41 Asian Legal Business | December 2024 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 endto-end services. DS Legal Capital offers a range of support from initial case evaluation and litigation strategy to case management and post-judgment enforcement. “Thirdparty 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. 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, thirdparty funding is sensitive to investment cycles,” Zhang explains. “Initially, we set an investment cycle of three years for each case, but with delays, especially China Report 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. 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: “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.
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