An extract from The Third Party Litigation Funding Law Review, 5th Edition
The Dubai International Financial Centre (DIFC) is a free zone within the United Arab Emirates (UAE), which was established in 2004. The DIFC is a common law jurisdiction – an enclave within the UAE's otherwise civil law legal system – and has its own courts (the DIFC Courts), where proceedings are governed by the Rules of the DIFC Courts (RDC), which are closely modelled on the English Civil Procedure Rules. The DIFC also has its own civil and commercial legal framework, which is different from the onshore UAE law. As part of that framework, the DIFC has its own Arbitration Law,2 which is based on the UNCITRAL Model Law. This used to be one of the many differences between the DIFC and onshore UAE; however, onshore UAE arbitration is now governed by the Federal Law No. 6 of 2018, which is also based on the UNCITRAL Model Law. This change brings the UAE into line with internationally accepted standards in terms of procedure and enforcement. It remains to be seen how the new Law will be applied in practice, but this development is likely to offer more certainty and, therefore, likely to make UAE-seated arbitration more attractive to funds.
The UAE, and the Middle Eastern region in general, have not been a traditional market for litigation funding, and that has mostly been because funders have perceived Middle Eastern jurisdictions as not offering the level of certainty and predictability they look for in the legal process. However, the introduction of common law free zones such as the DIFC (and more recently Abu Dhabi Global Market), with their own courts and arbitration laws, gives rise to more attractive new markets for funders.
Since their establishment in 2011, the DIFC Courts have seen their caseload increase steadily, and they are becoming the preferred dispute resolution forum in the region for both local and regional parties, as well as for parties from other international jurisdictions. According to the DIFC's annual report for 2020, the total number of cases before the DIFC Courts, including Court of First Instance, with its Technology and Construction Division and Arbitration Division, Small Claims Tribunal and enforcement proceedings was 882, with an average value of 86,337,354.20 dirhams for cases before the Court of First Instance, including Technology and Construction Division and Arbitration Division; an average value of 120,548.73 dirhams for cases before the Small Claims Tribunal; and with the average value of enforcement cases being 5,221,061.52 dirhams.3 In the first half of 2021, the DIFC Courts reported an increase of 11 per cent in the number of cases before the Court of First Instance compared to the same period in 2020, with 50 per cent of cases brought before the Court of First Instance being opt-in cases where the parties chose the DIFC Courts to resolve their disputes. The number of enforcement cases increased by 8 per cent compared with the number of enforcement cases filed in the first half of 2020, and the value of the enforcement cases filed in the first half of 2021 amounted to 568 million dirhams, which was an impressive increase of 198 per cent from the same period in 2020. These figures reinforce and illustrate the DIFC Courts' record of certainty for business through enforceable judgments. The operational capacity of the Small Claims Tribunal was also strong in the first half of 2021, with 201 claims with a total value of 20 million dirhams having been filed.4 This all, in turn, indicates potential for growth for litigation funding.
Various international funders have funded disputes in the DIFC in the past or have expressed interest in doing so in the future. In terms of physical presence, Omni Bridgeway, one of the companies offering litigation funding services, has an office in the DIFC.5
Legal and regulatory framework
Established in 2004, the DIFC is a relatively new common law jurisdiction. As a result, it does not have the same history of changing attitudes to third party funding (TPF) and champerty as that shared by other common law jurisdictions. DIFC legislation is silent on the issue of TPF and champerty, but, having its origins in the English common law system, the DIFC jurisdiction has inherited much of the same modern approach to these issues.
The position in England is that maintenance and champerty are no longer crimes or torts under English law, but that champertous agreements, as a matter of public policy, are unenforceable. TPF agreements, if properly structured, have been held to be in the public interest and not champertous. This is relevant, because English court judgments have persuasive authority in the DIFC Courts.
However, any English law precedent must be approached with caution, because the DIFC Courts have issued Practice Direction No. 2 of 2017 (PD), which has created new rules that are similar, but not identical, to the English law position.
In adopting the PD, the DIFC Courts have opted for a light-touch approach to regulation, with the main requirement being that of disclosure of the fact of TPF and the identity of the funder. It is worth noting that Subsection 3 of the PD makes it clear that the PD 'is without prejudice to any subsequent determination of the DIFC Courts regarding LFAs [litigation funding agreements] in general or any specific LFA in particular (or any part thereof)'.6 This means that we can expect further pronouncements by the DIFC Courts regarding TPF that will continue shaping the procedural requirements for TPF in the DIFC.
In addition, in September 2019, the DIFC issued DIFC Order No. 4 of 20197 (the Order). The Order addresses the conduct of practitioners in the DIFC and also contains several provisions relevant to TPF.
The Order imposes a general duty to avoid conflicts of interest and this should be considered when undertaking due diligence against the third party funder and in taking instructions from the client without significant third party intervention. The Order also obliges practitioners to refuse to take instructions that are in the interests of the third party funder without express written authority from the client, and imposes a duty to advise clients on the effect and impact of any TPF agreements on the client's potential liability to pay legal fees and expenses. Furthermore, the Order prohibits practitioners from accepting referral fees or benefits from a TPF provider, unless full disclosure is made in writing to the client.
Currently, the TPF market in the DIFC is not regulated, but this may change as the DIFC has been considering expanding the powers of the DIFC Courts to issue regulations regarding TPF (see Section VII).
It is worth noting that while contingency fees, or no-win-no-fee arrangements and agreements whereby a lawyer is rewarded by way of a share of the proceeds, are prohibited in onshore UAE proceedings, there has been a suggestion by the DIFC Courts that reasonable and proper contingency fees would be allowed in proceedings in the DIFC Courts.8 Conditional fee arrangements are permitted subject to disclosure requirements (whereby, in the event that the client is successful, the legal representatives receive an uplift in fees, as opposed to a share in the proceeds).
Structuring the agreement
TPF in the DIFC is growing in popularity but is yet to reach the levels comparable with funding available in other common law jurisdictions. As a result, the TPF agreement structure is borrowed heavily from the structures typical in other common law jurisdictions, and parties can expect to negotiate similar provisions relating to exclusivity, withdrawal, confidentiality, pricing, settlement and liability for costs.
The Abu Dhabi Global Markets Courts (the ADGM Courts) issued the Litigation Funding Rules9 in 2019 and these, together with the Civil Evidence Regulations 2015, prescribe the form of TPF agreements, among other things. The issuance of the Litigation Funding Rules by the ADGM Courts came about as a response to the growing interest in TPF in the region. These Litigation Funding Rules are the first of their kind in the whole Middle East and Africa region and aim to provide both parties and funders with greater certainty in relation to the enforceability of funding arrangements in proceedings for resolving disputes. The Litigation Funding Rules were issued after an extensive review of the TPF frameworks in other jurisdictions and a consultation stage was carried out to ensure that the views of all interested parties were received by the ADGM Courts.
The DIFC Courts have not yet had an opportunity to consider specific clauses in contractual disputes between funders and claimants. In one DIFC case,10 the claimant's funders filed a Part 8 claim with the DIFC Court of First Instance to protect and preserve its interest in the funding agreement following a change of legal representation by the claimant without finalising the replacement payment mechanism under the funding agreement. The funders obtained an order that the defendants pay the sum adjudged by the Court as due to the claimant (in excess of US$11 million) into Court and that this sum be held by the Court until the parties reach settlement or until final award or judgment. This indicates the willingness of the DIFC Courts to uphold the rights of the funders under TPF agreements, which is a positive trend in this jurisdiction.
The PD requires the funded party to disclose the fact of funding and the identity of the funder. The PD also sets out when and how notice must be given. For a standard claim (RDC Part 7), notice must be given in the case management information sheet, which has to be submitted before the case management conference (CMC) pursuant to RDC 26.3. Alternatively, if a party enters into a TPF agreement after the CMC, notice must be given in writing to all the other parties, as well as to the DIFC Courts' Registry, within seven days of entering into the agreement. In all other claims, written notice must be served to all other parties to the dispute as well as the DIFC Courts' Registry, where proceedings have yet to be commenced, as soon as practicable after commencement, including within the claim form or the particulars of claim and, in instances where the agreement was entered into after the proceedings were commenced, notice must be given within seven days of the date of the agreement.11
The PD also makes it clear that there is no notice requirement for claims made in the Small Claims Tribunal unless those claims are transferred to or appealed to the Court of First Instance, in which case notice must be given in accordance with the procedures outlined above.
This move towards transparency has its advantages, but parties should bear in mind potential consequences that this may entail. The PD does not require disclosure of a copy or of any part of the TPF agreement, but it is notable that the court may order such disclosure. TPF agreements often contain confidential and privileged information, so it is sensible that there is no standard requirement to disclose an agreement. It remains to be seen in which circumstances the DIFC Courts would order the disclosure of an agreement or parts of it. As the DIFC is a common law jurisdiction, the DIFC Courts recognise the concept of privilege, and therefore the parties can seek to protect their interests by utilising carefully drafted non-disclosure and common-interest clauses in TPF agreements.
Finally, while there is no general requirement to disclose any information about TPF in DIFC arbitration proceedings, the tribunals can exercise their powers to order such disclosure.
The position in relation to the liability of funders for adverse costs, security for costs and recovery of costs of securing TPF in the DIFC is broadly similar to the position in the United Kingdom.
The PD clarifies that the DIFC Courts have inherent jurisdiction to make costs orders against third parties, including funders, where the court deems appropriate. However, the PD is silent on the amount of costs that can be so recovered. It remains to be seen whether a cap similar to the Arkin cap on costs recoverable from third party funders will apply.
A defendant may seek an order for security for costs against a third party funder, and the DIFC Courts have jurisdiction to make this order if they are satisfied, having regard to all the circumstances of the case, that it is just to do so.
RDC Rule 25.103 clarifies that the defendant may seek an order for security for costs against someone other than the claimant, and the court can make such an order if it is satisfied, having regard to all the circumstances of the case, that it is just to make such an order; and one or more of the conditions in Rule 25.104 applies.12 RDC Rule 25.104 stipulates two conditions: that the person has assigned the right to the claim to the claimant with a view to avoiding the possibility of a costs order being made against him or her; or has contributed or agreed to contribute to the claimant's costs in return for a share of any money or property that the claimant may recover in the proceedings, and is a person against whom a costs order may be made.
In addition, the PD says that the court may take into account the fact of disclosure of TPF when deciding on the application for security for costs, but the fact of funding shall not by itself be determinative.
The PD does not address the question of whether the costs of TPF are recoverable in DIFC court proceedings; therefore, this remains an area of uncertainty.
In line with other major jurisdictions, the arbitration legislation in the DIFC does not authorise arbitrators to make costs orders against third parties as they are not parties to the arbitration agreement. The position regarding recoverability of TPF costs in DIFC-seated arbitration has not been addressed in case law yet. In England, the judgment in Essar v. Norscot13 addressed this issue, finding that the definition of 'other costs' in Section 59(1) of the English Arbitration Act 1996 includes TPF costs. Notably, Section 38(5) of the DIFC Arbitration Act, which defines the scope of what constitutes arbitration costs, is not as wide as Section 59(1) of the Arbitration Act 1996.
The year in review
The past year has been unprecedented in many ways. The DIFC Courts proved themselves as truly modern and reliable as they were able to remain fully operational even in the midst of the pandemic and during times when everything was physically closed. In 2021, 100 per cent of the hearings are taking place remotely through digital platforms, such as the region's first fully digitally integrated e-courtroom and case management system and paperless e-bundling solution, thereby allowing greater flexibility to its users and access to justice.
The DIFC Courts also launched a new Arbitration Division (ARB) in February 2020 as a response to the rapid increase of arbitration related cases referred to it. The ARB is similar to the TCD, which was launched in 2017 and leverages dedicated judicial and registry oversight and case management expertise. In addition, as the arbitration-related offerings are now streamlined, arbitration-related matters can be tended to faster as quick speed of response is essential for effectively supporting arbitration proceedings. Also, being well connected on a national, regional and global scale, the new division will help to ensure certainty of recognition and enforcement of arbitral awards. The new ARB has already seen an increase of 46 per cent in arbitration-related matters year-on-year. To support the ARB, the DIFC Courts also launched an Arbitration Working Group in 2020, being the first court in the region to launch an initiative of this kind. The Arbitration Working Group comprises a panel of experts, who range from arbitration professionals to educational institutions, and whose task will be to reinforce and share developments and best-practices with the aim of gaining a better understanding of how the DIFC Courts can adjust to offer better assistance to the arbitration industry and arbitration-related disputes.
It has also been interesting to follow the developments on the Technology and Construction Division (TCD), which deals with construction and engineering disputes. The TCD offers a forum similar to that of the Technology and Construction Court of England and Wales. It is staffed with specialist judges who are able to handle complex technical disputes, and in 2020 there was an impressive increase of 200 per cent in the number of cases filed at the TCD evidencing that this division has now fully taken off. This is an interesting development as complex technical and construction disputes have traditionally been referred to arbitration in this region.
One of the most significant developments in the UAE and DIFC arbitration landscape took place in September 2021 when the government of Dubai issued Decree No. 34 of 2021 concerning the Dubai International Arbitration Centre (the Decree), together with the Statute of Dubai International Arbitration Centre (the Statute). The aim behind the issuance of the Decree and the Statute was to streamline the arbitration services offering in Dubai. The Decree effectively abolished the Emirates Maritime Arbitration Centre and the DIFC Arbitration Institute and merged the operations of these two entities into the Dubai International Arbitration Centre (DIAC). It is now understood that DIAC will supervise any existing arbitrations before these two centres and will replace the two centres in existing arbitration agreements pursuant to which any proceedings have not yet been commenced. The Statute also provides, among other things, that in the absence of an agreement otherwise, the default seat for DIAC arbitrations will be the DIFC. These developments show the growth of the DIFC as an arbitration jurisdiction.
Conclusions and outlook
The DIFC Courts have dedicated significant attention to developments in TPF worldwide and to creating a regulatory environment that benefits parties' access to TPF. In June 2017, the DIFC issued a consultation paper proposing amendments to the DIFC Court Law 2004 specifically addressing the issue of TPF. The consultation paper proposed an amendment that would give the Chief Justice of the DIFC Courts powers to issue regulations regarding TPF in the DIFC Courts. According to the paper, the intention is to enable to the DIFC Courts to 'monitor the conduct of parties and practitioners before the DIFC Courts in relation to TPF of the DIFC Courts' proceedings, mirroring a global trend towards increased regulation of this swiftly changing industry'. The outcome of the consultation remains to be seen, but it is clear that the DIFC Courts are keen to ensure that TPF is available to parties in the DIFC and is appropriately regulated. The move by the DIFC Courts in issuing the Order in September 2019, together with the ADGM Courts' issuance of the Litigation Funding Rules earlier in that year, shows a strong interest in TPF in the region, and it will be interesting to see whether the DIFC Courts will follow suit and issue further regulations relating to TPF.
Another development in the DIFC Courts that will be interesting to watch in the coming years is how the establishment of the ARB – the dedicated Arbitration Division – evolves.
The way the DIFC Courts managed to adapt and demonstrate their ability to continue offering services even during the difficult times has really shown that the DIFC Courts could be considered a benchmark for modern day international commercial courts. It will be interesting to see how the DIFC Courts fine tune their digital operations and offerings and what other innovative solutions they will be bringing to the table in the future.
It will also be interesting to see how the arbitration landscape will be shaped in Dubai following the changes that will take place pursuant to the issuance of the Decree and the Statute. The Decree provides for a six month transition period, so it remains to be seen how the modifications envisaged by the Decree and the Statute are executed in practice. It will be of particular interest to see how DIAC will be reorganised and how the new DIAC arbitration rules will look. As there were suggestions previously that DIAC's previous updated rules were going to recognise that the parties may utilise TPF to finance their proceedings, it will be interesting to see whether these new rules will contain any specific provisions in relation to TPF.