Ⅰ. Introduction
Arbitration is an alternative dispute resolution method that allows disputes arising between parties to be resolved more radiply, confidentially, and flexibly without resorting to court proceedings. In this respect, it is frequently preferred by parties, particularly in commercial relations and complex contractual disputes.
However, arbitration proceedings often become financially burdensome for the parties due to the high litigation costs. In particular, in international arbitration, expense items such as institutional fees paid to the arbitration center, arbitrators’ fees, expert reports, and opinions of specialists impose a significant economic burden on the parties to the dispute. This situation directs parties who face difficulties in covering litigation and arbitration costs towards an alternative financing model referred to as “third-party funding.”
Third-party funding is a mechanism based on the principle that the litigation costs of one of the disputing parties are covered by a non-party third person or institution. While the third-party funder aims to receive a certain share of the compensation awarded in the event of a favorable outcome, the funded party is temporarily relieved from the financial obligations related to the arbitral proceedings.
In this article, following the explanation of the concept of third-party funding, its current status under Turkish law will be examined, the scope of application, potential effects, and legal boundaries of third-party funding in arbitration proceedings will be evaluated and furthermore its advantages and potential risks will be analyzed.
ⅠⅠ. The Concept of Third-Party Funding
Third-party funding is defined as a financial arrangement model whereby a funder, who is not a party to the dispute, undertakes the costs of litigation or arbitration proceedings in return for receiving a share of the amount obtained as a result of the dispute. In other words, the third-party funder is considered a person who provides capital or financial support to either the plaintiff or the defendant in the dispute and, in return, seeks to obtain a direct economic benefit from the decision to be rendered at the end of the proceedings or to assume a specific obligation arising from such decision.
In this context, third-party funding is not regarded as a mechanism exclusively available to plaintiff. The defendant may likewise enter into an agreement with a third-party funder for the purpose of covering litigation costs. Therefore, the financing model may be utilized by both parties. The nature of the funded party spans a wide range, as an individual, a legal entity, or, in some circumstances, even a state may benefit from third-party funding.
ⅠⅠⅠ. The Legal Status of Third-Party Funding under Turkish Law
Under Turkish law, there is no legislative provision that directly regulates third-party funding or explicitly prohibits it. Therefore, third-party funding cannot be considered a prohibited activity within the Turkish legal system and, as a rule, is deemed applicable. Indeed, it is known that certain companies operating in the field of litigation and arbitration funding in Turkey. However, there has not yet been any dispute resolved by a judicial or arbitral decision concerning third-party funding. This indicates that the matter has so far emerged only in a very limited manner in practice and has not been concretized through court decisions.
In the current legal framework, the recognition of third-party funding as permissible under the current legal framework also brings forth a significant need for regulation. The absence of explicit provisions regarding this mechanism in legislation makes it difficult to resolve problems that may arise in practice. For example, issues such as the legal nature of the funding agreement, how the reciprocal rights and obligations of the parties will be determined, the limits within which the scope of funding will be accepted, and how the funder’s influence on the arbitral award will be assessed remain uncertain. In order to eliminate such uncertainties, reliance must be placed upon the general provisions of contract law and the principle of freedom of contract, which, in turn, reduces predictability for the parties.
Moreover, as will be addressed under the following section, the lack of regulatory mechanisms for oversight and transparency with respect to third-party funding in the Turkish legal system increases the risks that parties and arbitrators may face. Since there is no obligation to disclose the existence of funding or the identity of the funder, remedies remain limited in situations that could cast doubt on the impartiality of arbitrators. This creates uncertainty, particularly in relation to challenges against arbitrators and annulment proceedings.
On the other hand, the absence of explicit regulation on third-party funding under Turkish law may lead to the development of practices disconnected from international standards. Indeed, international arbitration institutions have begun to establish various principles concerning the disclosure of funding and the impact of funders on arbitration costs. Unless a similar approach is adopted in Turkish law, the principles of equality and transparency may be undermined for the parties.
In conclusion, third-party funding is, under the current circumstances, recognized as an an applicable institution in in Turkish law. However, due to the existing regulatory gap, the resolution of problems that parties and practitioners may face remains confined to general principles.
Ⅳ. Advantages and Risks of Third-Party Funding in Arbitration
Third-party funding provides significant opportunities for parties in arbitration proceedings; however, as briefly mentioned under previous section, it also gives rise to various risks. The main advantages and risks of this mechanism are summarized in the table below:
| Advantages | Risks |
| It facilitates access to justice and prevents parties from being deprived of legal remedies due to financial barriers. | It increases the likelihood of conflicts of interest that may cast doubt on the impartiality and independence of arbitrators. |
| The coverage of arbitration costs by the funder reduces the financial risk of the parties and contributes to the preservation of cash flow. | The intervention of the funder in the case may undermine the party’s autonomy and impair the attorney–client relationship. |
| Thorough due diligence conducted by funders helps eliminate weak cases and allows only strong claims to be brought to arbitration. | Since the litigation costs that the losing party is obliged to pay to the opposing party are not covered by the funder, this creates a risk of non-recovery of such expenses. |
| The funder’s objective assessment enables the parties to approach the dispute more realistically and increases the likelihood of settlement. | The absence of clear rules regulating the obligations of funders leads to ethical and legal uncertainties. |
As seen in the table, while third-party funding offers positive contributions in arbitration such as facilitating access to justice and sharing risks, it also creates significant problem areas concerning transparency, conflicts of interest, and cost allocation. Therefore, it is crucial that both parties and arbitrators exercise diligence in its application and that benefit is taken from international practices.
Ⅴ. Conclusion
Although arbitration, with its swift and flexible nature, is a dispute resolution method preferred by parties particularly in commercial disputes, it is not always accessible due to high litigation costs. At this point, third-party funding emerges as an important alternative mechanism, as it alleviates the financial burdens of the parties.
Under Turkish law, there is no legislative provision that directly regulates or prohibits third-party funding, which indicates that, as a rule, its application is possible. Nevertheless, the lack of explicit regulation creates uncertainly in many respectssuch as the nature of funding agreements, the obligations of the parties, the impartiality of arbitrators, and the principle of transparency. The resolution of these uncertainties solely within the framework of general contract law provisions and the principle of freedom of contract makes predictability limited for the parties.
In international arbitration, rules have begun to be developed regarding the disclosure of funding, the role of funders, and their impact on costs, and it is of great importance for Turkish law to fill this gap through similar regulations. Such a step would both strengthen balance and equality between the parties and enhance the credibility of the arbitral process.
In conclusion, third-party funding is regarded as an applicable mechanism in arbitration proceedings under Turkish law and offers significant opportunities in terms of access to arbitration. However, to prevent these opportunities from turning into risks and to address issues such as transparency and conflicts of interest, clear and comprehensive regulations are required.
