United Arab Emirates: Third Party Funding Gains Momentum In The UAE

By Yasmin Mohammad, Investment Director and Noor Kadhim, Legal Counsel, Vannin Capital

With the development of the DIFC and ADGM international legal centres, the benefits of third party funding are becoming available to more businesses in the Middle East. The DIFC has recognised this and published new laws on funding, which should favour established, professional providers

Attitudes to third-party litigation funding are changing in the Middle East, and the growth of free-zone jurisdictions with common law systems means more international businesses in the region are seeking funding alternatives.

Third-party funding of disputes has never been restricted in the United Arab Emirates in the same way that champerty and maintenance rules previously presented legal hurdles in markets like England, Australia and Singapore. The concept of another unrelated party having an economic interest in a case is also not an issue under the principles of Shari'a law.

Despite this, the relative certainty of the UAE court system has so far driven little demand for third-party funding. There has also been a misconception that third-party funding is for impecunious claimants who might otherwise be denied access to justice. While this may have been true 30 years ago, today's users of third-party funding are more likely those with deep pockets who prefer not to lock up their cash in lengthy proceedings with no guarantee of success.

Many claimants in the UAE are major corporations operating in energy and infrastructure, construction, financial services and telecommunications. These businesses have adequate resources to pursue contentious matters, but would rather deploy funds elsewhere. A funder can help take the burden completely or partially off the company, and, in return for a negotiable success fee, can allow it to use funds more strategically for alternative investments, cash-flow purposes, or for business expansion.

The rise of the free-zones

The rise of free zones in the UAE – most notably the Dubai International Financial Centre (DIFC) and the Abu Dhabi General Marketplace (ADGM) – has shifted the legal dynamics of the region. Free zones employ common-law systems, whose familiarity has attracted more overseas businesses, and which offer more legal certainty to funders unfamiliar with the onshore court system.

Judgments made in the wider UAE are increasingly being enabled by the free-zone courts, and claimants have gained more confidence in the efficiency and authority of the offshore legal systems. With companies in the Middle East also learning more about third-party funding, the conditions are ripe for more funding opportunities across the UAE.

Dubai leads the way

In March 2017, the DIFC took the lead on third-party funding when it issued a Practice Direction, that made it mandatory for parties to a litigation to disclose the existence of third-party funding, and allowed the courts to take account of funding when making security for costs applications. That means funders can be on the hook for adverse costs orders, regardless of whether or not they are actively involved in the management of the case.

These requirements may now lead clients to seek reassurance that funders are good for the money. In the United Kingdom, many – but not all – funders have signed up to a Code of Conduct produced by the Association of Litigation Funders, which requires funders to maintain adequate financial resources to meet their obligations to fund disputes, and to cover aggregate funding liabilities for a minimum of 36 months. It also prevents funders from taking control of litigation or settlement negotiations, and from causing the client's lawyers to act in breach of their professional duties.

Clients in the Middle East may now be well-advised to make sure funders adhere to a similar code of practice, both to ensure they have funds available for the matter, and to protect themselves from the kinds of orders a judge is now able to make under the DIFC Practice Direction.

The future for funding UAE cases

The issuance of the Practice Direction shows the tide of transparency has shifted, to ensure both availability of funds and that any conflict of interest is revealed. In principle, Vannin has no opposition to disclosure, either of the existence of a funding arrangement or of their identity, within a public court action.

That said, there are not yet any published criteria clarifying the court's discretionary powers, and so there is uncertainty as to whether, once a funding arrangement is disclosed, a judge will be more or less likely to make an adverse costs order against a funder, or a security for costs order against a plaintiff. Obviously, the more money that a funder deploys, the more expensive the funding operation becomes for a potentially meritorious claimant.

While these questions remain, it is nevertheless clear that third-party funding is swiftly moving up the agenda in the UAE legal community and we at Vannin Capital remain available to discuss any queries that clients and practitioners may have.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.