We invite you to read the column written by our Senior Associate, Nicolás Cruz, and Associate, Erico Kompatzki, from the Civil Litigation and Arbitration Group, on third-party litigation funding (Third Party Funding) and the opportunities for its implementation in Chile.
It has become increasingly common for parties involved in litigation to turn to funding from third-party investors in order to cover the high costs associated with complex proceedings, particularly in arbitration matters. This mechanism has come to be known as Third Party Funding, or TPF.
Under this mechanism, once the investor has reviewed the relevant background information and agrees to invest, it will cover all or part of the costs of legal counsel, arbitral fees (if any), experts, and other procedural expenses, in exchange for a percentage of the proceeds in the event the claim is successful.
The main advantage of resorting to TPF is that it helps level the playing field for parties with limited resources, allowing them to pursue legal actions from a much stronger position by having access to specialized advice—particularly expert evidence—thereby strengthening their evidentiary efforts in ways that would otherwise be virtually impossible.
That said, the use of TPF has not been without criticism. In this regard, it has been argued that the main risks associated with Third Party Funding relate primarily to: (i) an increased risk of conflicts of interest; and (ii) limitations on the independence of the funded party.
Regarding the first point—perhaps the most debated—it has been argued that TPF introduces a new actor into the equation, one that also has an interest in the outcome of the dispute. As a result, it would become necessary to disclose any connection that the funder may have with the arbitrator—or judge—hearing the case.
Although situations involving potential conflicts of interest may also arise in ordinary courts, it seems more likely in arbitration that the funder in a given case may also be funding a party represented by the same arbitrator, who is now acting as counsel for that party.
While there is no unanimous position, the prevailing view appears to support the establishment of a duty to disclose the existence of TPF, without requiring disclosure of the content of the funding agreement between the party and the funder. In our view, this approach makes sense, as it avoids making public a private agreement that could unduly influence the arbitrator’s perception of the funded party.
In order to address this emerging need, several arbitral institutions have gradually begun to introduce disclosure obligations regarding TPF for parties resorting to litigation funding, so that arbitrators may, in turn, identify potential conflicts of interest. This approach has been adopted by the International Chamber of Commerce Court of Arbitration[1] (ICC), the Singapore International Arbitration Centre[2] (SIAC), the Hong Kong International Arbitration Centre[3] (HKIAC), and more recently by ICSID, through its 2022 amendments to the Arbitration Rules[4].
As has occurred in other areas of arbitration, soft law instruments have proven to be particularly useful in promoting TPF disclosure. In this regard, the IBA Guidelines on Conflicts of Interest in International Arbitration (the “Guidelines”) have been the main reference, given their widespread adoption. Since 2014, the Guidelines have emphasized the importance of considering any person with a “direct economic interest” when identifying conflicts of interest. In their most recent 2024 update, the Guidelines further developed this concept, elevating the funder to the equivalent of a party for purposes of assessing potential conflicts of interest.
In this context, it is worth noting that the Chartered Institute of Arbitrators (CIArb) published this year its Guideline No. 19, the CIArb Guideline on Third Party Funding 2025, which provides guidance not only on how to address arbitrations involving TPF (Part 2), but also on the funding process itself (Part 1).
At the domestic level, however, consideration of the implications of TPF in terms of conflicts of interest still appears to be in its early stages. Its incipient growth will therefore require concrete measures to be adopted in the short or medium term.
Although the country’s main arbitration center—CAM Santiago—has made progress on conflicts of interest through the introduction of the CAM Santiago Code of Ethics and Best Practices, Article 3, which refers to the duty of disclosure, does not make specific reference to persons with a “direct economic interest,” limiting itself instead to the parties and their “representatives and attorneys.” Similarly, while the Declaration of Impartiality and Independence that every arbitrator must submit prior to accepting appointment mentions that the arbitrator should consider the IBA Guidelines when making disclosures, neither the Arbitration Rules nor most terms of reference expressly provide that such Guidelines also apply to the parties.
We believe that including such provisions when agreeing on the terms of reference may be the most expeditious way to encourage the incorporation of TPF-related considerations in matters of conflicts of interest.
Moreover, it is necessary to consider the effects that third-party funding may have on a party’s autonomy when making strategic decisions in the proceedings, particularly with respect to the possibility of reaching an early settlement.
Those who agree to finance a dispute do so in order to obtain a certain return or percentage of the proceeds. While there is nothing inherently wrong with this, it may give rise to borderline situations in which the interests of the funded party are not fully aligned with the funder’s expectations.
This is particularly evident in the context of settlements and other out-of-court agreements. A party may receive a proposal that sufficiently satisfies its own interests, but is insufficient to cover the investment or to ensure the minimum expected return for the funder. Does this mean that the party’s will must yield to the funder’s interests?
In principle, we believe it should not. Beyond conflict-of-interest considerations, the party that is legally recognized as such in the proceedings is the beneficiary of the funding. Therefore, in abstract terms, TPF should not restrict that party’s autonomy to reach a settlement, even if doing so may be detrimental to the funder.
The situation may be different if the terms of reference or another agreement executed by the parties provides that any settlement requires the funder’s consent. In such cases, the funder’s authorization may indeed be necessary.
This does not mean, however, that acting otherwise would be without consequences. It is highly likely that such conduct would constitute a breach of the funding agreement by the beneficiary, entitling the funder to pursue the remedies agreed upon by the parties—whether legal actions, enforcement of penalty clauses, fines, or claims arising from the failure (or fulfillment) of certain conditions, among others. That discussion, however, is distinct—albeit related—to the dispute addressed in the funded proceedings.
Accordingly, any settlement reached without the funder’s consent will generally remain valid, but may give rise to the corresponding liability of the party that breached the funding agreement.
Overall, TPF presents itself as an interesting tool to promote access to justice for parties facing material disadvantages, improving the administration of justice and fostering genuine equality of arms.
This does not mean, however, that TPF is free of challenges. On the contrary, in our local context there remains significant room for growth in its use and implementation, both in terms of the availability of litigation funders and with respect to funding disclosure and internal regulation of funding agreements.
In this regard, soft law instruments and comparative experience offer a valuable and practical set of tools to observe and, potentially, implement, enabling the growth of TPF while adequately addressing its associated risks.
Column written by:
Nicolás Cruz | Senior Associate Civil Litigation and Arbitration Group | ncruz@az.cl
Erico Kompatzki | Associate Civil Litigation and Arbitration Group | ericokompatzki@az.cl
