Growing confidence for funders in the Middle East

This article has been co-authored by Norton Rose Fulbright and Grant Thornton UK LLP.

• Introduction
• Litigation funding benefits
• Litigation funding considerations in the UAE
• Onshore UAE
• DIFC
• ADGM
• Outside of the UAE
• Will developments abroad drive the growth of litigation funding in the Middle East?
• What next?

Introduction

Litigation funding is a financing arrangement where a party, who is otherwise unrelated to the dispute, agrees to finance some, or all, of a party's litigation (or arbitration) costs in exchange for sharing in some, or all, of the amount of that party's eventual judgment or award. Conversely, if the litigation is unsuccessful then the litigation funder does not recover the capital it invested or receive any return on the investment.

Litigation funding has become prevalent in many jurisdictions, such as the United Kingdom, Australia, and the USA. Until relatively recently, litigation funding was not common in the UAE. However, recent years have brought a marked increase in the number of litigation funders operating in the region, and we expect this growth to continue.

Below we outline some of the benefits of litigation funding and provide an overview of the funding landscape in key jurisdictions in the UAE and wider Middle East.

Litigation funding benefits

Litigation funding considerations in the UAE

The UAE consists of both the onshore jurisdiction (a civil law system) and offshore jurisdictions which include the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM) (which are both common law jurisdictions with an English law background and their own statutory regimes). This adds complexity to any funding arrangements because a distinction must be drawn between the regulatory regimes that apply onshore and offshore.

Onshore UAE

Onshore, the UAE has not instituted any regime to govern litigation funding, but there is no prohibition against funding arrangements in either the Civil Code, the Commercial Transactions Law, or the Civil Procedure Code. It is generally agreed amongst local legal experts that litigation funding conforms to Sharia principles. We therefore anticipate that litigation funding would be allowed in onshore proceedings.

Although we are not aware of any disputes in onshore courts that have been subject to litigation funding. A welcome development would be the introduction of an onshore litigation funding regime, similar to those in place in the DIFC and ADGM.

DIFC

The DIFC Courts have seen several cases where funding arrangements have played a part in proceedings and has developed a framework by which funded parties must abide. This framework (set out in Practice Direction No. 2 of 2017 (PD 2/2017)) requires parties who have entered into a litigation funding agreement to put every party to the proceedings on notice as to the existence of the funding agreement, and to file a notice with the DIFC Courts' Registry. Whilst the notice must disclose the identity of the funder, PD 2/2017 does not require the actual funding agreement to be disclosed.

Litigation funders should be aware that by entering into a funding arrangement, they may be liable for adverse costs orders. PD 2/2017 provides that the DIFC Courts may take the existence of a funding agreement into account when determining applications for security for costs. PD 2/2017 also reiterates the DIFC Courts' inherent jurisdiction to make costs orders against third parties, including litigation funders.

This is not a remote risk, as demonstrated when English courts found a litigation funder to be jointly and severally liable for the defendant's costs in 2022 (see, for example, The ECU Group v HSBC [2022] EWHC 1616 (Comm)). The DIFC Courts have a foundation in English law and may find such authority persuasive.

Beyond PD 2/2017, the DIFC Courts have also set out guidelines concerning the obligations of practitioners with clients who have entered into litigation funding arrangements. These obligations are set out in DIFC Courts' Order No 4 of 2019 (Order 4/2019), the code of conduct for practitioners before the DIFC Courts.

Articles 12(E) and 17(B) of Order 4/2019 are of particular importance to practitioners with funded clients. Article 12(E) emphasises the importance of a lawyer placing their duties to their client above the interests of their client's funders. Article 17(B) provides that notwithstanding the presence of a litigation funder, a client may still bear the full burden of an adverse costs award.

The DIFC has established a practical litigation funding regime for ensuring that all parties and the Court are notified that a party is funded, while also clarifying the scope of a practitioner's obligations toward the client and the funder.

ADGM

The ADGM regulates litigation funding by Article 225 of the Civil Evidence, Judgments, Enforcement and Judicial Appointments Regulations 2015 (ADGM Regulations) and the Litigation Funding Rules 2019 (ADGM Funding Rules).

The ADGM Regulations set out parameters for what a "litigation funding agreement" is and provide that it must be in writing. The ADGM Regulations also allow the ADGM Court to prescribe rules regulating litigation funding from time to time. The ADGM Regulations require that a funded party must notify the other parties and the ADGM Court of the existence of the funding agreement. The ADGM Regulations also allow the ADGM Court to consider the existence of a funding agreement when making costs orders.

Key principles of the ADGM Funding Rules are as follows, they:

1. Detail certain requirements which a litigation funder must meet before it is allowed to fund litigation, including prescribing liquidity requirements.
2. Provide safeguards for funded parties, including that the litigation funder must ensure that reasonable steps are taken to provide the litigating party with independent advice in relation to the funding agreement.
3. Specify the required contents of a funding agreement, including the scope, timing, funding amounts, and the funder's exposure to adverse costs orders.
4. Set out various obligations of confidentiality, including prohibitions against conflicts of interest of the lawyers for the funded party or between multiple funding parties, and whether the funder can take part in settlement discussions.

Like the DIFC, the ADGM Courts have adopted a practical and flexible regime to regulate litigation funding, one that seeks to balance the interests of all parties involved, while offering protection to clients taking out litigation funding agreements.

Outside of the UAE

Outside of the UAE, litigation funders should be optimistic, as laws regulating litigation funding may be on the way across the rest of the Middle East.

Qatar, Bahrain, Oman, and Saudi Arabia do not yet have any laws specifically dealing with litigation funding. However, there are positive signs that these jurisdictions may be more welcoming of the practice in the future. Several arbitral institutions in the region have introduced rules that aim to regulate funding of arbitral proceedings.

One example is the Saudi Centre for Commercial Arbitration (SCCA). The SCCA's new Arbitration Rules (SCCA Rules), released in May 2023, anticipate that parties may seek to fund their arbitrations. Article 17(6) of the SCCA Rules provide that if a party is having its costs funded, it must disclose the existence of that economic interest and the identity of the funder to the SCCA Administrator, the other parties to the arbitration, and the tribunal.

Similarly, the Bahrain Chamber for Dispute Resolution's (BCDR) 2022 Arbitration Rules (BCDR Rules) require funded parties to notify the BCDR of the existence of the funding arrangement and the identity of the litigation funder. The BCDR is then required to transmit this notice to the parties and tribunal.

The BCDR Rules also require consideration of whether any relationship between the tribunal and the funder violates the BCDR Rules' requirements of tribunal independence. How this requirement for independence will work in practice remains to be seen, as it could open the way for parties to strategically engage funders that have the potential to conflict their tribunal, thus opening an avenue for guerrilla tactics that could frustrate the arbitral proceedings.

Will developments abroad drive the growth of litigation funding in the Middle East?

Recent developments in the United Kingdom may help to further boost the popularity of litigation funding in the region.

Specifically, the UK Supreme Court's ruling in R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal and Others [2023] UKSC 28, held that litigation funding agreements which specify payment as a percentage of damages recovered, are now unenforceable for failure to comply with the relevant provisions of the Damaged Based Agreement Regulations 2013. This development has caused trepidation among some funders, who are concerned that their funding agreements may no longer be valid before UK courts, particularly where such agreements are akin to a contingency-type arrangement.

PACCAR was due to be revisited by the passage of the Litigation Funding Agreements (Enforceability) Bill, which was due to legislatively reverse PACCAR and confirm the enforceability of litigation funding agreements. However, the passage of the Bill was halted by the UK general election, and it was not flagged for renewal in the King's Speech of 17 June 2024. Accordingly, it is now no longer clear when (or if) the Bill will be passed, leaving the status of litigation funding in the UK uncertain. Such uncertainty may cause funders to re-deploy funds to jurisdictions, such as the Middle East, where the direction of travel is positive and there is greater certainty as to the enforceability of litigation funding agreements.

What next?

An influx of funders into the Middle East region has driven the growth in the use of litigation funding in the UAE. As the spotlight on funding brightens, and the availability of funders grows, we anticipate that Middle Eastern jurisdictions will be put under increasing pressure to pass laws to regulate the role and scope of funders and funding agreements.

As the recent updates to the BCDR's and SCCA's arbitration rules show, there is clearly an awareness and interest in litigation funding across the region, and we anticipate that litigation funding will become an increasingly important part of dispute resolution across the Middle East.

In the meantime, we consider that parties and funders entering into funding agreements, should ensure that they follow a few best practices. For example, both parties should:

1. ensure that any funding arrangement is set out within a sophisticated agreement that accurately codifies expectations and obligations. Ideally, the funding agreement should aim to ensure that both the funder and the funded party's interests are aligned;
2. consider whether "After The Event" insurance should be obtained. This is especially important in jurisdictions where funders may be exposed to adverse costs orders;
3. understand the control (or lack thereof) that each party will have over the management of proceedings. Generally, litigation funders will have limited control over proceedings, and the funded party's lawyers or management will be in charge of the proceedings. However, some agreements allow the funder to have more say in the day to day management of a matter; and
4. whatever the nature of the funding agreement, the funded party's management should continue to take an active role in the strategy and settlement of the matter.

Norton Rose Fulbright have acted on numerous funded disputes. Should you have any questions about litigation funding or would like to find out more, please contact Head of Dispute Resolution for the Middle East Nicholas Sharratt, Grant Thornton partner Prashan Patel, or Senior Associate Alexander Field.