The lawfulness of third party/litigation funding of arbitration and litigation in the UAE

17 April 2019

This briefing note considers the extent to which Third Party Funding, also known as litigation funding, is likely to be permissible under the various judicial authorities within the United Arab Emirates, from the positive to the equivocal and why we think third party funding of disputes is set to rise in the UAE.



The courts of the Dubai International Financial Centre and the Abu Dhabi Global Market

We will first address the free zone, common law, jurisdictions of the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM). As a starting point it is helpful to look at the approach which English law has taken to third party funding given that DIFC law is modelled on English common law and that the ADGM applies English common law directly.

By way of background, in England and Wales before 1967 involvement in another party's litigation with no interest other than commercial gain, which is essentially what litigation funding is, would have offended against the medieval common law doctrines of maintenance and champerty that essentially aimed to prohibit disinterested parties from encouraging vexatious litigation. Historically, maintenance and champerty would have been both a crime and a tort. The Criminal Law Act 1967 abolished that criminal and civil liability but left open the possibility that a contract could be ruled unenforceable as a matter of public policy if the champerty was not justifiable.

English case law on maintenance and champerty has developed considerably since 1967 and litigation funding is now regarded as generally acceptable as a matter of public policy, provided that the funder does not exercise too much influence or control over the litigation and provided that the funded party has more to gain from the litigation financially than the funder does. In fact with these provisos litigation finance is now seen as positively benefitting the public interest by increasing access to justice.

The DIFC and ADGM Courts have taken their cue from this approach in England & Wales and have separately recognised and regulated the use of third party funding for litigation in their courts. The DIFC court Practice Direction on Third Party Funding which was issued in 2017 and the ADGM Courts, Civil Evidence Judgments, Enforcement and Judicial Appointments Regulations 2015 (the 2015 Regulations) deal with issues like disclosure to the other parties of the fact of funding and the identity of the funder (which is required in the DIFC but not the ADGM courts), the significance of funding on a security for costs application and the recovery of amounts payable under a funding agreement in any costs order.

The DIFC Court's Practice Direction on Third Party Funding was introduced in March 2017 as part of its mandate to increase accessibility to justice to provide the structure by which ‘funded parties’ and their lawyers engage transparently in proceedings in the DIFC Courts. The DIFC Court's support for litigation funding is also apparent from the comments on its website about the relevant practice direction, where it says "Third party finance is not only a lifeline for disadvantaged claimants, it also offers a way for corporates to finance litigation and arbitration off-balance sheet, as a more efficient way to manage legal costs." The ADGM has also published a Consultation Paper on Proposed Litigation Funding Rules to invite comments from industry professionals and the public which are to apply to litigation funding agreements as defined in the 2015 Regulations.

And so provided that the practice directions and regulations are complied with, and provided that the remaining public policy objections to third party funding under English law are avoided, it seems highly unlikely that any challenge to the existence or terms of third party funding in litigation in the DIFC or ADGM Courts would succeed. That would of course also apply to any technology and construction cases heard in the Technology & Construction Division of the DIFC Courts.

Arbitration

For those unfamiliar with international arbitration it is necessary to explain that the seat of the arbitration is of critical importance. It will determine; the procedural laws that will apply to the arbitration; the supervising court that will assist and support the parties if required the nationality of the arbitration and therefore the laws which will apply at the enforcement stage. If the seat of the arbitration is not confirmed in the agreement then the rules of the relevant arbitration institution may dictate a default seat.

Arbitration seated in the DIFC or ADGM

Arbitrations which are seated in the DIFC or ADGM will be subject to either the DIFC Arbitration Law or the ADGM Arbitration Regulations. Third party funding is expressly permitted in both the DIFC Courts (under the Practice Direction on Third Party Funding issued in March 2019) and the ADGM Courts (under the Litigation Funding Rules enacted on 16 April 2019). However neither set of arbitration laws contain express provisions about third party funding, and the same is true of the DIFC-LCIA Arbitration Rules. Given the "funding friendly" approach of the DIFC and ADGM Courts it seems very unlikely that these Courts would refuse to recognise and enforce an arbitral award resulting from an arbitration in which one of the parties had been funded, for example based on an argument that third party funding is contrary to public policy, would succeed. Third party funding agreements that avoid excessive control by the funder, or excessive returns, are also very likely to be upheld by these Courts.

Arbitration seated in onshore UAE

Arbitrations which are seated in onshore UAE will be subject to both the UAE Civil Procedure Code and the still relatively new Federal Arbitration law No 6 of 2018.

There are no references to third party funding, permissive or otherwise, in either the UAE Civil Procedure Code, the new Federal Arbitration law or in the local arbitration rules that are often applicable to onshore seated arbitrations. To our knowledge, neither have there been any reported cases in the local courts that have commented on the topic.

There was a flutter of excitement in late 2017 when the draft new Dubai International Arbitration Centre (DIAC) Arbitration Rules were announced, as they apparently contained provisions requiring disclosure of the fact of third party funding, which might have been seen as tacit approval of the concept. The final version of those Rules is yet to be published and it remains to be seen whether it will contain the same provision about funding.

We might therefore look to the underlying principles under the UAE Civil Code and Sharia'h law to predict how the onshore courts might approach the concept of third party funding in litigation and arbitration.

Legal principles under the UAE Civil Code and Sharia'h Law

Naturally, civil law jurisdictions like the UAE have not inherited the common law's restrictions on maintenance and champerty and that may explain why references to the permissibility of funding, either in litigation or in arbitration, are few and far between. There is also a strong argument that litigation finance is in the public interest as providing increased access to justice in a jurisdiction which does not have a developed system of state sponsored legal aid. Litigation finance may therefore be seen as beneficial from a public policy perspective on the basis that it corresponds with a concept in Sharia'h law known as Maslahah, which allows prohibition or permission of a thing according to whether it serves the public interest of the Muslim community. As access to justice is regarded in almost all legal systems as being in the public interest it seems unlikely that the UAE would take a different approach.

On the other hand there have been suggestions that litigation finance may offend the Sharia'h doctrines regarding gambling, excessive speculation or uncertainty and the charging of interest (known as Riba). Expert legal opinions that we have seen suggest that these concerns are misplaced. Taking interest first, UAE law allows for the charging of interest in certain defined circumstances. For example, the UAE Commercial Code permits interest to be charged as compensation for a delayed payment at the agreed contractual rate. In Third Party Funding agreements, the returns to funders do not include the charging of interest where the returns are based only on a percentage of recoveries or a multiple of the amount invested, as is usually the case. Certain funding models do provide for the payment of interest on the amount invested depending on the length of time the case takes, but they are less usual and are probably best avoided when funding cases in onshore UAE.

The Sharia'h prohibition of gambling (known as Maisir or Qimar) is of course well-known. The defining characteristic of the prohibition is the "easy acquisition of wealth by chance" or "effortless gain at the cost of others". However, it is important to consider that funders carry out extensive due diligence and research into the merits of a case before agreeing to fund it. Funders then of course assume the not insignificant risk of the case failing and of losing all the money they have invested in funding the case. The transaction is therefore a long way from being the "easy acquisition of wealth by chance". To quote one commentary, the prohibition does not extend to a transaction which "relies on the analysis of a lot of economic and financial data and which involves the investment of assets, skills and labour", all of which are hallmarks of third party funding.

There is a related prohibition against uncertainty or excessive speculation known as Gharar. Gharar is intended to prevent exploitation of unwitting parties to transactions where the subject matter is uncertain or where there is a lack of information and knowledge about the ultimate outcome, or where there is excessive risk or speculation about some essential element of the transaction.

Again, this risk is unlikely to arise where experienced funders are involved because they will carry out a detailed due diligence on the merits of a case before deciding whether to provide funding. As with the gambling prohibition, any excessive speculation will be mitigated by the due diligence undertaken before the claim is funded. Also, any uncertainty about the terms of the funding should be avoided by the signing of a detailed funding agreement carefully spelling out the risks and benefits to both parties and making clear that there is mutual and equitable risk-sharing.

Potential challenges and the road ahead

Litigation finance is only in its relative infancy in the UAE (and in the Gulf generally) so only time will tell how the onshore UAE courts will react to a challenge to a claim backed by third party funders, either in the course of local court proceedings or of an onshore seated arbitration award which the award creditor subsequently seeks to have enforced in onshore Dubai.

The new Federal Arbitration Law is based on the UNCITRAL Model Arbitration Law, adding some further potential grounds for challenge based on irregularities of the arbitral proceedings. As an example, one might ask whether an arbitration award obtained with the benefit of third party funding might be set aside under Article (53) on the ground that it was "in conflict with the public order and the public morality of the State" or could the arbitral proceedings themselves be said to be "void in such a way that has influenced the award"?

Of course that is part of the wider debate about how the onshore courts will deal with applications to set aside awards under the new Law and whether they will adopt a more arbitration friendly approach than has sometimes been the case in the past. The first few funded cases to be heard in front of the onshore courts will give a clue as to which way the wind is blowing but it can be persuasively argued that the UAE is more likely to welcome third party funding rather than discourage it. Particularly, because as explained above, funding helps achieve the social objective of widening access to justice, but also because of the likely future growth of funding of international arbitration and the rise of competition from other international arbitration centres such as Hong Kong and Singapore, where third party funding for international arbitration is already permitted.

The growth of third party funding for arbitration and litigation in the UAE would align with and support the country's ambition to become the leading regional arbitration centre. But this requires the onshore courts in particular to develop a reputation for permitting the third party funding of both cases that are litigated before the courts and arbitrations that are seated in onshore Dubai and therefore subject to their supervision. We, like many others, are hoping that the wind blows in favour of promoting the use of Third Party Funding in the UAE.

For more information on Third Party/Litigation Funding of disputes in the UAE please get in touch with our UAE Law experts.


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