Third-party funding in the MENA region
Cheng-Yee Khong, Associate Investment Manager - Omni Bridgeway
Nathan Landis, Senior 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.
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.
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.
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.
funding is generally not prohibited and is gradually becoming more accepted in
the Middle East and North Africa (MENA) region.
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.
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
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.
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
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.
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.
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.
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.
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
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
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.