Third-Party Funding in Arbitration: A Game Theory Approach to Analyze Its Impact on the Construction Industry

Construction and engineering arbitration proceedings often require significant costs, which can discourage claimants from pursuing their legitimate and meritorious claims. Therefore, third-party dispute funders have emerged to support claimants in pursuing their claims despite the cost-intensive nature of such cases. While there is a growing interest in third-party funding (TPF) as a mean to address this issue, there is a lack of analytical research evaluating its impact on the process and outcomes of resolving construction and engineering disputes. This research aims to analyze the impact of introducing third party funding to the arbitration of construction and engineering disputes by developing a game theory model that incorporates the strategic interactions between the funder, claimant, and respondent along with their respective expected payoffs. Subsequently, a Monte Carlo simulation was executed on the developed game model to analyze how equilibria strategies would change upon varying the model’s key parameters. The simulation has shown that the introduction of TPF has increased the total number of filed arbitration cases and increased the expected outcomes for both impecunious claimants and claimants with the ability to self-fund their claims. Moreover, the simulation has also shown a significant decrease in the settlement rates of the cases that were funded by a third party. It was evident in this study that introducing third-party funding has contributed to shaping the strategic dynamics and monetary rewards of resolving construction and engineering disputes through arbitration. This study contributes to the body of knowledge by quantitatively modeling the impact of introducing third-party funding to the arbitration of construction and engineering disputes.