Evolving Landscape Of Third Party Funding In Arbitrations In The UAE

OVERVIEW

This Practice Note discusses Third Party Funding and Arbitration in the United Arab Emirates ("UAE"). In particular, emphasis has been placed on the evolving landscape relating to Third Party Funding across the region, which is increasingly now being recognized as a viable source to allow access to justice in UAE arbitrations, especially construction and high-value commercial claims.

Third Party Funding is not a novel concept but one which has been around for some time now. In fact, the litigation world globally has reaped benefits of Third Party Funding for some years, and in many cases, it has become a conjugal symphony between providing access to justice and gaining windfall from awards.

Although Third Party Funding is yet to formally find its stronghold in the UAE, specifically where it comes to onshore disputes, it has increasingly become the most talked about and sought after concept in the arbitration space. UAE's arbitration friendly environment, coupled with its position as a global hub for ease of doing business, has catapulted Third Party Funding to the fray and in the spotlight of arbitration practitioners in the region.

This Practice Note provides an overview of Third Party Funding in the UAE and its introduction, applicability and rise with respect to arbitrations in the region, discussing the procedural shifts adopted by arbitral institutions to align themselves with global demands as well as outlining the important steps and practical nuances in obtaining Third Party Funding.

DEFINITIONS

• "DIAC" refers to the Dubai International Arbitration Centre
• "ICC" refers to the International Chambers of Commerce
• "ArbitrateAD" refers to the Abu Dhabi International Arbitration Centre
• "ADCCAC" refers to the Abu Dhabi Commercial Conciliation and Arbitration Centre
• "SICAC" refers to the Sharjah International Commercial Arbitration Centre
• "RAK Chamber" refers to the Ras Al Khaimah Reconciliation and Commercial Arbitration Center
• "DIFC Courts" refers to the Dubai International Financial Centre Courts
• "ADGM Courts" refers to the Abu Dhabi Global Market Courts
• "UAE" refers to the United Arab Emirates
• "UAE Arbitration Law" refers to the UAE Federal Law No. (6) of 2018

PRACTICAL GUIDANCE

Third Party Funding is a financing method which involves funding of arbitration by bona fide specialized providers who are neither parties to the dispute nor in any manner closely connected with it, but whose sole interest lies in potential profit, in return for which financial support is provided to a party to an arbitration.

Stricto sensu Third Party Funding in arbitration is an arrangement where a party to the arbitration and an institutional funding corporation or firm, entirely unconnected with the dispute, agrees to cover the party's legal costs and expenses in the arbitration, in exchange for a share in the award. In other words, it is a non-recourse financing by an institutional funder where repayment is purely contingent on the party's success in the arbitration.

While Third Party Funding was earlier concentrated institutionally, and ran somewhat similar to a hedge fund, it has now become a concept where it has now extended to family offices and financial firms also beginning to offer products akin to Third Party Funding. This is partly due to the market sentiment and demand of Third Party Funding.

Third Party Funding: An Overview into the UAE market

Historically, the established common law doctrines of champerty and maintenance prevented intermeddling in a litigation by unrelated third parties. The rationale was to specifically restrict powerful, wealthy and influential individuals from manipulating and intermeddling with the judicial system ensuring that the judiciary remains independent and devoid of unwanted and vexatious litigants.

However, with the ever evolving commercial, trade and geo-political scenario and constant shuffling in the dispute resolution landscape globally, the concept of Third Party Funding arose, which has been seen as a forward looking concept celebrated for its role in bringing access to justice to litigants lacking appropriate financial stimulus to defend their rights. In fact, it has also been considered and discussed by the UNCITRAL Working Group III.¹

The concept of Third Party Funding has gained considerable traction, and the market has evolved significantly. There have been a host of litigation funders, some of whom are renowned globally, and have now shored up in the UAE, raring to take advantage of the UAE's fundamental business approach of pushing innovation to the forefront.

From a practical perspective, litigation funders have broken into the region, however, not without their fair share of issues, with the UAE federal law landscape still not formally recognizing Third Party Funding as a concept available to parties in a dispute.

Initially, litigation funders were skeptical of entering into funding arrangements which related to onshore seated arbitrations, due to valid concerns surrounding enforcement. A bulk of the Third Party Funding in UAE was concentrated in offshore seated 'common law' arbitrations. However, the tide is shifting, and litigation funders and parties alike are warming up to entering into funding arrangements even for onshore seated arbitration as the dispute resolution landscape develops further.

The bulk of arbitrations which are being looked at by litigation funders are construction arbitrations, which is a result of ever-increasing construction projects and consequently disputes in the UAE. Further, with growth in knowledge amongst parties on the benefits of Third Party Funding, it is now being used as an effective tool in disputes.

Regulatory framework on Third Party Funding in the UAE

The UAE has been moving towards adopting global best practices over the past few years, which also includes ensuring there is an active framework and mechanism to deal with Third Party Funding.

While the UAE Federal Law No.6 of 2018 ("UAE Arbitration Law") does not codify Third Party Funding or similar funding arrangements, some of the leading arbitral institutions have been quick to lead innovation in this space.

The International Chamber of Commerce ("ICC"), a globally prominent and also sought after arbitral institution in the UAE, issued revised rules² which under their general provisions require parties to promptly disclose existence and identity of any non-party with an economic interest in the outcome of the arbitration through a funding arrangement.³

The Dubai International Arbitration Centre ("DIAC") with their new and revamped status have also introduced fresh rules⁴, with a plethora of changes aimed at competing with global arbitral institutions, and have included a specific provision relating to Third Party Funding, which also require parties to disclose the identity of the funder and whether or not the funder has committed to an adverse costs liability.⁵

It is interesting to point out that DIAC prohibits Third Party Funding after constitution of the tribunal, in order to ensure that the tribunal remains conflict free. This approach is certainly unique to DIAC in the region.

Close on the heels of DIAC, the Abu Dhabi International Arbitration Centre ("ArbitrateAD") rebranded from erstwhile Abu Dhabi Commercial Conciliation and Arbitration Centre ("ADCCAC") in February 2024, also introduced their rules⁶, which also include a specific provision relating to Third Party Funding.⁷ Although, the provision is not as robust as those provisioned by DIAC, but rather are somewhat similar to those of the ICC.

However, some of the more upcoming arbitral institutions e., Sharjah International Commercial Arbitration Centre ("SICAC") and the Ras Al Khaimah Reconciliation and Commercial Arbitration Center ("RAK Chamber"), still continue to closely follow the developments to the UAE Arbitration Law. However, future developments and traction gained by third party funders in the region may prompt changes being made to the UAE Arbitration Law.

Apart from arbitral institutions, leading common law judiciaries in Dubai and Abu Dhabi e., Dubai International Financial Centre Courts ("DIFC Courts")⁸ and the Abu Dhabi Global Market Courts ("ADGM Courts")⁹ have both also introduced Third Party Funding within their legal framework, which demonstrates the UAE's appetite for not only adapting to global trends but also leading the region in innovation and growth in dispute resolution across the Middle East.

Compliance with Sharia'a law and Public Policy concerns

While there are no express provisions which regulate Third Party Funding under Sharia'a law, it can be arguable that Third Party Funding is compliant under Sharia'a law. Certain Islamic finance transactions can sometimes also be considered somewhat similar to Third Party Funding.

In order to be compliant with Sharia'a, the three key principles to bear in mind are riba (interest), gharar (excessive speculation) and maisir (gambling). Third Party Funding in its most basic sense does not fall foul of any of these principles. Some may argue that litigation funders are awarded interests, however, this is inaccurate as what is awarded are in fact damages which have been agreed between parties.

Similarly, there is a school of practitioners who argue that Third Party Funding provides access to justice and complies with the Sharia'a law principle of maslaha (public interest). Another savior to Third Party Funding is extensive due diligence which is carried out by almost all litigation funders, and almost all but eliminates speculative nature of funding but instead is considered to be a well thought out financial investment.

However, litigation funders and parties must adopt a balancing act and tread a fine line in this distinction to ensure that issues and objections on breach of UAE public policy are not faced insofar as it concerns enforcement of arbitral awards.

Best Practices, Challenges and Ethical implications relating to Third Party Funding

Best Practices

Third Party Funding can be obtained at any stage in the arbitration process and sometimes is even obtained solely for the post-award enforcement process.

Nevertheless, it is important to highlight and note best practices while going for Third Party Funding. Some of which are as follows:

Conduct proper market research on litigation funders in the region and the products being offered by each litigation funder;

Most appropriate mechanism is to obtain Third Party Funding as early as possible in the arbitration process to minimize risks;

Conduct an intensive due diligence exercise on the potential claims and, or merits of the case;

Ensure that as a Claimant proactive steps are taken to ensure that at least a reliable asset investigation report is in place. Litigation funders often are reluctant in UAE where there is no clarity on available and enforceable assets; and

Carefully consider the financial terms and conditions in the draft term sheet offered by the litigation funder and ensure that adverse cost protection is covered by the litigation funder.

Challenges

The most significant challenge faced by parties is the time taken to obtain Third Party Funding as each litigation funder operates independently and has different checks and balances in place. While some litigation funders are able to grant funding in as little as one month, others take almost one year.

Third Party Funding is also risky resulting in the funding agreements becoming increasingly straight jacket and complex and sometimes also prices out parties. However, to an extent this has been corrected with smaller litigation funders offering bespoke and unconventional funding options making them more attractive.

Another important challenge while obtaining Third Party Funding is the level of intervention which a litigation funder may exert on the arbitration as some may take a more hands-on approach. However, more often than not and specifically with arbitrations, a more hands-off approach has been witnessed.

Lack of familiarity with Third Party Funding often also restricts and has historically made litigation funders reluctant to be involved with onshore arbitrations.

The UAE is a unique jurisdiction where there are two sets of Court systems e., onshore Courts which run as per civil law and offshore Courts which apply common law, and work hand-in-hand with arbitration. Therefore, it becomes critical to clearly identify the Court which supervises the arbitration.

Ethical Implications

With the introduction of Third Party Funding, parties need to be careful to ensure that several ethical implications are safeguarded against.

Parties must be wary about sharing information on an ad-hoc basis with litigation funders as issues may arise where attorney-client privileged communications may sometimes become jeopardized. Therefore, it is important to ensure confidentiality is maintained and parties actively enter into confidential agreements.

Transparency is another key element of Third Party Funding, as parties often fail to disclose their funding arrangements. However, with DIAC, ArbitrateAD and ICC implementing transparency vis-à-vis Third Party Funding, this is now a mandatory requirement to ensure ethical considerations like conflict of interest are adhered.

As the industry evolves, and the UAE adopts Third Party Funding in a more granular manner into local legislation, parties may need to look out for increased or evolved implications to bear in mind.

Benefits of Third Party Funding of arbitration in the UAE

As is evident, Third Party Funding has grown exponentially in the UAE, and some of the important benefits of Third Party Funding can be succinctly categorized as follows:

Increased access to justice generally for impecunious parties in arbitrations as financial disparity is moderated and playing field is levelled. Although, in practice several corporations are now using Third Party Funding as a calculated strategy to minimize risk;

Entirely non-recourse payment to the litigant e., litigant's duty to pay back the advance is contingent;

Similar to an investment where the litigation funder takes on the risk of losing the investment if the arbitration is unsuccessful;

Uniqueness allowing Third Party Funding to be deployed at any stage in the arbitration process or even in a post-award enforcement stage;

Enables the funded party to facilitate cash-flow management as financial risk passes on to the litigation funder; and

Global outreach as major litigation funders have footprint in most jurisdictions making enforcement of awards a more streamlined process.

CONCLUSION

The time to sit back and wait for other nascent jurisdictions has gone by and the UAE has demonstrated a willingness to become the hub of innovation. Undoubtedly, this has catapulted Third Party Funding to become the talk of the arbitration industry regionally with legal circles increasingly now exploring innovative ways to be involved in Third Party Funding.

While Third Party Funding may still be in a nascent stage regionally, the impetus to compete globally has resulted in significant traction with formation of a sizeable market at the cusp of committing to Third Party Funding. As a result, there is now not only an appropriate regulatory framework but also a defined roadmap for litigation funders and parties alike to tread on, thereby reducing complexities in an evolving dispute landscape.

The changing dynamics to Third Party Funding in arbitrations across the UAE will undoubtedly result in better practices being adopted by litigation funders and parties. It will also be interesting to see how the UAE regulatory framework adapts to the demand for Third Party Funding with regulatory changes on the horizon.

Footnotes

1. UNCITRAL Third Party Funding (https://uncitral.un.org/en/thirdpartyfunding)

2. ICC Arbitration Rules 2021

3. Article 11(7) of ICC Arbitration Rules 2021

4. DIAC Arbitration Rules 2022

5. Article 22 of DIAC Arbitration Rules 2022

6. ArbitrateAD Arbitration Rules dated 1 February 2024

7. Article 48 of ArbitrateAD Arbitration Rules dated 1 February 2024

8. DIFC Courts Practice Direction No. 2 of 2017 on Third Party Funding

9. ADGM Courts, Civil Evidence, Judgments, Enforcement and Judicial Appointments Regulations 2015; and ADGM Courts Litigation Funding Rules 2019

This article is first published in LexisNexis

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.