This article considers the use and regulation of third party funding in the United Arab Emirates (UAE), historical impediments to the proliferation of third party funding, recent legal developments that may favour the growth of third party funding in the market, and views on the future landscape of third party funding.
This article is part of Thomson Reuters Practical Law’s global guide to arbitration. For a full list of jurisdictional Q&As visit global.practicallaw.com/arbitration-guide.
While third party funding has existed in some form or another for some time, its use in recent years has significantly expanded in a number of jurisdictions across the world, both in court litigation and in both international and domestic arbitration. This article provides:
- An outlook on the use and regulation of third party funding in the United Arab Emirates (UAE).
- Historical impediments to the proliferation of third party funding.
- Recent legal developments that may favour the growth of third party funding in the market.
- Views on the future landscape of third party funding.
What is third party funding and why it is used?
Third party funding is effectively a mechanism by which a party (the funder) who is unrelated to the parties in the dispute provides financial support to one of the parties in the dispute. Typically, this financial support will cover the party’s legal costs and disbursements. These costs (whether they are incurred in litigation or arbitration) can often be substantial and therefore sometimes discourage legitimate actions from being commenced. Third party funding provides an avenue to ensure that the cost of the legal proceedings is not an impediment to a party’s right to bring an action.
This was, and remains, particularly attractive for parties who could not afford the costs of the dispute and/or did not have the cash liquidity for the costs of litigation or arbitration, which can in some cases be disproportionately high compared to the amounts in dispute. This is particularly true where the claim is complex and requires a substantial amount of legal analysis and expert opinion.
In today’s market, third party funding is also used by parties who want to manage their financial risk and the exposure associated with litigation or arbitration, by removing these costs from their company’s balance sheet. By seeking external funding, a company can ensure that its financial resources are not diverted away from the day-today operations of their business towards often costly and lengthy proceedings.
Each funding arrangement is different, but generally a third party funder will be reimbursed its investment, along with an agreed percentage of any sum recovered in the judgment or award.
Third party funding can be used by either claimants or defendants/respondents, and the funding arrangement put in place is tailored to each case or portfolio of cases.
Can any claim benefit from third party funding?
In theory, this is at the discretion of the third party funder. However, the nature of the arrangement dictates that the claim or counterclaim must have a good chance of succeeding for a third party funder to invest in it. In practice, this means that funders undertake a thorough due diligence exercise of the claim and of the party requesting funding, to assess whether the claim is sufficiently meritorious to warrant third party funding. Although this vetting process will usually result in some initial up-front costs, it can provide the funded party with a degree of assurance as to the merits of its claim (assuming funding is granted). While this does not remove the inherent litigation risk of disputes, it is a positive by-product of the third party funder’s involvement at an early stage.
Third party funding in the UAE
Third party funders tend to gravitate to jurisdictions that are well established, predictable, consistent, and transparent. In addition, where the funding relates to an arbitration, third party funders like jurisdictions in which an arbitral award is enforceable. Historically, these jurisdictions have included the US, the UK, Australia, France and Germany, among others.
While the UAE has not traditionally been a jurisdiction that has attracted third party funders, it has become an increasingly attractive forum for resolving disputes both locally, regionally, and internationally. This is, in part, due to Dubai being seen as an increasingly attractive hub to do business in the Middle East and Africa. It is also due to the existence of both common and civil law jurisdictions in the UAE, and a number of other fairly recent developments in the UAE’s legal landscape (see below, Recent developments in the UAE).
Historical challenges to third party funding in the UAE
The scarcity of third party funders’ interest in the UAE in the past was not due to a lack of demand. The disputes landscape in the UAE, particularly in Dubai and Abu Dhabi, has seen a continuous increase in largescale and complex disputes in sectors that, by their very nature, attract funders in other jurisdictions (for example, construction, financial and foreign investment disputes).
Although demand was not an issue, other concerns arose. Some of the challenges to the use of third party funding in the UAE are set out below.
Certainty and predictability of legal proceedings
An assessment of the jurisdiction in which the proceedings are taking place (in the case of litigation) or the courts in which the award will be enforced (in arbitration) forms part of the due diligence exercise that any third party funder conducts before their investment. In the UAE, the international community’s lack of familiarity with the legal system, compounded with the protracted nature of court proceedings and a perceived lack of transparency, has been a barrier to the proliferation of third party funding.
While certainty about the outcome of legal proceedings can never be guaranteed regardless of the jurisdiction, an element of certainty is required to allow parties to put in place an effective funding arrangement.
Courts’ approach to arbitration
In the case of funding arbitrations, the extent to which the enforcing court favours arbitration is an important factor in determining how “safe” the jurisdiction is from a legal perspective. Although arbitration in the Middle East is historically a preferred method of resolving disputes, the UAE courts have in the past issued a number of decisions which are viewed as not adopting an arbitration-friendly approach.
Regulation of third party funding
The legality of third party funding is, for obvious reasons, a prerequisite for a party’s ability to use it. This is governed by the laws of the seat of the arbitration or the laws of the court that has jurisdiction over a case. While third party funding is not prohibited by law in the UAE (nor indeed in the wider Middle East region), it has until recently not been regulated. This has created uncertainty around the permissibility of its use, which in turn meant that it was not an obvious destination for third party funders.
Recent developments in the UAE
The UAE has, in recent years, seen a number of significant developments both onshore and offshore, that have largely alleviated the concerns discussed (see above, Historical challenges to third party funding in the UAE). This has made the UAE a much more attractive jurisdiction for dispute resolution in general and, as a result, for third party funders.
The developments in the UAE, both onshore and offshore, are discussed below.
Onshore: New Federal Arbitration Law
On 3 May 2018, the UAE published its first stand-alone arbitration law (Federal Law No. 6 of 2018) (New Arbitration Law), repealing and replacing the arbitration chapter of the UAE Civil Procedures Law No. 11 of 1992 (CPC). The New Arbitration Law is largely based on the United Nations Commission on International Trade Law (UNCITRAL) Model Arbitration Law, and embodies a more modern and favourable approach to arbitration, with fewer restrictions imposed on both the parties and the arbitral tribunal. The new law is largely untested, but should enable proceedings to be concluded with more certainty, speed and efficiency.
In particular, and contrary to the CPC (which remained silent as to the finality of an arbitral award), Article 52 of the New Arbitration Law provides positive affirmation that an award is final, binding and that the matter cannot be pursued further. The award has the same executory effect as a court judgment as recognised by the competent UAE Federal Court of Appeal.
Further, the grounds on which a party can seek annulment of the award in the New Arbitration Law are now far more limited, coupled with a positive obligation on a court to recognise and enforce arbitral awards in a shortened period of time.
Although the new law is widely untested, it does provide a clearer framework for the enforcement of arbitral awards, bringing the UAE more in line with international standards.
Offshore: Dubai International Financial Center (DIFC)
On 14 March 2017, the DIFC implemented Practice Direction No. 2 of 2017 on Third Party Funding in the DIFC Courts (Practice Direction).
The Practice Direction sets out the requirements that funded parties must observe in the DIFC courts, and how they should interact with funders in legal proceedings. Notably, it provides that:
- Parties who have entered into a funding arrangement with a litigation funder must put every other party to the relevant dispute on notice of the fact that it has entered into a litigation funding arrangement in connection with the proceedings, and of the identity of the litigation funder. Unless the DIFC courts order otherwise, the party does not need to disclose a copy of the litigation funding agreement entered into (section 4, Practice Direction).
- The DIFC courts can take into account the fact that a party has disclosed that it has entered into a litigation funding arrangement when making determinations on applications for security for costs. However, the fact that a party is a funded party will not in itself be determinative (section 8, Practice Direction).
- The DIFC courts have inherent jurisdiction to make costs orders against third parties, including third party funders, where it deems it appropriate in the circumstances of the case (section 9, Practice Direction).
The Practice Direction does not have retroactive effect (that is, it only applies to third party funding arrangements entered into on or after 14 March 2017).
The practical effect of the Practice Direction is not fully known as it appears that the issues it raises have not been debated before the DIFC courts. However, the Practice Direction is a significant development for the following reasons:
- Third party funding was not prohibited before the issuance of the Practice Direction. However, its enactment emphasises the permissibility of third party funding in the market.
- There is a strong emphasis in the Practice Direction on transparency of the third party funding arrangement. This acknowledges and addresses the legal community’s concerns in relation to the ethical considerations around the motives of third party funders and the extent to which their role may affect the strategy of the case and any potential settlement negotiations between the parties.
- The Practice Direction also seeks to balance the need for transparency with the confidentiality between the parties, by expressly providing that the terms of the litigation funding arrangement must not be disclosed unless ordered otherwise by the court. Presumably, although this is yet to be tested, the DIFC courts will only request that the funded party disclose a copy of the third party funding agreement if there is a concern about the way in which the funder is being remunerated and if/whether this has any impact on the litigating party’s autonomy.
Abu Dhabi Global Market (ADGM)
The ADGM is a common law jurisdiction located in the Emirate of Abu Dhabi. It is similar to the DIFC in that respect but, unlike its Dubai equivalent, the ADGM adopts English laws wholesale (including the principles of equity), and has incorporated a number of English law statutes by express reference.
The ADGM Courts, Civil Evidence, Judgments, Enforcement and Judicial Appoints Regulations 2015 (ADGM Regulations) expressly addresses litigation funding agreements and the conditions applicable to them in the ADGM (Article 225). The following conditions must be satisfied for a litigation funding agreement to be valid in the ADGM:
- The funder must be a person, or a person of a description, prescribed by the Chief Justice (that is, a natural or legal person).
- The agreement must be in writing.
- The agreement must not relate to proceedings that cannot be the subject of an enforceable conditional fee arrangement or to proceedings of any such description as may be prescribed by the Chief Justice.
- The agreement must comply with such requirements (if any) as may be prescribed by the Chief Justice.
- The sum to be paid by the litigant must consist of any costs payable to him/her in respect of the proceedings to which the agreement relates, together with an amount calculated by reference to the funder’s anticipated expenditure in funding the provisions of the services.
- The sum paid to the litigant must not exceed such percentage of that anticipated expenditure as may be prescribed by the Chief Justice in relation to proceedings of the description to which the agreement relates.
Similar to the DIFC Practice Direction, the ADGM Regulations provide that a party who has entered into a third party funding arrangement must put all the other parties on notice of the fact that he/she has entered into such an agreement in respect of the relevant dispute. There is no express requirement that a copy of the agreement be disclosed (or indeed that a copy of the agreement is not to be disclosed, as is the case with the DIFC Practice Direction). However, this appears to be implied by Article 225(6), which provides that a litigant who enters into a litigation funding agreement in respect of proceedings must put every other party to the relevant dispute on written notice (in accordance with subsection (7)) only of the mere fact that they have entered into a litigation funding agreement in respect of the relevant dispute.
The future of third party funding in the UAE
The recent legal developments in the UAE have instilled confidence in the market and are promising as to the future of third party funding in the region. Further, the onshore UAE legal system is based on civil law. As a result, it did not inherit many of the historical impediments to third party funding (such as champerty and maintenance rules) faced by other common law jurisdictions. This is a significant advantage, and while the Middle East may be on the back foot in terms of third party funding as compared to other more mature jurisdictions, once the use of third party funding becomes more prevalent, it will not be slowed down by those historical impediments faced by other jurisdictions.
Zachary Krug, a Senior Investment Officer at Woodsford Litigation Funding, gave the firm his views on the future of third party funding in the UAE:
“The last year has been an exciting time in the development of litigation funding in the UAE. In particular, the DIFC Court’s Practice Direction was a very positive step, providing clarity on the permissibility of funding and important issues like disclosure.
Moreover, it led global funders and law firms in the region to engage in a conversation about the use of funding. In turn, funders became familiar with the region’s legal institutions and gained comfort that legal outcomes are predictable, consistent and enforceable, which are key to any funder’s decision-making.
At Woodsford, we have certainly seen an increase in inquiries from the region in the last year. The majority of inquiries we have received recently are related to DIFC litigation or DIAC arbitration matters. Further, while the viability of the DIFC as a conduit jurisdiction remains an open question, we have seen a marked increase in efforts to enforce awards onshore.
Looking ahead, we expect to see continued growth as practitioners and in-house counsel become more familiar with the substantial advantages of funding. However, use of funding tacks broadly with other economic and legal developments. While litigation funding as an asset class is uncorrelated to the broader market, its deployment can be correlated to overriding economic conditions. Indeed like litigation itself, which is often somewhat countercyclical, litigation funding can be especially attractive when companies need to preserve cash or are facing economic headwinds. Thus, the UAE’s economic outlook may have a significant impact on whether funding grows incrementally or more substantially in the near term. Either way, we are excited for the next stage of growth” (September 2018).
Nour Kirk, Deputy Registrar in the DIFC courts, had the following thoughts on the future of third party funding:
“We hope that the introduction of Practice Direction No. 2 of 2017 on Third Party Funding (Practice Direction) is a progressive and welcomed development for DIFC Court litigants. Traditionally, third party funding was perceived as falling under the unfavorable doctrines of champerty and maintenance (both of which were prohibited by common law), and also at times used as a way of introducing vexatious, frivolous or malicious claims into the Courts. What we see now, however, is third party funding becoming increasingly and internationally recognised as a means of facilitating access to justice for parties who are either out-of-pocket or seeking to manage their resources in a more efficient manner. This is especially the case where arrangements are made on the basis of the funder only receiving payment of its fees if the claim is successful, since this is a solid means of guaranteeing that the due diligence process, on the merits of the claim, is thorough and detailed.
Although we have not seen an influx of third party funding arrangements as yet in the DIFC Courts, we do anticipate that parties will start reaping the benefits of this resource to allow them to bring meritorious claims, where they may have otherwise been unable to do so. So long as compliance with the Practice Direction is maintained by both parties and funders alike and parties continue to explore settlement options at all stages of the process (without any discouragement at all from funders), the use of third party funding arrangements is a valuable tool for parties to be allowed to bring and manage claims” (September 2018).
A promising future
The UAE has not always been an obvious destination for third party funders. This was in part due to historical reasons, including the lack of legal certainty (given the absence of binding precedent) and perceived transparency in the local courts, the courts’ approach to the enforcement of arbitral awards and the general lack of regulation of third party funding.
More recently, however, the UAE has seen a number of promising legal developments, including the enactment of the long awaited standalone New Arbitration Law and the implementation of the DIFC Practice Direction and the ADGM Regulations, both of which expressly permit and regulate the use of third party funding in these respective legal freezones. It is too early to tell how these changes will affect third party funding in practice. However, their purpose seems to be aligned with the overarching vision of the UAE to be a global hub for business by, among others, ensuring that its legal system is transparent, robust and highly sophisticated (the very traits that have attracted third party funders to other jurisdictions around the world).