Third-Party Funding in Turkish Arbitration: Costs, Disclosure and Conflicts of Interest

Introduction

Arbitration can provide a neutral, specialist and internationally enforceable method of resolving commercial disputes. It may nevertheless require substantial financial resources.

A complex arbitration may involve:

• Institutional registration and administration fees;
• Arbitrator fees;
• Turkish and foreign legal counsel;
• Technical and financial experts;
• Document production;
• Translation;
• Hearing facilities;
• Electronic evidence review;
• Travel and accommodation;
• Interim-measure applications;
• Enforcement proceedings.

Even a company with a legally strong claim may prefer not to allocate several million dollars to a dispute that could continue for years. A claimant may have valuable contractual rights but limited immediate liquidity. A business may also wish to protect its balance sheet by converting the legal cost of the arbitration into an externally financed commercial risk.

Third-party funding in Turkish arbitration may provide a solution. Under a typical arrangement, a person or entity that is not originally a party to the dispute finances some or all of the arbitration expenses in return for an agreed financial benefit if the funded party succeeds.

Funding may improve access to arbitration and permit a company to pursue a meritorious claim without using its operating capital. It may also provide professional case assessment, budget management and enforcement support.

The arrangement creates important legal and ethical questions:

• Is third-party funding permitted under Turkish law?
• Must the funder’s identity be disclosed?
• Can a funder participate in the selection of arbitrators?
• Does the funding create a conflict of interest?
• Can the respondent obtain security for costs?
• Can the successful party recover the funder’s return?
• What happens if the funder terminates the agreement?
• May confidential documents be shared with the funder?
• Can the funder control settlement?
• How should the funding agreement be structured?

Türkiye does not currently have a single statute dedicated exclusively to third-party funding in commercial arbitration. The legal position must therefore be evaluated through the general principles of Turkish contract law, arbitration legislation, professional rules governing lawyers, the applicable institutional rules and the specific terms of the funding agreement.

This guide examines the structure, potential validity and practical consequences of third-party funding in Turkey-seated domestic and international arbitration.

What Is Third-Party Funding?

Third-party funding generally involves the provision of money or other financial support by a non-party for the prosecution or defence of an arbitration.

The funder commonly pays some or all of the following:

• Lawyers’ fees;
• Arbitrator and institutional fees;
• Expert costs;
• Document-production expenses;
• Translation and hearing costs;
• Interim-protection expenses;
• Enforcement costs;
• Security ordered during the proceedings.

In a commercial non-recourse arrangement, the funder receives an agreed return only if the funded party recovers money or another economic benefit.

If the funded claim fails, the funder usually loses the amount invested, subject to the exact agreement.

The funder’s return may be structured as:

• A percentage of the recovery;
• A multiple of the amount funded;
• The higher of a percentage and a funding multiple;
• A return increasing according to the duration of the case;
• A fixed preferred return plus a success-based amount.

The economic arrangement may vary considerably. The legal analysis should therefore focus on the substance of the agreement rather than merely the title “litigation funding” or “arbitration funding.”

Types of Arbitration Funding

Single-case funding

A funder finances one identified arbitration.

The agreement usually defines:

• The funded claim;
• The approved budget;
• Maximum capital commitment;
• Funder return;
• Reporting obligations;
• Settlement procedure;
• Grounds for termination.

This is the most recognisable form of third-party arbitration funding.

Portfolio funding

A funder finances several claims belonging to the same company or corporate group.

The funder’s return may be calculated across the entire portfolio rather than according to the result of each dispute individually.

Portfolio funding may diversify risk and permit the company to finance both strong and more uncertain cases within one commercial structure.

Law-firm portfolio funding

A funding arrangement may support a portfolio of cases handled by a law firm.

Such arrangements require particularly careful review under Turkish professional rules. Turkish law prohibits the use of paid intermediaries to bring legal work to lawyers and regulates lawyers’ financial interests in disputed rights. A funding arrangement must not operate as a prohibited referral or client-acquisition mechanism.

Defence funding

Funding is not limited to claimants.

A respondent may obtain financing to defend an arbitration, pursue a counterclaim or manage the financial effect of a major international dispute.

Because a respondent may not obtain a monetary recovery, the funder’s return may be linked to:

• Amounts successfully avoided;
• Settlement savings;
• A fixed premium;
• Another portfolio asset;
• Insurance reimbursement.

Award monetisation

A party that has already obtained an arbitral award may receive an immediate discounted payment from a financier instead of waiting for annulment and enforcement proceedings to end.

Depending on the arrangement, the transaction may involve:

• An assignment of award proceeds;
• A secured loan;
• A partial sale of the economic recovery;
• Non-recourse enforcement financing.

The legal owner of the award, the authority to conduct enforcement and the distribution of recovered amounts must be defined clearly.

Insurance-backed funding

Legal-expense insurance, after-the-event insurance and adverse-cost protection may perform functions similar to third-party funding.

An insurer may pay legal costs or protect the party against an adverse costs award. Because the insurer may have a direct economic interest in the result, its identity may also become relevant to arbitrator conflict checks. The 2024 IBA Guidelines expressly recognise that funders and insurers may possess a direct economic interest or exert influence over the proceeding.

Affiliate or shareholder funding

A parent company, shareholder or related entity may finance the arbitration.

Not every internal group arrangement is treated commercially as third-party funding. However, an entity with a direct economic interest, indemnification obligation or controlling influence may still need to be disclosed for conflict-of-interest purposes.

Why Do Companies Use Third-Party Funding?

Third-party funding is not used only by insolvent or financially distressed claimants.

A profitable company may choose funding to:

• Preserve working capital;
• Protect borrowing capacity;
• Avoid legal-cost volatility;
• Share litigation risk;
• Obtain an independent assessment of the claim;
• Pursue several disputes simultaneously;
• Remove arbitration expenses from the operational budget;
• Finance enforcement in several jurisdictions.

A claimant may also face an imbalance where the respondent has significantly greater financial resources. Funding may allow the claimant to retain experienced counsel, instruct qualified experts and present the case properly.

The funder’s due diligence may provide an additional commercial assessment. A professional funder will normally review jurisdiction, merits, quantum, enforceability, budget and expected duration before committing capital.

Funding approval does not prove that the claim will succeed. The tribunal must decide the case independently according to the evidence and applicable law.

Is Third-Party Funding Legal in Türkiye?

No current Turkish statute provides a general sentence declaring every form of third-party arbitration funding lawful or unlawful.

As an inference from the current statutory texts, the Turkish Code of Civil Procedure, International Arbitration Law and published ISTAC framework do not establish a comprehensive, stand-alone regulatory code dealing specifically with commercial third-party funding.

This does not mean that funding agreements are automatically invalid.

Article 26 of the Turkish Code of Obligations allows parties to determine contractual contents freely within the limits established by law. Article 27 renders contracts invalid where they violate mandatory statutory provisions, morality, public policy, personality rights or objective possibility.

A funding agreement may therefore be evaluated under the general principle of freedom of contract, subject to:

• Mandatory law;
• Public policy;
• Good faith;
• Professional rules;
• Confidentiality;
• Personal-data obligations;
• The law governing assignment and security;
• The specific nature of the funded dispute.

The absence of a dedicated funding statute should not be confused with unconditional approval of every funding model.

A Turkish-law funding agreement could become problematic where it:

• Gives the funder unlawful control over legal representation;
• Conflicts with lawyers’ professional duties;
• Operates as a prohibited legal-work referral system;
• Attempts to transfer a non-transferable right;
• Violates confidentiality;
• Contains an unlawful or immoral economic arrangement;
• Prevents the client from making essential decisions about its own claim;
• Circumvents mandatory attorney-fee limitations.

Each agreement should be reviewed individually.

Legal Nature of the Funding Agreement

A third-party funding agreement may be characterised as an atypical or mixed contract.

Depending on its provisions, it may contain elements resembling:

• Financing;
• Investment;
• Assignment of future proceeds;
• Risk participation;
• Loan;
• Partnership;
• Mandate;
• Insurance;
• Service.

A non-recourse funder does not ordinarily expect repayment if the claim fails. The agreement may therefore differ materially from an ordinary loan.

By contrast, an arrangement requiring repayment regardless of outcome may operate economically as credit rather than non-recourse funding.

The agreement should specify:

• Governing law;
• Dispute resolution;
• Place of performance;
• Currency;
• Tax responsibility;
• Funding commitment;
• Return calculation;
• Payment waterfall;
• Termination;
• Security rights;
• Enforcement authority.

The arbitration clause governing the underlying commercial dispute does not automatically govern disputes between the funded party and the funder.

The funding agreement should contain its own valid dispute resolution clause.

Third-Party Funding and Lawyers’ Fees

The funder’s economic return must be distinguished from the lawyer’s fee.

Article 164 of the Turkish Attorneyship Law provides that a lawyer’s fee may be agreed as a percentage of the amount or value at issue, but the percentage may not exceed 25%. The law also prevents an agreement granting the lawyer an ownership share in non-monetary property or rights forming the subject of the dispute.

The 25% rule applies to lawyers’ remuneration. A professional funder that does not provide legal services occupies a legally different position.

Nevertheless, the parties should avoid a structure designed merely to disguise an unlawful lawyer fee as a funder return.

The arrangement should clarify that:

• The lawyer provides legal services independently;
• The funder provides capital;
• The lawyer’s fee complies with the Attorneyship Law;
• The funder does not direct the lawyer’s professional judgment;
• The funder is not being paid to bring legal work to counsel;
• The client remains the lawyer’s principal.

Article 47 also prohibits lawyers from acquiring disputed rights relating to matters they handle, subject to the statutory attorney-fee rules. Article 48 criminalises paid intermediation for bringing work to a lawyer.

These provisions make it particularly important to separate:

1. Legal representation;
2. Client acquisition;
3. Financial investment in the dispute.

Costs of Turkish Arbitration

Third-party funding is commercially relevant because Turkish arbitration legislation places important cost obligations on the parties.

Under Articles 441 and 442 of the Code of Civil Procedure, domestic arbitration costs may include:

• Arbitrator and tribunal-secretary fees;
• Arbitrator travel and related expenses;
• Tribunal-appointed expert and inspection costs;
• Approved witness expenses;
• Attorney fees determined according to the applicable minimum fee tariff;
• Court charges connected with statutory applications;
• Notification costs.

The tribunal may request advances from the parties. Unless otherwise agreed, the advances are paid equally. If the required advance remains unpaid following suspension, the arbitration may end. Unless the parties agreed otherwise, costs are generally imposed on the unsuccessful party or allocated according to the parties’ relative success.

Article 16 of International Arbitration Law No. 4686 contains a comparable framework for international arbitration, including arbitrator fees, expert costs, witness expenses, attorney fees, court charges, advances and allocation of costs according to success.

ISTAC’s cost framework separately requires registration fees and advances intended to cover arbitrator fees, arbitrator expenses and administrative costs. Failure to deposit the required advance may lead to termination of the proceeding under the applicable rules.

A funding arrangement may therefore cover two distinct categories:

Institutional and tribunal costs

These include registration fees, arbitrator fees, institutional administration and tribunal-appointed experts.

Party costs

These may include counsel, party-appointed experts, document review, translation, travel and enforcement work.

The funding agreement should identify which expenses are covered and which remain the funded party’s responsibility.

Who Is Responsible for Paying Arbitration Costs?

The funded party remains the party to the arbitration unless the funder has separately become bound through a valid legal arrangement.

The arbitration institution and tribunal will ordinarily look to the arbitration parties for:

• Registration fees;
• Advances;
• Expert deposits;
• Hearing expenses;
• Adverse cost obligations.

A private promise by the funder to pay these amounts does not necessarily release the funded party from responsibility toward the institution or opposing party.

The funding agreement should therefore regulate:

• Payment timing;
• Direct payment to counsel or the institution;
• Currency risk;
• Tax and bank charges;
• Budget overruns;
• Emergency expenditure;
• Failure of the funder to pay;
• Remedies available to the funded party.

Can the Funder’s Return Be Recovered as Arbitration Costs?

A funded claimant should not assume that the respondent will be ordered to reimburse the funder’s success return.

The statutory cost categories under Articles 441 and 442 of the Code of Civil Procedure do not expressly identify third-party funding returns. Attorney fee recovery is also linked to the applicable minimum fee tariff rather than automatically to every amount privately paid to counsel.

International Arbitration Law No. 4686 similarly contains defined categories of arbitration costs but does not expressly regulate the recovery of a funder’s success premium.

Accordingly, the recoverability of:

• Funding premiums;
• Return multiples;
• Insurance premiums;
• Portfolio-funding expenses;
• Enforcement-finance charges

is uncertain and will depend on the applicable arbitration law, institutional rules, parties’ agreement, tribunal authority and the circumstances of the case.

Even where a tribunal possesses broad cost discretion, it may ask whether the expense was:

• Reasonable;
• Necessary;
• Proportionate;
• Caused by the opposing party’s conduct;
• Properly disclosed;
• Within the permitted definition of recoverable costs.

The funding agreement should be commercially viable without assuming recovery of the funder’s return from the respondent.

Disclosure of Third-Party Funding

Disclosure is one of the most important issues in funded arbitration.

The principal reason is conflict checking.

A funder may have:

• A relationship with an arbitrator;
• A relationship with the arbitrator’s law firm;
• A financial interest in another party;
• Repeated dealings with counsel;
• Involvement in a related arbitration;
• Influence over arbitrator selection.

If the funder’s identity is unknown, the arbitrator may be unable to disclose a relevant relationship.

Is Disclosure Mandatory under Turkish Arbitration Legislation?

The current Turkish domestic and international arbitration statutes do not contain an express, comprehensive provision requiring every funded party in every arbitration to disclose every funding arrangement automatically.

The current published ISTAC framework examined for this article also does not establish a dedicated third-party-funding disclosure code comparable to the express provisions adopted by some other arbitral institutions.

However, an obligation may arise through:

• The arbitration agreement;
• The adopted institutional rules;
• A procedural order;
• The tribunal’s directions;
• The IBA Guidelines, where adopted or used as guidance;
• The arbitrator-disclosure process;
• A security-for-costs application;
• A specific legal or ethical obligation.

The absence of an express general statutory rule does not mean that concealment is always appropriate.

Early disclosure of the funder’s identity is generally the safer approach where the funder has a direct economic interest in the award.

The 2024 IBA Guidelines

The 2024 IBA Guidelines on Conflicts of Interest in International Arbitration treat persons or entities with a direct economic interest in, controlling influence over or duty to indemnify a party for the award as potentially bearing the identity of that party for conflict purposes. The Guidelines specifically explain that third-party funders and insurers may possess a direct economic interest or influence the conduct of the proceedings, including arbitrator selection.

General Standard 7 requires a party to inform the arbitrators, tribunal, other parties and institution of relevant relationships involving persons or entities with a direct economic interest in the award. The explanation identifies an entity funding the arbitration as an example. The disclosure duty is described as early and continuing.

The IBA Guidelines are a soft-law instrument. They do not automatically override:

• Turkish legislation;
• The arbitration agreement;
• Mandatory institutional rules;
• A tribunal’s procedural order.

They nevertheless provide influential guidance for international arbitration conflict checks.

What Should Be Disclosed?

Disclosure can occur at several levels.

Identity of the funder

The funded party may disclose:

• The funder’s legal name;
• Corporate group;
• Relevant affiliates;
• Insurer, where applicable.

This is usually the minimum information needed for conflict checks.

Existence of the arrangement

A party may confirm that funding exists even where the entire agreement is not produced.

Economic interest

The tribunal may require information about whether the funder:

• Receives a percentage;
• Has a direct economic interest in the award;
• Bears adverse costs;
• Has security over the proceeds.

Control and influence

Information may be relevant concerning whether the funder can:

• Approve counsel;
• Participate in arbitrator selection;
• Control settlement;
• Terminate funding;
• Direct procedural strategy.

Full funding agreement

Disclosure of the full agreement should not be automatic in every case.

The agreement may contain commercially sensitive information, legal assessments, budget strategy and settlement thresholds.

Full or partial production may become relevant where the terms bear directly on:

• Arbitrator conflicts;
• Security for costs;
• Control of the proceedings;
• Adverse-cost protection;
• Settlement authority;
• Privilege or confidentiality;
• Allocation of award proceeds.

A tribunal may consider redaction or limited-access measures rather than unrestricted disclosure.

Conflicts of Interest Involving the Funder

A funder may have recurring professional relationships with arbitration practitioners.

Potential conflicts include:

• The arbitrator advising the funder;
• The arbitrator’s firm representing the funder;
• The funder financing another case in which the arbitrator acts as counsel;
• The funder repeatedly appointing the same arbitrator;
• An arbitrator owning shares in the funder;
• A funder financing both sides of related disputes;
• An insurer indemnifying a party while maintaining a relationship with an arbitrator.

Under the 2024 IBA framework, a person or entity having a direct economic interest in the award may be considered for conflict purposes in the same manner as a party. A significant arbitrator interest in such an entity may fall within serious conflict categories.

The funded party should conduct reasonable enquiries before arbitrator appointment.

The conflict list should include:

• Funder;
• Fund manager;
• Relevant affiliates;
• Insurer;
• Broker;
• Persons controlling the funding decision;
• Any entity entitled to indemnification.

Disclosure must be updated if the funder changes during the arbitration.

Security for Costs

A respondent may argue that the claimant’s use of third-party funding creates a risk that an adverse costs award will not be paid.

The respondent may therefore seek security for costs.

Possible forms of security include:

• Bank guarantee;
• Escrow deposit;
• Letter of credit;
• Funder undertaking;
• After-the-event insurance;
• Deposit with an institution;
• Parent-company guarantee.

Does Funding Automatically Justify Security?

Funding alone should not automatically prove that the claimant is insolvent or unwilling to pay costs.

A company may use funding for balance-sheet or risk-management reasons despite having sufficient assets.

A tribunal considering security may examine:

• Claimant’s financial position;
• Location of assets;
• Previous payment conduct;
• Likelihood of cost recovery;
• Changes in financial circumstances;
• Terms of the funding arrangement;
• Whether the funder covers adverse costs;
• Timing of the application;
• Prejudice to the funded claim;
• Conduct of both parties.

The respondent should not use security as a strategy to prevent a financially weaker claimant from pursuing an arguable claim.

At the same time, the claimant should not use funding to transfer every downside risk to an entity beyond the tribunal’s jurisdiction while preserving all potential upside.

Turkish Law and Security for Costs

The Turkish Code of Civil Procedure contains security rules for court litigation in Article 84, including specified situations involving residence abroad or documented financial difficulty. However, Article 444 provides that the other provisions of the Code do not automatically apply to matters governed by the domestic arbitration chapter unless otherwise stated. The ordinary court-security rules should therefore not be assumed to create an automatic third-party-funding security mechanism in arbitration.

The authority of a Turkey-seated tribunal to order security for costs may instead require analysis of:

• The parties’ arbitration agreement;
• The institutional rules;
• Tribunal procedural authority;
• Interim-measure powers;
• The applicable domestic or international arbitration statute.

There is no express Turkish statutory rule stating that a funded party must provide security merely because funding exists.

Is the Funder Liable for Adverse Costs?

The funder is ordinarily not a signatory to the underlying arbitration agreement and is not automatically an arbitration party.

An adverse costs award made against the funded claimant does not necessarily bind the funder directly.

Funder liability may depend on:

• The funding agreement;
• An express undertaking;
• Applicable law;
• Whether the funder became a party to a costs arrangement;
• Exceptional facts concerning control or abuse;
• Enforcement proceedings.

The respondent should not assume that it can enforce an award against the funder merely by proving the existence of funding.

The funded party should determine whether the funding package includes:

• Adverse-cost coverage;
• Security-for-costs coverage;
• Insurance;
• A direct funder undertaking;
• A cap on liability.

Confidentiality and Attorney Secrecy

Funding due diligence requires the claimant to disclose substantial information to the potential funder.

This may include:

• Contracts;
• Legal opinions;
• Witness evidence;
• Expert reports;
• Damages calculations;
• Settlement history;
• Counsel strategy;
• Enforcement information.

Turkish Attorneyship Law Article 36 prohibits lawyers from disclosing matters learned through their professional duties. The client’s consent is relevant to permitted disclosure, but counsel must still protect professional secrecy and evaluate the scope of any disclosure carefully.

ISTAC presents its arbitration service as confidential and flexible, and its internal institutional rules require the Secretariat and relevant boards to preserve the confidentiality of submissions and information.

Before sharing documents with a funder, the party should consider:

• Written client authorisation;
• Non-disclosure agreement;
• Secure data room;
• Access controls;
• Restrictions on use;
• Return or destruction of information;
• Cybersecurity;
• Personal-data redaction;
• Privilege implications;
• Disclosure to the funder’s consultants and investment committee.

Only information reasonably necessary for evaluation should be disclosed during the initial stage.

Does Disclosure to a Funder Waive Privilege?

The effect of sharing legal material with a funder depends on the applicable law, the nature of the information and the safeguards used.

The parties should not assume that every communication shared with the funder remains protected automatically.

Risk may be reduced through:

• A common-interest or confidentiality arrangement where legally recognised;
• Express acknowledgment that counsel represents only the client;
• Use restrictions;
• Limited disclosure;
• Separate legal and commercial data rooms;
• Redaction of legal advice not necessary for investment assessment.

The procedural law, governing law and potential enforcement jurisdictions should be considered before sharing privileged material.

Funder Influence and Control

A professional funder will normally require information and contractual protections because its capital is at risk.

Legitimate funder rights may include:

• Receiving periodic reports;
• Monitoring the approved budget;
• Reviewing material procedural developments;
• Being consulted about settlement;
• Conducting compliance checks;
• Terminating funding in defined circumstances.

Excessive control may create legal, ethical and practical problems.

The client should retain authority over:

• Legal instructions;
• Factual admissions;
• Witness evidence;
• Appointment and supervision of counsel;
• Settlement acceptance;
• Procedural decisions;
• Whether to continue or withdraw the claim.

Counsel’s professional judgment must remain independent from the funder.

The funding agreement should state expressly that the funder does not become the lawyer’s client merely by paying legal fees.

Settlement Provisions

Settlement is one of the most sensitive areas of a funding agreement.

The client may wish to accept a settlement because of commercial relationships, management time or reputational risk. The funder may reject the same settlement because it produces an inadequate investment return.

The agreement should provide a clear mechanism.

Possible structures include:

• Client retains final authority after consultation;
• Settlement below a defined amount requires joint approval;
• Disagreement is referred to independent counsel;
• Funder return changes if a reasonable settlement is rejected;
• Funding terminates under specified conditions.

A provision giving the funder absolute and unlimited control over settlement may undermine the client’s control of its own claim and create conflicts with counsel’s professional duties.

Termination of the Funding Agreement

The funder may seek termination rights where:

• Merits materially deteriorate;
• Jurisdiction fails;
• Evidence was misrepresented;
• The client breaches the agreement;
• The budget is exceeded;
• Sanctions or compliance problems arise;
• Recovery becomes impossible;
• Counsel withdraws;
• The claimant refuses a contractually defined reasonable settlement.

The client should resist termination rights that allow the funder to withdraw merely because the case has become less commercially attractive.

The agreement should regulate:

• Notice;
• Opportunity to remedy;
• Funding during the notice period;
• Existing counsel and expert commitments;
• Confidentiality after termination;
• Funder rights in later recovery;
• Treatment of sunk costs;
• Security releases;
• Replacement funding.

A sudden withdrawal shortly before the hearing could place the funded party in a severe procedural position.

Due Diligence Conducted by Funders

A funder will commonly review:

Jurisdiction

• Validity of the arbitration agreement;
• Scope of the clause;
• Applicable institution;
• Seat;
• Non-signatory issues;
• Limitation periods.

Merits

• Contractual obligations;
• Breach;
• Defences;
• Evidence;
• Witness credibility;
• Counterclaims.

Quantum

• Value of the claim;
• Causation;
• Methodology;
• Recoverable loss;
• Interest;
• Cost of proof.

Enforcement

• Respondent’s assets;
• Asset jurisdictions;
• Sovereign immunity;
• Existing security;
• Insolvency risk;
• Annulment risk.

Economics

• Expected duration;
• Required budget;
• Minimum acceptable recovery;
• Settlement probability;
• Funding return;
• Portfolio concentration.

The claimant should not disclose misleading or incomplete information. A material misrepresentation may permit termination and create separate liability under the funding agreement.

The Funding Waterfall

The agreement should state how recovered amounts are distributed.

A typical waterfall may address:

1. Enforcement and collection expenses;
2. Reimbursement of funded capital;
3. Funder return;
4. Unpaid legal fees;
5. Client’s remaining recovery.

The agreement should regulate:

• Partial awards;
• Interim payments;
• Settlement;
• Non-monetary relief;
• Recovery in different currencies;
• Taxes;
• Interest;
• Costs awards;
• Counterclaim set-off;
• Recovery below the total funding expenditure.

Ambiguous waterfalls may produce a separate dispute after the underlying arbitration is won.

Assignment and Security over Award Proceeds

A funder may request security over the future recovery.

Possible mechanisms may include:

• Assignment of proceeds;
• Pledge over receivables;
• Escrow instructions;
• Control of a collection account;
• Share security;
• Payment direction to enforcement counsel.

The enforceability of the security should be assessed under the law governing:

• The funded claim;
• The funding agreement;
• The receivable;
• The debtor;
• The place of enforcement.

The agreement should distinguish between assigning:

• The economic proceeds of a claim; and
• The entire legal right or status as claimant.

Not every disputed right can be transferred freely, and a transfer should not be assumed to make the funder a party to the arbitration.

Funding in Investment Arbitration

Third-party funding has received particularly significant attention in investor-state arbitration.

UNCITRAL Working Group III has continued developing draft provisions addressing third-party funding, disclosure and procedural consequences. Recent 2026 working documents contemplate definitions of funding, disclosure duties and the possible consideration of non-disclosure in procedural decisions. These materials form part of an ongoing reform process and are not automatically applicable to every Turkish commercial arbitration.

An investor relying on an investment treaty should review:

• The treaty text;
• Applicable arbitration rules;
• Any mandatory disclosure requirements;
• Security-for-costs provisions;
• Funder restrictions;
• Tribunal procedural orders.

Rules developed for investor-state proceedings should not be transferred automatically to private ISTAC or ad hoc commercial arbitration.

Effect of Funding on the Merits

The existence of funding does not prove that:

• The claim is strong;
• The claim is weak;
• The claimant is insolvent;
• The claim is abusive;
• The respondent should be liable;
• Security must be ordered.

The tribunal should decide the merits according to the contract, law and evidence.

Funding may be relevant to procedural questions, but it should not become an indirect merits argument.

A respondent should not argue that a professional funder’s investment proves speculative litigation. Equally, a claimant should not argue that funder due diligence establishes the legal validity of the claim.

Funding Agreement Disputes

Disputes may later arise between the funder and funded party concerning:

• Whether a recovery occurred;
• Calculation of the funder return;
• Settlement approval;
• Termination;
• Budget overrun;
• Disclosure failures;
• Control of enforcement;
• Distribution waterfall;
• Confidentiality;
• Misrepresentation.

The funding agreement should contain a dispute resolution clause addressing:

• Arbitration institution;
• Seat;
• Language;
• Number of arbitrators;
• Governing law;
• Interim measures;
• Confidentiality;
• Expedited procedure.

The clause in the funding agreement should not create inconsistencies with the underlying arbitration.

It may nevertheless be inappropriate to consolidate the funding dispute automatically with the underlying case because the funding agreement may contain confidential case assessments not relevant to the respondent.

Drafting a Third-Party Funding Agreement

A properly structured agreement should address at least:

1. Identity of the funder and funded party;
2. Funded arbitration and claims;
3. Maximum capital commitment;
4. Approved budget;
5. Covered costs;
6. Payment procedure;
7. Funder return;
8. Distribution waterfall;
9. Adverse-cost coverage;
10. Security-for-costs coverage;
11. Confidentiality;
12. Privilege protection;
13. Reporting obligations;
14. Counsel independence;
15. Settlement authority;
16. Termination grounds;
17. Consequences of termination;
18. Assignment and security;
19. Compliance and sanctions;
20. Governing law and dispute resolution.

Practical Disclosure Clause

A procedural order may provide:

Each party shall promptly disclose the identity of any person or entity that is not a party to the arbitration but has provided material funding for the prosecution or defence of the case in return for a direct economic interest in the outcome.

The funded party shall notify the tribunal and the other parties promptly of any change in the identity of the funder.

Disclosure of the complete funding agreement shall not be required unless the tribunal determines that specified terms are relevant and material to a conflict-of-interest, security-for-costs or costs issue.

This form of clause separates conflict disclosure from automatic disclosure of commercially sensitive terms.

Practical Checklist for Funded Turkish Arbitration

Before entering into a funding agreement connected with Türkiye, the parties should determine:

1. Which law governs the funding agreement;
2. Whether the underlying right is transferable;
3. Whether the funding structure complies with Turkish mandatory law;
4. Whether lawyer-fee limits are respected;
5. Whether prohibited referral issues arise;
6. Which costs are covered;
7. Whether adverse costs are covered;
8. Whether security for costs may be required;
9. Whether the funder must be disclosed;
10. Whether the funder has arbitrator conflicts;
11. Whether the funding terms must be produced;
12. How confidentiality will be protected;
13. Whether privilege may be affected;
14. Who controls legal strategy;
15. Who decides settlement;
16. When the funder may terminate;
17. How a recovery will be distributed;
18. What security the funder receives;
19. Whether the funder can finance enforcement;
20. How funding disputes will be resolved.

Frequently Asked Questions

Is third-party funding prohibited in Turkish arbitration?

There is no general statutory provision expressly prohibiting every form of third-party funding. A funding agreement should be assessed under Turkish contract law, mandatory rules, public policy and applicable professional obligations.

Does Türkiye have a dedicated third-party funding law?

The current Turkish arbitration statutes do not establish a comprehensive stand-alone third-party funding regime. The legal position must be determined from general legislation, institutional rules and the funding agreement.

Can a funder receive a percentage of the award?

Potentially, depending on the applicable law and the structure of the agreement. The arrangement should be distinguished from a Turkish lawyer’s contingency fee, which is subject to the 25% limit in Article 164 of the Attorneyship Law.

Can a Turkish lawyer own part of the disputed property?

Article 164 prevents an attorney-fee agreement from granting the lawyer ownership of part of non-monetary property or rights forming the subject of the dispute.

Must funding be disclosed automatically?

Turkish arbitration legislation does not contain a universal express disclosure rule for every funded case. Disclosure may nevertheless be required by institutional rules, a procedural order, the arbitration agreement or conflict-of-interest principles.

What information should generally be disclosed?

The identity of the funder and relevant affiliates should ordinarily be considered for conflict checking. Full agreement terms should generally be requested only where relevant to a defined procedural issue.

Why can the funder create an arbitrator conflict?

A funder may have a direct economic interest in the award or influence the conduct of the proceeding. The 2024 IBA Guidelines therefore treat funders and insurers as potentially relevant to the identity of a party for conflict purposes.

Are the IBA Guidelines binding in Turkish arbitration?

Not automatically. They are soft-law guidance unless incorporated by the parties, institutional rules or tribunal procedure.

Does funding automatically justify security for costs?

No. Funding alone does not necessarily establish insolvency or non-payment risk. The tribunal should assess the particular circumstances.

Is a funder automatically liable for adverse costs?

Ordinarily not. The funder is generally not a party to the arbitration. Liability may depend on the funding agreement, an express undertaking and applicable law.

Can the funder’s success premium be recovered from the respondent?

Recovery is uncertain. Turkish arbitration cost provisions do not expressly identify third-party funding returns as a recoverable category.

Can the funder choose the lawyer?

The agreement may permit consultation concerning counsel, but the client should retain legal authority and counsel must maintain professional independence.

Can the funder control settlement?

The funder may have consultation or defined contractual rights, but absolute funder control may create legal and ethical concerns. The client’s decision-making authority should be preserved.

Can confidential legal documents be provided to a funder?

Disclosure should occur only after reviewing attorney secrecy, privilege, data protection and contractual confidentiality. Turkish lawyers are prohibited from disclosing professional secrets under Article 36.

Can a funder terminate financing during the arbitration?

Only according to the funding agreement. Termination grounds, notice, ongoing commitments and consequences should be defined precisely.

Does the underlying arbitration clause bind the funder?

Not automatically. The funding agreement should contain a separate dispute resolution clause.

Can a foreign funder finance an ISTAC arbitration?

Potentially. The agreement should be reviewed for Turkish mandatory-law, tax, banking, professional and conflict issues, together with the ISTAC procedure.

Conclusion

Third-party funding in Turkish arbitration may provide an effective mechanism for financing complex domestic and international disputes.

Funding can allow a company to:

• Preserve working capital;
• Share arbitration risk;
• Retain specialist counsel;
• Instruct qualified experts;
• Finance international enforcement;
• Pursue meritorious claims despite liquidity constraints.

Türkiye does not currently maintain one comprehensive statute regulating every aspect of commercial third-party funding. Funding agreements must therefore be evaluated through the general principles of Turkish contract law, arbitration legislation, attorney professional rules and the relevant institutional procedure.

Freedom of contract provides an important legal basis, but it is limited by mandatory law, morality, public policy and other statutory protections.

A funding structure must remain separate from the lawyer–client relationship.

Turkish lawyers’ percentage fees are subject to a statutory 25% cap. Lawyers are also subject to restrictions concerning disputed rights, client referrals, professional secrecy and independence. Funding must not be used to circumvent those rules.

Disclosure is another central issue.

Even where no general statutory disclosure rule applies, the funder’s identity should ordinarily be considered for arbitrator conflict checks. The 2024 IBA Guidelines recognise that funders and insurers may possess a direct economic interest in the award or influence the proceedings.

Disclosure of the funder’s identity does not necessarily require disclosure of the full funding agreement. The tribunal should examine whether specific terms are relevant to conflicts, security for costs, control, confidentiality or cost allocation.

Security for costs must also be assessed carefully.

The existence of funding does not automatically demonstrate insolvency. At the same time, a claimant should not be permitted to transfer all downside risk to an unreachable funder while leaving the respondent without a realistic remedy for an adverse costs award.

The funding agreement should address:

• Covered expenses;
• Adverse costs;
• Security;
• Confidentiality;
• Settlement;
• Control;
• Termination;
• Enforcement;
• Distribution of recovery.

The client must retain control of legal instructions and settlement decisions, while counsel must remain professionally independent.

The funder’s return should not be assumed to be recoverable as arbitration costs. Turkish arbitration statutes identify defined cost categories but do not expressly recognise funding premiums or return multiples.

Funding should therefore be evaluated according to the net amount the client is expected to retain, not according to the headline value of the claim.

For Turkish and international companies considering arbitration funding, specialised Turkish arbitration counsel can assist with the legal review of funding agreements, arbitrator disclosures, security-for-costs applications, confidentiality protocols, attorney-fee compliance and enforcement planning.