Recent court decisions in China confirm legality of funded arbitration

In two interconnected decisions, different courts in the People’s Republic of China (PRC) have confirmed the legality of third-party finance arrangements for arbitration under PRC law and that the existence of such legal finance was not a valid ground on which to challenge an award.

Significance of the recent decisions for third-party funding in PRC

These decisions are significant because they are the first cases in which PRC courts have considered disclosure, conflicts of interest and public policy issues in the context of legal finance.

The decisions concern a CIETAC arbitral award rendered in a dispute under an aircraft operating lease agreement[1]. The claimant had obtained a successful award in December 2021 and had used legal finance to finance its claims.

The respondents resisted enforcement of the award before the Wuxi Intermediate Court and, when this effort failed, sought to set aside the award before the Beijing Fourth Intermediate Court. Their arguments for set-aside were based on an alleged conflict of interest with the arbitrator and the assertion that the legal finance company’s access to case information violated the confidentiality of the proceedings.

Both the Beijing and Wuxi courts held that there was no reasonable basis for the arbitrator to recuse himself and insufficient evidence that the impartiality of the arbitral tribunal was compromised. In fact, the claimant had voluntarily disclosed the existence of financing to the tribunal, and both parties had exchanged opinions and evidence on the legality of the financing agreement during the proceedings. Both PRC courts also held that the existence of legal finance did not breach the confidentiality requirement.

The implications for legal finance in the region

Although PRC courts are not bound by these decisions in future cases (given the PRC is a civil law jurisdiction), the judgments provide clarity on the legality of the use of legal finance and indicate the recognition by Chinese courts of its utility in arbitration. This development in the PRC follows other Asian jurisdictions, such as Singapore and Hong Kong, that have adopted friendly positions to legal finance for arbitration proceedings to enhance their competitiveness as arbitral seats.

[1] Ruili Airlines Co. Ltd. and Others v. CLC Aircraft Leasing (Tianjin) Co., Ltd.