Originally from Handbook on Third-Party Funding in International Arbitration, Second Edition

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In light of the fast rise of Third-Party Funding (“TPF”) in international arbitration, parties and counsel are often still unfamiliar with this relatively new source of funding and its distinct features. This chapter shall serve as an introduction to the core elements of third-party funding agreements (“FA”). While the FA is typically a highly customized agreement tailored to the underlying matter and the funded party’s needs, there are several common terms that can be generally found in every FA, which also will be discussed in this chapter.

At the outset, it should be noted that the legal nature of the FA is often unclear due to the many different funding structures and distinct arrangements available in practice. The conceivable legal qualifications of the FA may include in particular the following: a (silent) partnership, a purchase of receivables, an aleatory contract (by way of purchase of an uncertain performance), a profit participation loan or right, or a contract sui generis. The correct legal qualification can be highly relevant for legal consequences, such as the scope of warranty, termination conditions, regulatory oversight, or (corporate) fiduciary duties. Depending on the applicable jurisdiction, the different legal qualifications of the FA and the respective consequences should therefore be carefully considered when drafting and negotiating the FA.

I. Confidentiality and Nondisclosure

The funder’s initial due diligence of the case and its prospects as well as the ongoing reporting to the funder during the pending proceedings necessarily requires the sharing of confidential, privileged and, on occasion, highly sensitive information with the funder. In addition, funders might produce sensitive documents on their own when assessing the case. Therefore, prior to entering into the FA, the funder, the funded party and its counsel usually enter into a nondisclosure agreement (NDA) for the case evaluation process (see also Chapter 10). Typically, the subsequent FA contains a similar nondisclosure provision. The FA may also provide that the funded party shall use its best endeavors to limit the scope of any necessary disclosure to external parties (see Chapter 6) as far as possible and to procure that any recipient of disclosed information will maintain the secrecy of the disclosed information (e.g., by entering into a corresponding NDA).