputes with speculative ones, creating cross-pressures?
7. Settlement priorities: Do you need non-monetary outcomes (licenses reinstated, supply resumed) that a funder might undervalue?
8. Enforcement geography: Are assets in pro-enforcement venues, or will you need multi-jurisdictional action with political overlays?
9. Regulatory overlay: Will sector regulators (especially in the UAE or UK) view the funding optics negatively in ways that matter?
10. Opportunity cost: Could the time spent funding be better spent winning early procedural terrain?

If your answers cluster toward control, speed, and settlement flexibility, self-funding a lean, phased case (with contingency elements) often wins on net value. If answers cluster toward risk transfer, large quantum, and clean enforcement, TPF may be the right instrument—if terms are negotiated shrewdly.

14) Negotiating the term sheet: protect value without poisoning relationships

Core levers to get right:

• Return structure: Cap the funder’s upside at tiered percentages or a declining multiple over time. Add buy-down rights if you choose to self-fund later phases.
• Control & consent: Settlement belongs to the client subject to reasonable consent not to be unreasonably withheld over a pre-agreed acceptance band. No unilateral funder veto.
• Budget flex: Build contingency and re-forecast triggers; avoid “hard caps” that force artificial case truncation.
• Counsel continuity: Clarify that funder cannot replace counsel absent defined events and a client veto; preserve privilege on counsel reports.
• Walk-away: Strictly define material adverse change; insist on notice and cure periods; require tail coverage for sunk disbursements if exit occurs late.
• ATE alignment: If adverse-cost cover is part of the package, ensure limits and triggers match tribunal practice.
• Confidentiality & privilege: Embed common-interest language, secure data room protocols, and specify governing law for privilege analysis.
• Disclosure protocol: Agree what is disclosed (existence + identity) and coordinate conflict checks timelines.

15) Procedural playbook to reduce TPF-specific friction

• Front-load the merits: Even under funding, invest in issue lists, chronology, and thematic bundles so your case tells itself quickly; tribunals appreciate discipline.
• CMC strategy: Present a practical timetable and focused disclosure; being the “reasonable party” helps on later costs decisions, especially in London.
• Security-for-costs readiness: Prepare affidavits on solvency, ATE policies, and enforcement posture; have a draft response before the opponent files.
• Disclosure submissions: Offer targeted disclosure (existence + identity) to meet conflict concerns while resisting scope creep into funding terms.
• Settlement channels: Keep without-prejudice lines open; if funding pre-conditions bind you, ensure your lead negotiators know the parameters.
• Enforcement mapping: Build the post-award action plan early; funders like it, tribunals respect it, and respondents notice.

16) Special considerations for State-owned and listed companies

• Governance optics: Funding may draw public or parliamentary scrutiny; ensure procurement/approval trails are pristine.
• Disclosure to markets: Listed companies face continuous disclosure obligations; coordinate with investor relations to avoid messaging gaps that respondents will exploit.
• Sanctions/ESG: Ensure funder sources are sanctions-clean and ESG-consistent with your corporate commitments; reputational blowback is costly.
• Audit-ready files: Preserve decision memos explaining why funding was selected (or rejected), showing board-grade risk assessment.

17) Worked example: when self-funding can beat funding on net recovery

• Assumptions: Claim value USD 20m; success probability 60%; budget USD 2.5m to award; expected adverse costs if losing USD 0.8m; enforcement cost 5% of recovery; settlement at day 1,000 likely around USD 12–14m.
• TPF deal: Funder pays USD 2.5m fees + ATE; takes 30% of net proceeds.
• Self-fund: Company funds USD 2.5m from treasury; buys ATE for USD 300k equivalent.

Outcome A (settle at USD 13m; costs USD 2.5m; enforcement USD 650k):

• TPF net: 13 – 0.65 – (30% of 12.35) ≈ 13 – 0.65 – 3.705 ≈ USD 8.645m (before taxes).
• Self-fund net: 13 – 0.65 – 2.5 ≈ USD 9.85m, minus ATE premium if applicable.

Delta: USD 1.2m+ in favour of self-funding, despite taking fee risk—and with complete control over settlement.

This simplified illustration shows why many corporates prefer staged self-funding (possibly with partial contingency) over TPF, unless quantum or risk profile clearly justifies the premium.

18) A 90-day action plan if you’re considering funding

Days 1–15 — Feasibility & Strategy

• Build a single source of truth (chronology, issue list, key documents).
• Prepare a lean budget with milestones and decision gates.
• Map enforcement and security-for-costs exposure.

Days 16–45 — Parallel Tracks

• Commence essential case work (don’t pause for funding).
• Prepare a short funder pack (10–15 pages + exhibits).
• Identify ATE options and terms.

Days 46–70 — Term Sheet Negotiation

• Insist on settlement flexibility, exit controls, and privilege protections.
• Agree a disclosure protocol and conflict check timeline.

Days 71–90 — Case Momentum

• Lock in CMC proposals, expert scoping, and security-for-costs response kit.
• Keep settlement channels warm; test early resolution scenarios with and without funding.

19) TRW’s view: when we recommend TPF—and when we don’t

We recommend TPF when:

• Quantum is high, merits strong, enforcement clean, but the claimant cannot prudently commit the required budget;
• There is genuine social or strategic value in risk transfer (e.g., State-owned claimant needing budget neutrality);
• The funder’s portfolio fit and sector expertise will add productive discipline without distorting settlement.

We advise caution—or alternatives—when:

• The case turns on business relationships where non-monetary outcomes matter (licenses, supply, approvals);
• Early merits wins are achievable with modest spend;
• The settlement logic is time-sensitive, and funder hurdles risk missing the window;
• You sit in a regulatory glare (Dubai onshore sectors, UK regulated industries) where funding optics complicate the narrative.

For a conversation about whether TPF or a lean self-funding plan is the better path for your dispute, reach out to us here: TRW Law Firm.

20) Quick reference: pros & cons (with a focus on drawbacks)

Dimension	Funding (Drawbacks)	Mitigation
Net Recovery	Funder share materially reduces proceeds	Negotiate caps, tiers, buy-downs; model early settlements
Control	Consent rights & budget vetoes can shift control	Tight term drafting; settlement bands; client primacy
Disclosure	Invites conflicts checks & security for costs	Pre-plan disclosures; ATE/undertakings; solvency evidence
Delay	Funding process can slow case start	Run case prep in parallel; set internal deadlines
Settlement	IRR targets may discourage rational early deals	Pre-agreed settlement ranges; side letters
Adverse Costs	Not always covered by funder	Obtain ATE; quantify worst-case; maintain reserves
Exit Risk	Funder walk-away destabilizes timing	Narrow triggers; cure periods; transition financing plan
Portfolio Spillover	Other claims influence this claim’s settlement	Ring-fence critical claims; separate economics
Reputation	Optics with State/regulator can be negative	Narrative management; stakeholder mapping
Recoverability	Funding costs often not shifted to loser	Assume non-recoverability in your economics

21) Frequently asked questions

Q: Will a tribunal force disclosure of the funding agreement terms?
Typically tribunals focus on existence and identity for conflict management. Terms (pricing, governance) are more sensitive and often protected, unless directly relevant to a live issue (e.g., security for costs). Expect targeted disclosure, not wholesale.

Q: Can we keep funder communications privileged?
It depends on seat and governing law of privilege. Use common-interest frameworks, route communications through counsel, and restrict distribution. Design your data room with privilege in mind.

Q: Can we recover funding costs from the respondent if we win?
Don’t assume so. Some tribunals have allowed elements in specific contexts, but many treat funding costs as non-recoverable. Model your outcome with zero recovery of funding costs.

Q: Will funding make the tribunal think less of our case?
Not if your case is well-presented. But sloppy disclosure, overbearing funder involvement, or gamesmanship can backfire in costs. Present a disciplined, client-led process.

Q: Is portfolio funding always better?
Cheaper capital, yes—but cross-effects can constrain settlement flexibility. Use bespoke ring-fencing for critical disputes.

22) Closing thought: the cheapest dollar is the one you don’t spend unnecessarily

Funding solves a real problem for many claimants. But its drawbacks—cost, control, settlement friction, disclosure-triggered applications, regulatory variance, and exit risk—are real. For many foreign companies, the optimal strategy is a hybrid: self-fund the front-end to secure early wins and credibility, then re-test funding once the case is better framed—or not at all if a rational settlement is in reach.

TRW’s teams in Dhaka, Dubai and London structure disputes to convert claims into cash (or business value) with minimal drag from process and optics. Whether you fund, self-fund, or blend the two, we design the path that maximizes your net, preserves your control, and respects the jurisdictional nuance of where you will actually need to enforce.

To discuss the right approach for your dispute or portfolio, contact us: TRW Law Firm.

TRW Law Firm — International Arbitration • Cross-Border Enforcement • Settlement Engineering
Dhaka • Dubai • London