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The latest Quarterly Focus from CDR looks at the topic of third-party funding in China, examining how the country’s legal system has continued to demonstrate an openness towards arbitration funding whilst taking a more cautious approach when it comes to litigation funding. The article gathers insights from legal professionals with experience in Chinese disputes, exploring how the country has created both opportunities and hurdles for funders looking to expand into this market.

The publication of the China International Economic and Trade Arbitration Commission (CIETAC) 2024 rules is highlighted as the latest development in China’s arbitration bodies explicitly addressing third-party funding, with the Beijing Arbitration Commission (BAC) and Shanghai Arbitration Commission (SHAC) having taken similar steps in recent years. Addressing how these developments in arbitration rules have evolved, Rachel Turner of Pinsent Masons explains that “China has a number of arbitration institutions that are relatively independent but follow each other quite closely.”

However, whilst commissions have created a structure for third-party funders to operate within, the details of these rules have raised some concerns for funders. Carolina Carlstedt from Litigation Capital Management (LCM) says that rules around disclosure of third-party funding are “rather broad” and could, depending on the interpretation, include a range of sensitive information around the funding arrangement. Carlstedt goes on to suggest that “this level of disclosure is likely to put off the international funders and may even end up detrimental to funded claimants as it would disclose the size of their war chest.”

When it comes to litigation, China’s courts have not shown the same openness that can be seen in the approach of the arbitration commissions, with a 2021 decision from the Shanghai Second Intermediate Court ruling that a funding arrangement was ‘invalid in domestic litigation proceedings.’ Omni Bridgeway’s Ruth Stackpool-Moore and Chee Chong Lau argue that this decision and the broader structural issues have made it “difficult for professional funders to consider the funding of domestic litigation in the PRC.”The full Quarterly Focus, which also analyses the state of third-party funding in Hong Kong and the future of the market in China, can be read here.

In a contributed article to Law360, Bob Koneck, Chris Le Neve Foster and Richard Butters from specialist insurance broker Atlantic Global Risk, discuss an innovative model for litigation finance. The authors explain that this new model, which they describe as ‘insurance-backed litigation funding’, is differentiated from traditional approaches to litigation funding through ‘the pricing and the parties’. 

Expounding upon this idea, the authors detail how the structure of insurance-backed funding arrangements differ, with the law firm or client first securing an insurance policy to cover a minimum amount of recovery before non-recourse capital is secured to finance the litigation itself. This funding arrangement means that the capital will be repaid by two separate sources: the damages from the case and the ‘the proceeds of the insurance policy that will pay out if the financed litigation yields a monetary recovery insufficient to repay the funder.’

The authors further explain that using this model in cases where the claimant is unsuccessful, ‘the loss triggers a payout under the insurance policy that repays the funders their deployed capital and, depending on the structure of the financing, some or all of the funders' accrued but unpaid interest.’

As for the relative pros and cons of adopting an insurance-backed approach, the authors argue that this model is ‘usually cheaper’, due to the fact that it allows ‘insurance-backed funders to price their capital using an interest rate, without any right to the remaining upside in the litigation.’ On the other hand, insurance-backed funding creates an ‘enhanced execution risk’, as the increase in the number of parties involved in closing any funding arrangement can ‘slow or complicated the process.’

The full article, which explains the different aspects of insurance-backed litigation funding and the process for acquiring it, can be read here.