Third-Party Funding in Turkish Arbitration: Disclosure, Costs and Conflict Risks

Third-party funding in Turkish arbitration is becoming increasingly relevant for companies, investors, contractors, shareholders and claimants that possess potentially valuable legal claims but do not wish to finance the full cost of arbitration from their own balance sheets.

International arbitration can involve substantial expenditure. The parties may need to pay arbitrator fees, institutional costs, legal fees, expert expenses, translation costs, hearing costs, document-hosting charges and possible enforcement expenses.

A business may have a strong contractual claim but face liquidity constraints. A solvent company may also prefer to preserve capital for its commercial activities rather than allocate significant funds to a dispute that may continue for several years.

Third-party funding can provide a solution.

Under a typical funding arrangement, an external funder agrees to pay some or all of the funded party’s arbitration costs. In return, the funder receives an agreed return if the claim succeeds. If the claim fails, the funder will ordinarily lose the amount invested, subject to the precise terms of the funding agreement.

Funding can improve access to arbitration and allow businesses to manage legal risk. However, it also introduces an additional economically interested participant into proceedings that were originally designed around the claimant, respondent and arbitral tribunal.

The presence of a funder may create questions concerning:

• Disclosure of the funding arrangement;
• Arbitrator independence and impartiality;
• Security for costs;
• Liability for adverse costs;
• Control over the proceedings;
• Settlement authority;
• Confidentiality;
• Legal privilege;
• Termination of funding;
• Recoverability of funding costs;
• Enforcement of the eventual award.

Turkish International Arbitration Law No. 4686 does not contain a dedicated statutory regime expressly regulating third-party arbitration funding. Turkish-seated arbitrations must therefore be analysed through general contract law, arbitration legislation, professional rules, the parties’ arbitration agreement and any institutional rules selected for the proceedings. Law No. 4686 gives parties broad freedom to determine the arbitration procedure directly or by incorporating institutional or international rules, subject to mandatory statutory protections.

This article explains the legal status of third-party funding in Turkish arbitration, the contents of funding agreements, disclosure standards, conflict-of-interest risks, security for costs, cost allocation, confidentiality and practical precautions for funded parties, respondents, counsel, arbitrators and funders.

What Is Third-Party Funding?

Third-party funding generally involves a person or entity that is not a party to the dispute providing financial resources for the pursuit or defence of arbitration.

The funder’s return is normally dependent on the outcome of the proceedings.

The return may be calculated as:

• A percentage of the compensation recovered;
• A multiple of the amount invested;
• The higher of a percentage and an investment multiple;
• A combination of fixed and outcome-dependent elements;
• A return determined according to the stage at which the dispute is resolved.

For example, a funder may agree to finance legal and expert costs in return for three times the invested amount or 25% of the recovery, whichever is higher.

The funder usually assumes the risk that the arbitration may be unsuccessful. If the claim is dismissed, the funder will not normally recover its investment from the funded party unless the agreement provides an exceptional repayment obligation.

The precise economic and legal structure varies substantially between agreements.

What Expenses Can a Funder Cover?

A funding arrangement may cover all or only part of the arbitration expenses.

Potentially funded expenses include:

• Legal fees;
• Arbitrator fees;
• Institutional administrative costs;
• Technical and quantum experts;
• Witness expenses;
• Translation and interpretation;
• Electronic document review;
• Hearing facilities;
• Travel and accommodation;
• Interim-measure applications;
• Setting-aside proceedings;
• Recognition and enforcement proceedings;
• Adverse-costs exposure;
• Security for costs.

Some funders provide only the costs necessary to obtain the award. Others finance enforcement until actual recovery.

The agreement should state clearly whether enforcement, appeals, annulment proceedings and settlement implementation are included. An award may have substantial legal value but limited commercial value if the debtor refuses to pay and the funding ends immediately after the award is rendered.

Common Forms of Arbitration Funding

Third-party funding may take several forms.

Single-Case Funding

A funder finances one identified arbitration in return for a share of the recovery.

This is the most recognisable funding model.

Portfolio Funding

A funder finances several disputes belonging to the same company, corporate group or law firm.

The funder’s return may depend on the combined outcome of the portfolio rather than one case.

Portfolio funding can spread risk and may permit financing of claims that would not justify individual funding.

Defence Funding

Funding is not limited to claimants.

A respondent may obtain funding for its defence, counterclaim or a portfolio of disputes. Current ICC and ICSID rules define regulated funding arrangements broadly enough to include funding of claims or defences where the non-party has an economic interest in the outcome.

Monetisation

A company with a pending claim may receive an immediate payment based on the anticipated value of the dispute.

The company may use the payment for general business purposes rather than only arbitration expenses.

After-the-Event Insurance

Insurance may cover potential liability for the opposing party’s costs.

Insurance and third-party funding are different products, but both may create conflict and disclosure issues where the provider has a direct economic interest in the award.

Law Firm Financing

A law firm may agree to defer part of its fees, charge a success-based fee or share financial risk with the client.

This should not be confused automatically with commercial third-party funding. Where Turkish lawyers are involved, the arrangement must comply with the Attorneyship Law and professional obligations.

Is Third-Party Funding Legal in Turkey?

Turkish legislation does not expressly prohibit commercial third-party funding of arbitration.

At the same time, Law No. 4686 does not contain a detailed regulatory framework governing funder licensing, permitted returns, disclosure, capital adequacy or funder liability.

The validity of a Turkish-law funding agreement must therefore be assessed under the general principles of the Turkish Code of Obligations.

Article 26 recognises freedom of contract within the limits established by law. Article 27 provides that agreements contrary to mandatory rules, morality, public policy, personal rights or objective possibility are null and void. Article 28 also permits relief where a clear imbalance between reciprocal performances was created by exploiting the other party’s distress, inexperience or lack of judgment.

Consequently, third-party funding should not be treated as automatically valid or invalid merely because it concerns arbitration.

The agreement should be examined in light of:

• The identity and regulatory status of the funder;
• The governing law;
• The amount invested;
• The funder’s expected return;
• Control rights;
• Termination rights;
• Settlement provisions;
• The funded party’s financial circumstances;
• Public policy;
• Professional independence;
• The nature of the underlying claim.

A commercially negotiated agreement between sophisticated parties will generally present a different risk profile from an agreement imposing an extreme return on a distressed individual who lacked independent advice.

Third-Party Funding and Contingency Fees Are Different

A third-party funder is not necessarily the funded party’s lawyer.

The distinction is important because Turkish law regulates lawyers’ success-based fees separately.

Article 164 of the Attorneyship Law permits an attorney fee calculated as a percentage of the amount or value in dispute, provided that the percentage does not exceed 25%. The agreement may not provide that part of the non-monetary property or right in dispute will belong directly to the lawyer.

Article 47 also prohibits a lawyer from acquiring disputed rights connected with a matter handled by that lawyer or facilitating their acquisition, subject to the statutory scope and period of the prohibition.

These provisions regulate attorneys and attorney-client fee arrangements. They do not expressly establish a general 25% ceiling for an independent commercial funder that is not providing legal representation.

Nevertheless, a structure involving a law firm, affiliated funding entity, assignment of the disputed right or counsel’s direct economic ownership should be reviewed carefully.

The parties should avoid arrangements that compromise:

• Counsel’s professional independence;
• The client’s authority over the case;
• The prohibition on acquiring disputed rights;
• Attorney-client confidentiality;
• Ethical restrictions on referral payments;
• The distinction between legal services and investment activity.

Why Do Parties Use Third-Party Funding?

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

A funded party may be a large and solvent company seeking to:

• Preserve cash flow;
• Remove litigation expenses from its operating budget;
• Transfer part of the dispute risk;
• Obtain external evaluation of the claim;
• Finance several disputes simultaneously;
• Reduce the effect of arbitration expenses on financial statements;
• Pursue recovery from a difficult debtor;
• Avoid abandoning a valuable claim because of short-term liquidity pressure.

Funding can also change the internal economics of dispute management.

A company may prefer a defined contingent deduction from a future recovery over an immediate and uncertain expenditure of legal fees.

However, funding is not free capital. The return may become substantial if the case continues for a long period or produces a large award.

The funded party should compare:

• Expected claim value;
• Probability of success;
• Expected duration;
• Enforcement risk;
• Funding return;
• Cost of alternative financing;
• Settlement flexibility.

What Do Funders Evaluate?

A professional funder will ordinarily conduct legal, factual, financial and enforcement due diligence before agreeing to finance a case.

The funder may assess:

• Validity of the arbitration agreement;
• Jurisdiction;
• Applicable law;
• Liability;
• Quantum;
• Documentary evidence;
• Witness credibility;
• Counterclaims;
• Limitation periods;
• Possible annulment grounds;
• Debtor solvency;
• Location of assets;
• Enforcement jurisdictions;
• Estimated legal budget;
• Experience of counsel;
• Procedural timetable.

A strong claim against a debtor with no identifiable assets may not be commercially fundable.

Similarly, a high-value claim may be rejected if jurisdiction is uncertain, the evidence is weak or the expected costs are disproportionate to the realistic recovery.

The funded party should prepare a structured case memorandum and complete evidence package. Material weaknesses should be disclosed. Concealing information during the funder’s due diligence may allow the funder to terminate the agreement at the most damaging stage of the arbitration.

Essential Terms of a Funding Agreement

A funding agreement should regulate more than the amount of capital and the funder’s percentage.

Important provisions include:

• Funded claims and proceedings;
• Maximum funding commitment;
• Approved budget;
• Payment schedule;
• Legal and expert expenses;
• Enforcement funding;
• Funder return;
• Distribution waterfall;
• Priority between principal, costs, interest and funder return;
• Settlement consultation;
• Authority to accept or reject settlement;
• Reporting obligations;
• Confidentiality;
• Privilege protection;
• Disclosure duties;
• Security for costs;
• Adverse-costs liability;
• Termination;
• Consequences of termination;
• Change of counsel;
• Assignment;
• Governing law;
• Dispute resolution.

The funding agreement should also determine what happens if:

• The claim amount increases;
• A counterclaim is filed;
• The tribunal orders security for costs;
• The arbitration is consolidated;
• A second arbitration becomes necessary;
• The funded party changes counsel;
• The award is annulled;
• Enforcement requires proceedings in several countries;
• The respondent becomes insolvent;
• The parties receive a settlement proposal.

Disclosure of Third-Party Funding

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

The central purpose of disclosure is normally to identify potential conflicts between the funder and the arbitrators.

A funder may have:

• A relationship with an arbitrator;
• A relationship with the arbitrator’s law firm;
• Investments in other cases involving the arbitrator;
• A connection with counsel;
• A financial interest in an affiliated company;
• Influence over arbitrator selection;
• Insurance or indemnity relationships relevant to the dispute.

If the funder’s identity is concealed, the arbitrator may be unable to identify a conflict requiring disclosure or recusal.

Does Turkish International Arbitration Law Require Disclosure?

Law No. 4686 requires arbitrators to disclose circumstances that may justify doubts about their impartiality or independence and recognises challenge where such circumstances exist.

The statute does not, however, contain an express article requiring a funded party to disclose the existence and identity of a third-party funder.

This does not mean that disclosure is never required.

A disclosure obligation may arise from:

• The arbitration agreement;
• Applicable institutional rules;
• A procedural order;
• The tribunal’s case-management authority;
• Conflict-of-interest standards;
• A specific tribunal direction;
• The funded party’s duty of procedural good faith.

Law No. 4686 allows the parties to determine procedural rules by incorporating institutional or international arbitration rules. The applicable rule set must therefore be reviewed at the beginning of each case.

ICC Arbitration Seated in Turkey

A Turkish-seated arbitration may be administered by the ICC rather than ISTAC.

The ICC Arbitration Rules effective from 1 June 2026 expressly require each party to inform the ICC Secretariat, arbitral tribunal and other parties promptly of the existence and identity of any non-party that has entered into an arrangement for funding claims or defences and has an economic interest in the arbitration’s outcome.

Accordingly, a party to an ICC arbitration seated in Istanbul cannot rely on the absence of an express funding provision in Law No. 4686.

The incorporated ICC Rules create a procedural disclosure obligation.

The obligation concerns the existence and identity of the funder. It does not automatically require production of the entire funding agreement.

ICSID Arbitration Involving Turkey

Investment arbitration may involve a Turkish investor, an investment in Turkey or the Turkish state.

Under the ICSID Arbitration Rules effective since 1 July 2022, a party must file written notice disclosing the name and address of a non-party from which it directly or indirectly receives funding for the pursuit or defence of the proceeding through a donation, grant or outcome-dependent arrangement.

Where the funder is a legal entity, the notice must also identify the persons and entities that own and control it. The duty continues throughout the proceedings, and changes must be disclosed.

ICSID introduced the disclosure requirement principally to enable early conflict checks.

IBA Guidelines and Funder Disclosure

The 2024 IBA Guidelines on Conflicts of Interest in International Arbitration provide influential guidance even where they are not formally incorporated into the arbitration agreement.

The Guidelines recognise that third-party funders and insurers may possess a direct economic interest in the case, exercise controlling influence over a party or influence the conduct of the proceedings, including arbitrator selection.

They also state that a party should disclose, at the earliest opportunity, relevant relationships involving persons or entities that have a direct economic interest in the award or a duty to indemnify a party.

A prudent funded party should therefore make an early disclosure even where the applicable rules are silent, particularly if the funder has a substantial economic interest or influence over the proceedings.

Early disclosure reduces the risk of:

• Late arbitrator challenges;
• Reconstitution of the tribunal;
• Procedural delay;
• Setting-aside allegations;
• Enforcement objections;
• Reputational damage.

What Must Be Disclosed?

Disclosure can occur at different levels.

Existence of Funding

The party confirms that it has entered into a funding arrangement.

Identity of the Funder

The funder’s legal name and, where appropriate, its address and ownership or control structure are disclosed.

Nature of the Economic Interest

The party may explain that the funder’s return depends on the outcome without disclosing the precise return.

Terms of the Funding Agreement

The tribunal may request provisions concerning:

• Funder control;
• Settlement;
• Termination;
• Adverse costs;
• Security for costs;
• Budget;
• Counsel selection.

Complete Funding Agreement

Full production is the most intrusive form of disclosure and should not be automatic.

The agreement may contain commercially sensitive pricing, internal risk analysis and privileged legal information.

The tribunal should identify the legitimate procedural purpose before ordering production.

Is the Entire Funding Agreement Discoverable?

The existence of funding does not automatically make every term relevant.

The opposing party may seek the full agreement to investigate security for costs or the funder’s control. The funded party may object that the request is excessive, confidential and designed to obtain strategic information.

A proportionate approach may involve:

• Disclosure of the funder’s identity;
• Production of specific clauses;
• Redaction of commercial return terms;
• Counsel-only review;
• Confidential inspection by the tribunal;
• A summary of adverse-costs arrangements;
• Confirmation of available capital.

The tribunal should distinguish between information necessary to protect procedural integrity and information sought merely to obtain negotiation leverage.

When Should Disclosure Be Made?

Disclosure should occur early enough to permit meaningful conflict checks.

The ideal point may be:

• In the request for arbitration;
• In the answer;
• Immediately after the funding agreement is signed;
• Before arbitrator appointment;
• Before confirmation of a nominated arbitrator.

If funding is obtained after constitution of the tribunal, the party should disclose it promptly.

The obligation should be treated as continuing. Changes in the funder, ownership structure, co-funders, insurers or economic interests may create a new conflict.

A party should not delay disclosure until the opposing party discovers the arrangement independently.

Conflict-of-Interest Risks

Third-party funding expands the group of persons whose relationships may be relevant to arbitrator independence.

Potential conflicts include:

• The arbitrator advised the funder;
• The arbitrator’s firm represents the funder;
• The funder finances another case in which the arbitrator acts;
• The funder appointed the same arbitrator repeatedly;
• The funder has an ownership interest in a party;
• The arbitrator holds an interest in the funder;
• The funder has a business relationship with an expert;
• The funder controls a party affiliate.

The 2024 IBA Guidelines state that entities with a direct economic interest or controlling influence may, in appropriate circumstances, be treated as bearing the identity of the funded party for conflict analysis.

Conflict analysis must be conducted at the level of:

• Funder;
• Parent fund;
• Investment manager;
• Ultimate owners;
• Controlling persons;
• Co-funders;
• Insurers;
• Relevant affiliates.

Using only the trade name of a funding product may not be sufficient.

Effect of Non-Disclosure

Failure to disclose funding does not automatically invalidate the arbitration or the eventual award.

The consequences depend on:

• Applicable rules;
• Tribunal orders;
• Materiality of the relationship;
• Whether an actual conflict existed;
• Timing of discovery;
• Prejudice caused;
• Conduct of the funded party.

Possible consequences include:

• Order for disclosure;
• Postponement;
• Arbitrator challenge;
• Replacement of an arbitrator;
• Adverse cost allocation;
• Procedural sanctions;
• Arguments in setting-aside proceedings;
• Enforcement objections.

Under Turkish law, serious irregularities affecting tribunal constitution, equality or the right to present a case may become relevant to an annulment application. Non-disclosure becomes particularly dangerous where it concealed a relationship that created justified doubts about arbitrator impartiality.

Security for Costs

Security for costs is an order requiring a claimant or counterclaimant to provide financial security for the opposing party’s potential arbitration costs.

The purpose is to reduce the risk that the respondent will successfully defend the claim but be unable to recover the costs awarded in its favour.

Security may be provided through:

• Bank guarantee;
• Cash deposit;
• Escrow;
• Parent-company guarantee;
• After-the-event insurance;
• Funder undertaking.

Does Funding Automatically Justify Security?

No.

The existence of third-party funding should not by itself prove that the funded party is insolvent or unable to satisfy an adverse-costs award.

A financially strong company may use funding for risk-management reasons. A funder may also agree to cover adverse costs.

The ICSID 2022 Rules provide a useful international benchmark. They require tribunals deciding security-for-costs requests to consider the existence of third-party funding but expressly state that funding alone is insufficient to justify security.

Relevant factors may include:

• Funded party’s financial condition;
• Ability to satisfy a future cost award;
• Funder’s obligation to cover adverse costs;
• Risk of abusive non-payment;
• Asset location;
• History of compliance;
• Timing of the funding arrangement;
• Whether financial distress resulted from the respondent’s alleged breach;
• Effect of security on access to arbitration;
• Merits of the claim at a preliminary level.

Security for Costs under Turkish Arbitration Law

Law No. 4686 does not contain a standalone article expressly regulating security for adverse arbitration costs.

It permits tribunals to request an advance from the claimant for arbitration expenses. If the advance is not paid within the prescribed period, the tribunal may suspend the proceedings and ultimately terminate them. The law also permits security to be required in connection with interim measures.

Whether a Turkish-seated tribunal has authority to order security for adverse costs may depend on:

• The arbitration agreement;
• Institutional rules;
• Procedural powers;
• Applicable law;
• Characterisation of the requested security as an interim measure;
• The circumstances of the case.

The tribunal should address jurisdiction over the request explicitly and respect equality and proportionality.

Advances on Arbitration Costs

An advance on costs is different from security for costs.

The advance finances the institution, tribunal and administrative expenses of the arbitration itself.

Under the publicly available ISTAC Arbitration Rules text, the Board fixes an advance covering arbitrator fees, expenses and ISTAC administrative costs. The parties ordinarily pay equal shares, although one party may pay the other party’s unpaid share. Failure to pay may result in suspension and eventual termination of the relevant proceedings.

A funder should therefore determine whether its commitment includes:

• Claimant’s own advance;
• Respondent’s unpaid portion;
• Additional advances;
• Separate counterclaim advances;
• Emergency arbitrator costs;
• Expert deposits.

A failure to fund an unexpected additional advance may stop the arbitration before the merits are decided.

Adverse-Costs Liability

The funded party remains a party to the arbitration and is ordinarily the person against whom an adverse-costs award will be made.

The funder is usually not a signatory to the arbitration agreement and is not automatically subject to the tribunal’s jurisdiction.

Consequently, the tribunal may lack authority to order the funder directly to pay the opposing party unless:

• The funder consented to jurisdiction;
• The applicable rules provide a basis;
• The funder became a party;
• Another recognised legal basis exists.

The funding agreement should specify whether the funder will pay:

• Adverse arbitration costs;
• Court costs;
• Enforcement expenses;
• Interest;
• Security for costs.

A promise between the funder and funded party does not necessarily give the respondent a direct claim against the funder.

Allocation of Arbitration Costs

Article 16 of Law No. 4686 provides that, unless the parties agree otherwise, arbitration costs are imposed on the unsuccessful party. Where each party succeeds in part, costs are allocated according to the parties’ relative success.

The ISTAC Rules treat arbitration costs as including arbitrator and institutional charges, tribunal-appointed expert expenses, legal-representation costs, party-appointed expert costs and other expenses incurred during the proceedings. The tribunal may consider the nature of the dispute and the parties’ efforts to conduct the case efficiently and economically.

Funding does not eliminate the tribunal’s discretion concerning costs.

Conduct relevant to cost allocation may include:

• Failure to disclose funding;
• Unreasonable procedural applications;
• Destruction of evidence;
• Non-compliance with orders;
• Rejection of reasonable settlement proposals;
• Inflated or unnecessary expenditure;
• Delay caused by funding problems.

Are Funding Costs Recoverable from the Losing Party?

The funded party may seek to recover not only legal fees but also the funder’s return.

This remains legally uncertain.

The funder’s return may be substantially higher than ordinary legal costs. It represents the price of capital and risk transfer rather than an invoice for legal services.

Neither Law No. 4686 nor the publicly available ISTAC cost provisions expressly identify the funder’s success return as a recoverable category of arbitration costs. The legislation refers to arbitration expenses, legal representation, experts, court charges and related procedural expenditure.

A tribunal may therefore distinguish between:

• Legal fees actually paid;
• Expert and institutional costs;
• Financing charges;
• Contingent funder return.

Recovery of funding costs may depend on:

• Applicable institutional rules;
• Governing law;
• Causation;
• Reasonableness;
• Proportionality;
• Respondent’s conduct;
• Whether funding was necessary;
• Whether financing costs qualify as damages rather than arbitration costs.

The funding agreement should not assume that the losing party will reimburse the funder’s return.

Funder Control over the Arbitration

A funder will reasonably seek to protect its investment.

However, excessive funder control may undermine the funded party’s autonomy and counsel’s professional independence.

Potential control provisions include:

• Approval of counsel;
• Approval of experts;
• Budget control;
• Consent to major procedural steps;
• Settlement veto;
• Right to attend hearings;
• Access to all documents;
• Power to terminate funding.

The funded party should remain the legal owner and controller of its claim.

Counsel’s duties are owed to the client, not the funder. Legal advice should not be modified merely because the funder prefers a more aggressive or commercially advantageous strategy.

Settlement Authority

Settlement is a frequent source of conflict between the funded party and funder.

The funder may wish to accept a settlement that produces an acceptable return and removes further risk.

The funded party may prefer to continue because:

• It expects a larger award;
• It seeks declaratory relief;
• Reputation is important;
• The commercial relationship is relevant;
• The settlement does not compensate the full loss.

The reverse may also occur. The funded party may wish to settle quickly, while the funder considers the proposal insufficient.

The agreement should establish:

• Consultation procedure;
• Information required for evaluation;
• Independent counsel mechanism;
• Expert determination for disagreements;
• Consequences of rejecting a recommended settlement;
• Whether funding continues after rejection.

An unrestricted funder veto may raise concerns about effective control of the proceedings.

Termination of Funding

The funder may seek a right to terminate if:

• The claim’s prospects deteriorate;
• Material information was withheld;
• The budget is exceeded;
• Counsel changes;
• A conflict arises;
• The funded party breaches the agreement;
• Enforcement becomes uneconomic.

Termination during the proceedings may leave the funded party unable to continue.

The agreement should regulate:

• Notice period;
• Objective termination grounds;
• Cure rights;
• Existing unpaid invoices;
• Costs of changing funders;
• Continued adverse-cost coverage;
• Funder return if the party later succeeds;
• Effect of settlement after termination.

A funding agreement that allows termination at the funder’s unrestricted discretion may transfer too much risk back to the funded party.

Confidentiality and Privilege

Funders require extensive due diligence before investing.

The funded party may need to disclose:

• Legal opinions;
• Evidence;
• Witness assessments;
• Damages models;
• Settlement communications;
• Enforcement investigations;
• Counsel budgets.

Disclosure to a funder creates confidentiality and privilege risks.

Before providing documents, the parties should execute:

• Confidentiality agreement;
• Data-processing terms;
• Use restrictions;
• Cybersecurity obligations;
• Return and destruction provisions;
• Prohibition on disclosure to competitors;
• Rules for consultants and co-funders.

The parties should also consider whether disclosure to the funder may waive or weaken any applicable legal privilege in the jurisdictions where the arbitration, annulment or enforcement proceedings will occur.

The treatment of privilege is not uniform internationally. The safest approach is to limit disclosure to what is reasonably necessary and document the common legal purpose of the exchange.

Personal Data and Cross-Border Transfers

Funding due diligence may involve personal data relating to employees, witnesses, customers, directors and experts.

Where Turkish personal data is sent to a foreign funder, investment committee, consultant or data platform, the parties should assess the Personal Data Protection Law and applicable cross-border transfer requirements.

Commercial necessity does not remove data-minimisation, confidentiality and security obligations.

Sensitive information should be:

• Redacted where possible;
• Shared through secure systems;
• Limited to authorised persons;
• Retained only as long as necessary;
• Subject to appropriate international transfer safeguards.

Funding and Enforcement of the Award

A valid funding arrangement should not by itself prevent recognition or enforcement of an arbitral award.

However, funding-related misconduct may create indirect risks.

The award debtor may argue that:

• Funding concealed an arbitrator conflict;
• The funder improperly controlled the case;
• The arrangement violated public policy;
• The funded party was not the true owner of the claim;
• The claim was assigned invalidly;
• Due process was affected;
• Costs were awarded improperly.

Most of these objections should not justify refusal merely because funding existed.

The real question is whether a recognised annulment or enforcement ground has been established.

Nevertheless, an undisclosed material conflict involving the funder and an arbitrator may create a significantly more serious challenge than the mere commercial terms of funding.

Assignment of the Claim

Funding should be distinguished from assignment.

Under ordinary funding, the funded party retains ownership of the claim and promises a contractual share of the proceeds.

Under an assignment, the claim itself may be transferred to the funder.

Assignment creates additional questions concerning:

• Whether the claim is transferable;
• Whether the arbitration agreement transfers with it;
• Whether the assignee may commence arbitration;
• Notice to the debtor;
• Standing;
• Personal claims;
• Procedural succession.

The agreement should state expressly whether it creates only a contractual right to proceeds or transfers legal ownership of the claim.

An unintended assignment may generate jurisdictional objections that would not arise under a conventional funding agreement.

Insolvency of the Funded Party

If the funded party becomes insolvent, the claim and funding agreement may become subject to insolvency administration.

Issues may include:

• Whether the administrator continues the arbitration;
• Whether the funder’s return has priority;
• Whether the funding agreement can be terminated;
• Whether the claim can be sold;
• Whether settlement requires approval;
• Whether recoveries form part of the insolvency estate.

The funder should conduct insolvency analysis at the contracting stage, particularly where funding is sought because the claimant already faces financial distress.

Third-Party Funding in Investment Arbitration

Third-party funding has attracted particular regulatory attention in investor-state arbitration.

ICSID now imposes detailed disclosure requirements, while UNCITRAL Working Group III continues to consider draft provisions concerning the regulation of third-party funding in investment disputes. The UNCITRAL work addresses approaches including disclosure, conflicts, security for costs and possible restrictions on particular forms of funding.

An investor considering a treaty claim connected with Turkey should review:

• Applicable investment treaty;
• ICSID or UNCITRAL rules;
• Disclosure requirements;
• Funder ownership;
• Security-for-costs risk;
• Treaty-specific restrictions;
• Domestic law of the investor and funder.

The commercial arbitration analysis cannot automatically be transferred to investment arbitration.

Practical Checklist for a Funded Party

Before signing a funding agreement, the funded party should confirm:

• The funder’s identity and financial capacity;
• Regulatory status;
• Source of funds;
• Maximum funding commitment;
• Approved budget;
• Whether adverse costs are covered;
• Whether security for costs is covered;
• Whether enforcement is covered;
• Funder return and calculation;
• Settlement authority;
• Control rights;
• Termination grounds;
• Confidentiality and privilege protections;
• Disclosure obligations;
• Data-transfer arrangements;
• Governing law;
• Dispute-resolution clause;
• Effect of insolvency;
• Effect of changing counsel;
• Distribution waterfall;
• Consequences of partial recovery.

Independent legal and financial advice should be obtained before accepting a complex funding structure.

Practical Checklist for Respondents

A respondent learning that the claimant is funded should consider:

• Whether applicable rules require disclosure;
• Whether the funder’s identity has been disclosed;
• Whether owners and controllers should be identified;
• Potential arbitrator conflicts;
• Whether security for costs is justified;
• Claimant’s actual financial condition;
• Funder’s adverse-cost commitment;
• Whether the funding agreement contains relevant termination provisions;
• Whether disclosure requests are proportionate;
• Whether the funder controls settlement or procedure;
• Whether costs are being inflated.

The respondent should not assume that funding proves that the claim is abusive or that the claimant is insolvent.

A security application based solely on the existence of funding may fail and may result in unnecessary costs.

Practical Checklist for Arbitrators

Upon learning of funding, the tribunal should consider:

• Applicable disclosure rules;
• Identity of the funder;
• Ownership and control;
• Arbitrator-funder relationships;
• Law firm relationships;
• Portfolio conflicts;
• Need for additional disclosure;
• Confidentiality;
• Security-for-costs applications;
• Procedural equality;
• Funder control;
• Cost allocation.

The tribunal should avoid requiring full production of the funding agreement without identifying a specific procedural need.

Any order should be proportionate and should protect commercially sensitive information.

Sample Funding Disclosure Notice

A concise disclosure may state:

“The Claimant informs the Arbitral Tribunal, the administering institution and the Respondent that it has entered into a third-party funding arrangement with [full legal name and address of funder]. The funder has an economic interest in the outcome of the arbitration. The Claimant will disclose promptly any material change in the identity, ownership or control of the funder that may be relevant to arbitrator independence or impartiality. This notice does not waive confidentiality, privilege or any objection to the production of the commercial terms of the funding agreement.”

The wording should be adapted to the applicable institutional rules and tribunal directions.

Sample Third-Party Funding Clause for Procedural Orders

A procedural order may provide:

“Each party shall disclose promptly the existence and identity of any non-party providing funding for the pursuit or defence of claims or counterclaims where that non-party has an economic interest in the outcome of the arbitration.

The disclosure obligation is continuing and includes material changes in the funder’s identity, ownership or control.

The Arbitral Tribunal may order disclosure of specific provisions of a funding agreement where necessary to assess arbitrator conflicts, security for costs, control of the proceedings or another identified procedural issue. Any such disclosure may be subject to redaction and confidentiality protection.”

Frequently Asked Questions

Is third-party funding prohibited in Turkish arbitration?

No Turkish statute expressly prohibits commercial third-party funding of arbitration. Its validity must be assessed under general contract law, mandatory rules, public policy, professional obligations and the terms of the particular arrangement.

Is there a specific Turkish third-party funding law?

Law No. 4686 does not contain a dedicated third-party funding regime. Applicable institutional rules and procedural orders may impose additional obligations.

Must a funded party disclose the funder?

The answer depends on the applicable rules and tribunal orders. ICC and ICSID proceedings contain express disclosure obligations. Even where no express rule applies, early identity disclosure may be advisable for conflict checks.

Must the complete funding agreement be disclosed?

Not automatically. Disclosure may be limited to the existence and identity of the funder. Specific clauses may be ordered where relevant to security, conflicts, control or termination.

Can the respondent obtain security for costs merely because the claimant is funded?

Funding alone should not be sufficient. The tribunal should consider the funded party’s financial position, adverse-cost arrangements, enforcement risk and other circumstances. The ICSID Rules expressly state that funding alone does not justify security.

Can a funder be ordered directly to pay adverse costs?

Usually not without a jurisdictional basis. The funder is generally not a party to the arbitration agreement. The funded party normally remains liable under the award.

Are funding returns recoverable as arbitration costs?

Recovery is uncertain. Turkish arbitration legislation and ISTAC cost provisions do not expressly classify a funder’s contingent return as a recoverable arbitration cost.

Does the Turkish 25% lawyer fee limit apply to funders?

Article 164 regulates lawyers’ fees. It does not expressly impose the same ceiling on an independent commercial funder. Arrangements involving lawyers, affiliated funding entities or transfer of disputed rights require careful professional-law analysis.

Can a funder control settlement?

The funding agreement may provide consultation or consent rights, but excessive control may undermine the funded party’s autonomy and counsel’s independence.

Can funding be obtained after arbitration starts?

Yes. Any disclosure required by the applicable rules should then be made promptly, and conflict checks should be repeated.

Can respondents use third-party funding?

Yes. Funding can support a defence, counterclaim or portfolio of disputes.

Does funding affect enforcement of the award?

Funding itself should not prevent enforcement. Concealed conflicts, invalid assignment, serious procedural unfairness or public-policy violations may create separate risks.

Can the funder own the claim?

That depends on whether the arrangement is funding or an assignment. Transfer of the claim may affect standing, jurisdiction and the arbitration agreement and should be analysed separately.

Conclusion

Third-party funding in Turkish arbitration can provide valuable access to capital, risk management and financial flexibility.

It allows a party to pursue a meritorious claim without bearing every legal and expert expense directly. It may also permit a company to preserve liquidity and transfer part of the arbitration risk.

However, funding introduces a new participant with a direct economic interest in the outcome.

The funding agreement must therefore be structured carefully.

Turkish International Arbitration Law does not contain a specialised third-party funding regime. The agreement’s validity must be assessed under the Turkish Code of Obligations, applicable institutional rules, professional obligations and public-policy principles.

Disclosure is one of the most important procedural questions.

Law No. 4686 imposes independence and disclosure duties on arbitrators but does not create an express general funder-disclosure article. Institutional rules may fill that gap. The ICC Rules effective from 1 June 2026 and the ICSID 2022 Rules require disclosure of the existence and identity of relevant funders. The 2024 IBA Guidelines also treat persons with direct economic interests as relevant to conflict analysis.

A prudent funded party should therefore disclose the funder’s identity early enough to permit meaningful conflict checks.

This does not mean that the entire funding agreement must be produced. Commercial return terms may remain confidential unless they are relevant to security for costs, control, termination or another identified procedural issue.

Security for costs should not be ordered automatically merely because funding exists.

The tribunal should consider actual inability to pay, the funder’s adverse-cost commitment, asset location, procedural conduct and the effect of security on access to arbitration.

Cost allocation also requires careful distinction. Legal fees, expert expenses and institutional charges may constitute arbitration costs. The funder’s contingent return represents the price of financing and is not automatically recoverable from the losing party.

The funder’s control rights should remain proportionate.

The funded party must retain authority over its claim, while counsel must remain professionally independent. Settlement, budget, termination and change-of-counsel provisions should be negotiated before the arbitration begins.

Confidentiality and privilege should also be protected during funder due diligence. Sensitive evidence should not be disclosed without confidentiality, cybersecurity, data-protection and use restrictions.

Ultimately, third-party funding should support the arbitration rather than create a second dispute.

A transparent, adequately capitalised and carefully documented arrangement can improve access to justice and allow a commercially sound claim to proceed.

A poorly drafted agreement may instead generate conflicts, security applications, settlement disputes and enforcement risks.

The funding decision should therefore be treated as part of the overall arbitration strategy, not merely as a method of paying legal invoices.

Legal Disclaimer: This article is provided for general informational purposes only and does not constitute legal advice. The validity, disclosure and consequences of third-party funding depend on the funding agreement, arbitral seat, governing law, institutional rules, identity of the funder, professional obligations, cost exposure and intended enforcement jurisdictions. Case-specific Turkish and international legal advice should be obtained before entering into or challenging a third-party funding arrangement.