Third-party Funding in the Middle East: A Step-by-step Process

Marla Decker

Lake Whillans closely follows developments around the world related to third-party funding.  As third-party funding becomes mainstream in jurisdictions like the U.K. and U.S., it is not surprising that other jurisdictions have begun to pass laws that expressly permit third-party funding, effectively recognizing the utility of third-party funding to claimholders, the lack of detrimental effect to a legal system, and the fact that third-party funding helps make the jurisdiction an attractive forum for resolving commercial disputes.  Jurisdictions in the Middle East have recently followed the trend, and we asked Thomas Snider, Head of Arbitration for Al Tamimi & Company, the largest law firm in the Middle East, and his colleagues, Jane Rahman and Khushboo Shahdadpuri, to educate us on the status of third-party funding in the Middle East

Introduction

  1. Significant growth in the sector over the last decade has made third-party funding (“TPF”) a well-developed and relatively sophisticated industry with products that can be adapted to meet the needs of an ever-increasing number of interested users. TPF can be obtained for a variety of costs such as legal fees, case-related disbursements, and costs of appeal and/or enforcement where they are applicable. It is also possible to find funders who will use the relevant legal claim as collateral to obtain financing for, amongst other things, capital for the TPF user during the duration of the claim.
  2. Early adopters of TPF that were quick to move away from doctrines that prohibited its usage, such as champerty and maintenance, include jurisdictions such as Australia, England and Wales, and the United States. Recently, TPF has had significant movements in Singapore and Hong Kong, where legislation was revised to expressly allow its use and growth. As TPF continues to make inroads worldwide, we comment on the current landscape of TPF in the Middle East region.

TPF in the Middle East

  1. TPF has been generating increasing interest in the Middle East, both from potential funders and from potential users. As a central hub for global trade, the region regularly sees substantial high-value disputes involving sophisticated entities.
  2. Most of the legal systems in the Middle East are either civil law or Sharia law jurisdictions. As a result, they do not have the historical relic of the common law doctrines of champerty and maintenance.
  3. While there is no express provision for TPF in Sharia law, it is arguable that the principles of Sharia law do not prohibit it. In fact, there are some features of Islamic finance transactions that may be said to be analogous to TPF. Three of the key features of Sharia law are the prohibition of riba (interest), gharar (excessive speculation), and maisir (gambling). TPF does not necessarily conflict with any of these principles. It is generally not interest that is awarded to the funder in a successful case; rather it is a share of awarded damages in a pre-agreed ratio. Excessive speculation and gambling are also likely to be absent in light of the extensive due diligence and research that often goes into a potential case before funding is granted. However, Sharia law will likely prohibit investments in (or receiving funds from) businesses or ventures that are considered haram (sinful) and funders will need to keep this in mind when considering funding disputes that pertain to Sharia
  4. Notwithstanding this, the use of TPF is gaining more prominence within the Middle East as innovative free-zone jurisdictions that are increasingly international litigation- and arbitration-friendly, continue to grow in the region. This is perhaps most discernable in the UAE.

UAE

  1. Possessing a unique legal framework, the UAE is traditionally a civil law system influenced by the Egyptian Civil Code in which Sharia law provides guiding principles and sources of law. In addition, the UAE contains financial free zones which operate as autonomous jurisdictions modeled on the common law, most notably the Dubai International Financial Centre (“DIFC”) and the Abu Dhabi Global Market (“ADGM”).
  2. These financial free zones have or are expected to enact regulations and legislation aimed at allowing the use of TPF. In explicitly allowing for TPF in its rules, the UAE has signaled its clear intent for the growth of TPF in the foreseeable future.

Dubai

  1. The most prominent financial free zone in Dubai remains the DIFC. Within the DIFC, the DIFC Courts are an independent English language common law judiciary with jurisdiction over civil and commercial disputes. On 14 March 2017, the DIFC Courts enacted Practice Direction 2 of 2017, aimed at regulating the use of TPF in the DIFC Courts. Among other features, this Practice Direction provides that:
  • the funded party must disclose the existence of the TPF and identity of the funder, but not the TPF agreement itself unless otherwise ordered to do so;
  • the DIFC Courts are to take account that the relevant party is a funded party when making determinations on applications for security for costs; and
  • the DIFC Courts have the inherent jurisdiction to make costs orders against a third party, which includes a funder, where this is deemed appropriate.
  1. The DIFC Courts have also made orders recognizing the validity of funding arrangements entered into by the parties, as seen in the case of Vannin Capital Pcc Plc v Rafed Abdel Mohsen Bader Al Khorafi and others where the Respondent was ordered to pay back to the funder 50% of the costs of the proceedings funded in the underlying substantive case.
  2. In a similar move recognizing the increasing use of TPF, the latest revised draft arbitration rules for the Dubai International Arbitration Centre (DIAC), which are currently awaiting approval before enactment, include provisions that permit an arbitral tribunal to order the disclosure of TPF arrangements in the proceedings.

Abu Dhabi

  1. The ADGM, in Abu Dhabi, is home to the ADGM Courts. As the ADGM Courts apply English law, the common-law restrictions on TPF would arguably have applied until the recent enactment of the Litigation Funding Rules 2019 by the ADGM Courts on16 April 2019. The first of its kind in the region, these rules regulate the requirements of a funder as well as the conditions of an enforceable litigation funding agreement. The enactment of these rules is testament to the fact that TPF has become a “common component in financing litigation and arbitration proceedings in many leading civil and common law jurisdictions[1] and is aimed at offering certainty on the enforceability of funding arrangements in the ADGM.

Other jurisdictions in the region

  1. The global changes towards TPF of disputes, the rise in the use of international arbitration and litigation in the Middle East, and the ever-increasing cost of international arbitration and litigation, all point to a likely increase in the use of TPF in the Middle East. While many of the claimants in the region are typically large corporations in sectors such as energy, construction, and infrastructure, with adequate resources to pursue dispute resolution, they are beginning to consider the use of TPF in order to spread their risk. Other parties are considering TPF to take the cost of funding a dispute off their balance sheet (some forms of TPF will allow for this to occur). And many parties wish to benefit from the provision of working capital that TPF is able to provide through using the potential proceeds of the dispute as collateral for business financing.
  2. Apart from the UAE, other jurisdictions in the region, such as Egypt or Qatar, do not have laws that expressly allow for TPF. Equally, however, they do not have laws that explicitly prohibit it, which, as explained above, is unsurprising given that these jurisdictions are comprised of civil law and/or Sharia law jurisdictions. Given the liberalization of the rules pertaining to TPF in the UAE, it is hoped that the other jurisdictions in the region, especially those containing financial free zones like those in the UAE, will adopt similar provisions towards TPF step-by-step.

[1] ADGM Courts issue Public Consultation on litigation funding rules, 7 Nov 2018, https://www.adgm.com/media-center/announcement-listing-page/media-releases/adgm-courts-issue-public-consultation-on-litigation-funding-rules (last accessed 18 July 2019).

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