Third-party litigation funding, introduced to Asia's legal market in 2017, is gaining momentum in China. This innovative approach allows external parties to finance legal disputes, addressing high litigation costs and improving access to justice. Chinese firms are adapting the concept to meet local needs, particularly in complex cross-border disputes and international arbitrations.

• Third-party funding emerged in China in 2016 and has since been integrated into arbitration clauses by several institutions.
• High litigation costs and the difficulties of cross-border claims are key challenges that third-party funding aims to address. 

The concept of third-party litigation funding entered Asia’s legal market in 2017, which was marked by regulatory developments in Hong Kong and Singapore. In March of that year, Singapore passed the Civil Law (Amendment) Act, which permitted third-party funding in certain cases. Just a few months later, Hong Kong followed with the Arbitration and Mediation (Third Party Funding) (Amendment) Ordinance, legalising third-party funding in specific dispute resolution contexts.

Third-party funding involves a third party unrelated to a litigant providing financial backing for a dispute. If the case is won, the funder receives a portion of the award; if lost, the funder incurs no obligation from the litigant. 

While the concept was gaining traction in Hong Kong and Singapore, the market for third-party funding in China was only beginning to take shape. 

In 2016, Zhang Zhi, founder of DS Legal Capital in Qianhai, Shenzhen, encountered the concept at an international conference. Fascinated by its potential, he and his team explored ways to adapt third-party funding within China’s legal framework, launching DS Legal Capital in 2017 and promoting the practice through a Legal Capital Summit.

For Zhang, third-party funding addresses a critical issue in China: the high cost of litigation. “Litigation costs—including attorney fees, court fees, and expert fees—often account for 10 to 15 percent of a claim, but there’s little societal support to offset these costs,” he explains. “Third-party funding bridges the gap between investment demand and access to justice.”

Similarly, Fu Tong, co-founder of Houzhu Capital, saw firsthand the need for such support. As a former general counsel for a leading Chinese corporation, she often dealt with high-potential cases that her company hesitated to pursue due to budget constraints. In 2022, she and several legal professionals launched Houzhu Capital, intending to address this gap in the market.

“For many Chinese firms, cross-border litigation remains daunting and costly, with companies often lacking crucial information on foreign legal processes, choosing legal representation, or understanding the expenses involved.” - Fu Tong, Houzhu Capital

Global third-party funders are also increasingly present in Asia. Omni Bridgeway (OBL), a listed Australian funding firm, expanded into Hong Kong and Singapore shortly after the regulatory green light. “Since Hong Kong has opened the doors to allow third-party funding in the context of arbitrations, we have seen an uptick in China-related cases being funded by third-party funders. This was initially in respect of arbitrations seated in Hong Kong and Singapore, but has also extended to disputes seated in mainland PRC,” says Chee Chong Lau, OBL’s Singapore-based investment manager.

Fu notes that Houzhu quickly began to focus on cross-border dispute resolution, reflecting the growing demand among Chinese clients. With China’s emphasis on outbound economic engagement, many Chinese companies are deeply involved in international markets and face increasing needs for comprehensive cross-border compliance and risk management. Yet for many firms, cross-border litigation remains daunting and costly, with companies often lacking crucial information on foreign legal processes, choosing legal representation, or understanding the expenses involved.

“These are precisely the issues that third-party funding can help address,” says Fu.

Therefore, since its founding two years ago, Houzhu has served numerous major state-owned and central enterprises, financial institutions, and investment firms. “Leveraging our experienced founding team and extensive expert network, we provide clients with tailored, comprehensive solutions that align with their needs and budgets.”

Lau has observed similar trends. He notes that OBL has worked with clients across various industries in China, including state-owned enterprises, with many cases involving overseas proceedings. “Chinese companies have invested significant capital outside the PRC and are now encountering issues when investments turn sour.”

“The substantive litigation/arbitrations tend to be conducted outside the PRC and can be very costly. Furthermore, the ability of the counterparty to pay is often a big concern of the PRC clients, particularly if the counterparty is in a developing country in the Middle East, Africa, South America, or other parts of Asia. We have recently seen a lot of interest from Chinese clients seeking to enforce judgments/awards outside mainland China,” says Lau.

END-TO-END CAPABILITIES

Chinese third-party funding providers like DS and Houzhu are positioning themselves to meet these needs with end-to-end services. 

DS Legal Capital offers a range of support from initial case evaluation and litigation strategy to case management and post-judgment enforcement. “Third-party funding is a modern, integrated service,” Zhang says, adding that funders also provide valuable neutrality. 

Fu echoes this, noting that as a general counsel, she had often needed objective, expert insights for high-stakes decisions, underscoring her interest in the field.

Houzhu currently provides tailored support for Chinese clients, particularly in areas where demand has grown sharply - cross-border case support, for instance, includes helping clients find suitable legal counsel overseas, understanding foreign legal processes, and coordinating domestic and international proceedings. 

Houzhu also emphasises preemptive risk mitigation, recognising that complex cross-border cases often stem from early issues with due diligence or contract compliance. Fu describes the service as “setting up protective measures before problems arise.” 

Additionally, Houzhu has established a network of investigative partners to assist clients in execution strategy planning, asset tracing, and coordinating enforcement across different jurisdictions. Currently, Houzhu can provide funding specifically for the execution stage.

 In a past case, for example, a large state-owned financial institution held billions of RMB in claims against the actual controller of an invested company, which had transferred assets overseas. "We covered the initial costs, conducted a global investigation into the debtor’s asset distribution, and initiated targeted recovery actions, ultimately identifying executable assets in North America and proceeding with asset freezing, judgment recognition, and enforcement processes," says Fu.

MULTIPLE CHALLENGES

Despite promising opportunities, the sector faces some major hurdles in China. 

Zhang points out that China’s civil law allows third-party funding under the principle that “anything not explicitly prohibited is allowed,” creating no legal barriers for funders. Over the past seven years, Chinese courts and arbitration institutions have generally been receptive, with many institutions now including third-party funding clauses in their arbitration agreements. 

However, challenges remain. One is the long duration of litigation in China. “As a form of venture investment, third-party funding is sensitive to investment cycles,” Zhang explains. “Initially, we set an investment cycle of three years for each case, but with delays, especially due to the pandemic, cases often take five to eight years to reach enforcement.”

Another challenge involves the behaviour of funded clients. DS has encountered cases where clients failed to distribute recovered funds as agreed. Various factors, including economic cycles, corporate ethics, and the absence of escrow accounts for enforcement collections in China, influence this issue. 

Houzhu has observed similar challenges. To manage these risks, Houzhu incorporates client credibility into its evaluation process, with Fu noting that only five percent of cases assessed are approved for funding. Houzhu often sets up escrow accounts in cross-border disputes, reducing enforcement risks, while establishing repayment terms during early negotiations for domestic cases.

A further challenge is educating clients on the value of third-party funding, especially as Chinese firms face increasingly complex, cross-jurisdictional disputes. “Companies need a full strategy for complex, multi-party cases across different legal systems,” Fu observes, adding that Houzhu is working to raise awareness of the specialised resources and expertise third-party funders can bring to the table.

FUTURE DEVELOPMENT

Looking forward, third-party funders are optimistic about China’s potential market. DS, for example, has adjusted its strategy to reduce its investment ratio to around ten percent and to invest in a broader array of cases across China, focusing on large, multi-case series, staying true to their mission of “bringing justice through capital”.

Fu notes that Houzhu’s cases primarily involve international investment disputes, overseas debt recovery, and foreign equity conflicts. Economic changes have fueled disputes in these areas, driving rapid growth at Houzhu.

“Third-party funding emerged in the 1990s in Europe and the United States, and even today, there are fewer than one hundred funders worldwide, six of which are publicly listed,” Fu says. “This market in China is still in its infancy but has tremendous promise.”

Lau from OBL agrees: “China, being one of the largest economies in the world, will always be an important market for any business, including third-party funders,” he notes. 

“Furthermore, to the extent that many Chinese parties now do so much business all around the world, it is inevitable that disputes might arise and third-party funding then becomes a compelling option for Chinese parties to help manage the risks and costs of pursuing their claims,” he adds.