A previous version of this article was first published in Vannin Capital's Funding in Focus Series in May 2016.
From a local legal practitioner's view, the Middle East has not been an area of mainstream activity in dispute resolution funding. While there are a few examples of funded disputes here, it is only recently that funding has started to gain more tangible traction with potential litigants and the market has shifted gear. This is in part due to increased knowledge and awareness of funding amongst litigants and lawyers in the region, while developments in local legal systems have helped to shape the landscape into one where funders are more ready to invest. This article outlines some of the reasons why funding is starting to take off in the United Arab Emirates ("UAE").
UAE not a traditional market for funding
The past 12 months have seen a notable increase in awareness of third party funding in the UAE market, both amongst corporates and legal practitioners. Funding has been, and continues to be, a topic of discussion in legal and financial industry forums. But there is not yet a significant uptake of funding for disputes. What are the reasons for this?
Third party funding of litigation or arbitration is not prohibited under UAE law. It is also not a case of an absence of the right kind of disputes – quite the opposite in fact in the UAE since the mid-2000s, particularly with the growth of financial, investment and construction-related disputes.
It is fair to say that funders have long seen the UAE’s potential as a market for funding, but until recently have treated it extremely cautiously as an investment opportunity. This is borne out by the very few known examples of funded court litigation (in a relatively small market by size) and no real visibility of the use of funding in local arbitration. This perhaps owes something to the view that Middle Eastern jurisdictions have not traditionally provided the level of certainty and predictability of legal processes and outcomes that a funder may look for.
Undoubtedly there are claimants who have been discouraged from pursuing meritorious claims by jurisdictional risks of litigating in the local court systems. Arbitration has also faced challenges over the years in regional jurisdictions, particularly when it comes to upholding the arbitral process and the enforcement of awards. It is therefore unsurprising that funders have until recently found little encouragement to actively fund claims. So, what has changed?
From a legal perspective, two significant developments have signaled a change in the outlook for funding: (1) the rise of arbitration as a dispute resolution mechanism with a corresponding improvement in treatment of arbitration by the local courts; and (2) the establishment of financial free zones in Dubai and, much more recently, in Abu Dhabi, with specialist financial courts to support the increase in complex and high-value commercial transactions and related litigation. The result is a sophisticated legal landscape with international familiarity and increased certainty of process and outcomes. As such, the UAE has become a more attractive jurisdiction to litigants and funders alike.
Developing this theme, the remainder of this article considers the Dubai International Financial Centre (“DIFC”) Courts and the establishment of the Abu Dhabi Global Market (“ADGM”) to illustrate the current direction of litigation in the UAE.
The DIFC Courts were established nearly 12 years ago. Over the last five years in particular, a steady increase in case load has been accompanied by significant year-on-year growth in aggregate values in dispute. This suggests that more complex cases and higher value cases are being brought before the Courts.
The following is a summary of how the Courts are being used and gives an indication of where funding opportunities may arise:
- Sector coverage in DIFC Courts disputes is gradually broadening. Banking and finance related disputes continue to make up a significant body of the case load, in addition to more commonplace shareholder, property and other commercial contract disputes. Employment disputes are a mainstay of the Small Claims Tribunal, with some larger and more complex employment claims being heard in the Court of First Instance.
- In terms of subject matter, the past few of years have also seen 'firsts' in terms of cases in the DIFC Courts involving, amongst other things, insurance and reinsurance; a derivative shareholder action; professional negligence; litigation funding, construction and education. That is not say there have been a proliferation of cases from these sectors, but it does indicate a broadening spectrum in the DIFC courts’ case load since the expansion of its jurisdiction in 2011.
- As a result of the increasing popularity of the referral of contractual disputes to DIFC-LCIA arbitration, there is also a growing role for the DIFC Courts to play as the supervisory courts for DIFC-seated arbitrations.
- A robust and sophisticated DIFC insolvency regime is also likely to be a driver for increased volume of claims in the DIFC Courts going forward.
There is a generally heightened awareness of funding amongst DIFC legal practitioners and potential claimants. I have direct recent experience of potential claimants who are actively exploring third party funding for litigation in the DIFC Courts. The DIFC Courts are currently in a period of consultation over a draft Practice Direction in relation to third party funding; a clear recognition of the rise of funding in international litigation and a desire to encourage the use of funding while ensuring minimum standards and protections for parties. An increase in funded cases before the DIFC Courts is therefore anticipated.
Developments in DIFC law may also create opportunities for more funded claims. Two particularly noteworthy developments in the past 18 months involve the recognition and enforcement of arbitral awards and foreign judgments through the DIFC Courts as a conduit jurisdiction for enforcement into the wider UAE. This has particular significance where enforcement of arbitration awards and foreign judgments directly through the local courts (i.e. outside the financial free zones) remains a challenging area, albeit it should be recognised that there have been successes with some local court enforcements of foreign arbitration awards in recent years.
The seminal arbitration award enforcement case in the DIFC Courts is Banyan Tree Corporate Pte Ltd v Meydan Group LLC (a Clyde & Co case) in which the Courts for the first time ordered the recognition and enforcement of a Dubai-seated DIAC award against a defendant domiciled in Dubai outside the DIFC, in circumstances where neither the parties nor the award had any connection with the DIFC. Many similar award enforcement claims have followed in the wake of Banyan Tree as arbitration award creditors take advantage of the DIFC Courts enforcement regime as a route to enforcement ‘onshore’ and, possibly, beyond through the application of regional treaties. This is a trend I expect will continue.
The use of the DIFC Courts as a conduit jurisdiction for enforcement of foreign judgments is a much more recent but equally significant development. In DNB Bank v ASA Gulf Navigation Holding PJSC the DIFC Court of Appeal held that the Courts have jurisdiction to recognise and enforce foreign judgments in circumstances where the neither the parties nor the judgment for which enforcement is sought have any connection with the DIFC, and without delimiting the scope of the enforcement to the territory of the DIFC. A track record of successful onward enforcement of such DIFC judgments through local court execution procedures will hopefully follow in time.
In conclusion, while there is not a clear pattern of cases coming before the DIFC Courts, save perhaps for the current trend of arbitration award enforcement claims, which is now likely to be followed by an increase in foreign judgment enforcement claims, the DIFC Courts are gradually being used for a growing variety of disputes involving a range of different sectors. As such, the DIFC is likely to be the focus of funding activity in the UAE.
Abu Dhabi Global Market
The ADGM is a nascent legal jurisdiction established as a financial free zone in Abu Dhabi in 2013. Like the DIFC, the ADGM is a common law jurisdiction with its own judicial authority and court system that is independent of the UAE Federal Ministry of Justice, while being complementary to it.
Unlike the DIFC, the ADGM has adopted as its legislative foundation a wholesale importation of English common law together with select English statutes and specifically enacted ADGM laws. There are some carve-outs of provisions of the English statutes which are not relevant or applicable to the ADGM and/or the UAE, or which have been modified or amended under the enacting ADGM legislation to apply in context. This adoption of the laws of another jurisdiction is a particularly novel and intriguing feature of the ADGM that differentiates it from the DIFC.
The procedural rules of the ADGM Courts were issued on 31 May 2016, together with supporting Practice Directions and Conduct Rules. The Courts themselves expected to be open for business soon thereafter. Lord David Hope (a former judge of the English courts) is appointed as the inaugural Chief Justice, with four other international judges appointed to the bench from England, Australia, New Zealand and Hong Kong.
The potential for interaction between the DIFC Courts and the ADGM Courts promises interesting opportunities for inter-Emirate judgment enforcement. This is essential if the ADGM Courts are to enjoy the success of the DIFC Courts. In a promising start, in April 2016 the ADGM Courts and the Abu Dhabi Judicial Department signed a Memorandum of Understanding ("MOU") for judicial cooperation in legal and judicial matters. The MOU is to establish a framework for judicial cooperation between the ADGM Courts and the Abu Dhabi courts, specifically with respect to the reciprocal recognition and enforcement judgments, orders and arbitration awards. The MOU does not have legislative force and is framed as a "sound basis for cooperation and coordination" between the courts. The MOU was followed in May 2016 by a very similarly drafted Memorandum of Understanding between the ADGM Courts and the UAE Ministry of Justice concerning such matters of judicial cooperation between the ADGM Courts and the Federal Courts in the UAE.
A point of interest to claimants and funders is likely to be whether the ADGM Courts will follow the DIFC in providing a conduit jurisdiction for enforcement of arbitration awards and judgments. Much will depend on the interpretation and application of ADGM’s laws, and it will probably be some time before there is a firm position on the point. Like the DIFC before it, the early years of the ADGM are likely to see jurisdictional issues feature heavily in the Courts’ caseload, which will in time define more clearly the role the Courts will play in the UAE legal system.
The future for funding in the UAE
Drawing these themes together, what does the UAE offer for claimants and funders? The short answer is: more now than ever before. The UAE is entering a new phase in the way corporates think about litigation and how funding can help achieve a variety of commercial and financial objectives. The next 12-18 months will see a rise of funded cases in the financial courts and in regional arbitration, with the UAE as the focal point.
- ARB-003-2013 and CA-005-2014; the case was led by Keith Hutchison (Partner, Dubai) and Alec Emmerson (Consultant, Dubai).
- The DIFC has its own bespoke laws drafted with influence from a number of international jurisdictions. English common law authorities are frequently relied on in legal argument before the DIFC Courts. English common law also provides a default position for DIFC law where the there is no specific DIFC law on a particular issue and no other law otherwise applies according to the application of civil and commercial laws in the DIFC.
- ADGM press release, 19 April 2016.