Third-party funding in the MENA region

Co-Authors:
Cheng-Yee Khong, Associate Investment Manager - Omni Bridgeway
Prof Dr Mohamed Abdel Wahab, Founding Partner & Head of International Arbitration, Construction, and Energy Groups - Zulficar & Partners

The global pandemic and shuttering of most of the world’s international borders have heightened existing geopolitical risks, highlighting the continuing need to find effective mechanisms to manage global tensions and resolve international disputes. 

One such mechanism that we see growing as a pragmatic and practical mechanism for international dispute resolution is third-party funding, also known as dispute finance and litigation funding.

The international market for third-party funding is growing rapidly, driven by the increased use, cost, and complexity of international arbitration, together with increasing demands on arbitration parties and practitioners to manage the associated costs and risks.

Regulatory barriers in common law jurisdictions across the world that may have historically restricted the use of third-party funding have largely dissolved, and do not exist in civil law countries.

Third-party funding is generally not prohibited and is gradually becoming more accepted in the Middle East and North Africa (MENA) region.

While uptake in the region is currently low, some jurisdictions are beginning to embrace third-party funding. The Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Markets (ADGM) have both recognised the growth and benefits of third-party funding and expressly clarified that such funding is permitted in their territories.

A key source of demand for third-party funding within the MENA region is coming from construction. While contracts are being awarded, competition is growing, interim payments are slowing, and project costs and time overruns are escalating. This is creating cash flow difficulties, precipitating commercial disputes, and providing ammunition for potentially lengthy and expensive legal proceedings. Third-party funding can help provide a solution to these challenges.

An important attraction of third-party funding for practitioners is the ability it provides to manage costs and risks. Funding is typically provided on a ‘non-recourse’ basis, with the funder only recovering its costs and a return if the claim is successful. Where successful, the funder will typically seek reimbursement of their invested capital plus a return. However, if the claim is rejected or if there is no recovery, the funder bears the cost.

Such a funding model is particularly appealing to lawyers and commercial parties where the current Covid-19 crisis has impacted cash liquidity and the financial standing of their businesses. However, the range of third-party funding products available has expanded to accommodate a much wider range of commercial situations.

A significant trend that we are seeing is the market moving away from the traditional misconception that third-party funding is only available for parties in financial distress. This is far from the case. Third-party funding remains available for solvent and financially capable parties seeking to better manage arbitration-related costs and risks.

Companies are now viewing third-party funding as an effective financial or risk management tool - reducing their legal costs and allowing them to allocate resources to business-as-usual or core business needs, while ensuring their claims are properly pursued. Those funders offering case management services can also help relieve the day-to-day burden of managing international disputes for in-house legal departments.

Many corporate users of this form of litigation finance are finding that they are in a similar or better net position than they would have been had they financed the case themselves. Even if unsuccessful, they are invariably still better off having deployed the capital towards the core business and obtained non-recourse cost protection using third-party funding.

As demand for third-party funding increases, so too is the range of financing products and models available in the MENA region, including the use of portfolio financing for multiple disputes and increasing recognition of funding as a sensible tool for many CFOs and financial controllers to manage capital.

Despite these obvious attractions and benefits, claimants and their lawyers should still undertake careful due diligence on the funders they approach, considering important factors such as reputation, financial standing and, of course, track record.

While third-party funding products and arrangements are proliferating in many jurisdictions in Europe, the Americas, Asia, and Australia, uptake within the MENA region has been slow. This is due in part to misconceptions regarding funding arrangements and their legality. These are issues that can and will be partially addressed over time, through greater awareness and comprehension of what is still a relatively new and, yet still not fully understood, dispute resolution tool.

We also predict that some degree of regulation will take place in jurisdictions within the MENA region, and that this can help address other key risks and concerns around, for example, enforcement of awards.

The MENA region is rich in arbitration cultures and certain countries already have well established arbitration markets, such as Egypt and the UAE. Third-party funding of arbitration proceedings seated in jurisdictions within the region remains an open possibility, and a trend we expect to see rise in the future, particularly in relation to international arbitration. 

This article was published in the May 2021 issue of Dispute Resolution International (Vol 15, No 1), and is reproduced by kind permission of the International Bar Association, London, UK. © International Bar Association.