Paul Hughes, Legal Director in our Dispute Resolution team in Dubai, draws on his experience in litigation funding to examine the developments of third party funding in the GCC and the opportunities they will bring.

The DIFC Courts are in the process of drafting formal guidance in relation to litigation funding in the jurisdiction. The very existence of such guidelines suggests third party funding is here to stay as far as the DIFC Courts are concerned. This, coupled with a recent landmark English judgment on funded international arbitrations, points to an expected increase in the use of litigation funding in the GCC.

Litigation funding was traditionally used by parties who would otherwise have struggled to fund their litigation without such investment. However, the process is growing ever more sophisticated to the extent that international blue chip companies routinely fund ongoing litigation as a means of removing significant legal costs from their balance sheets.

In a period of tightening liquidity in the GCC, the options presented by litigation funders enable companies to pursue claims in a relatively risk-free manner – claims that they would otherwise have abandoned or perhaps settled at a significant discount.

The concept of litigation funding is recognised in international arbitration and it has been successfully used in the DIFC Courts. With the introduction of the Abu Dhabi Global Markets (ADGM) Courts, there have never been more favourable conditions to take advantage of litigation funding in the GCC.

Historically unattractive

Funders are attracted to legal systems that offer certainty of process both in terms of the determination of underlying merits claims and the ultimate enforcement of judgments and recovery of costs. As such, litigation funding has for some time been a high value industry in the UK.

Of course funders only invest in cases that have good prospects of success but an equally important factor is that any judgment or award will ultimately be enforced and converted to a cash recovery. Due to the perceived difficulties in enforcing judgments and arbitration awards in the GCC, funders have historically been reluctant to invest in litigation in the region (despite the fact that third party funding is not contrary to UAE Law).

That is beginning to change, largely due to the influence of the DIFC Courts, off-shore English language common law courts predominantly modelled on the English Commercial Court. The development of the DIFC Courts has led to greater certainty in litigation passing through those courts, which has in turn attracted investment from litigation funders.

Positive developments in the Courts

The increased appetite of funders to invest in litigation is a natural consequence of growing certainty in enforcement regimes and the DIFC Court is a key driver in increasing judicial certainty in the region.

The progress to date as far as third party funding is concerned is reflected in the funded case of Al Khorafi v Bank Sarasin [1] where the quantum awarded by DCJ Sir John Chadwick exceeded USD 50m and is representative of the high value cases being disputed in the DIFC Courts (which saw approximately USD 1.5 billion worth of disputes in 2015) and the region generally including by way of arbitration.

In addition to the underlying case, satellite litigation arose which saw the DIFC Court issue an urgent interim order for damages to be paid into Court pending resolution of the (disputed) destination of those funds. The fact that there was not only an element of certainty in the underlying funded case but also an option to seek interim protective relief to safeguard a funder's interest will no doubt appeal to litigation funders and encourage further investment in the region.

Abu Dhabi is following the DIFC's lead with the establishment of the ADGM Courts which have enacted regulations that make English common law (including principles of equity) directly applicable in the jurisdiction as well as having systems in place for reciprocal recognition and enforcement of judgments and awards.

A positive development in international arbitration

Funders have historically been willing to invest in international arbitrations although they will look carefully at the chosen seat of arbitration, the location of any assets and the prospects of enforcing any award before doing so.

Until recently, there was little authority on how a funder's premium would be treated when assessing the costs of an arbitration and whether it would be recoverable. The recent case of Essar Oilfield Services Ltd v Norscot Rig Management Pvt Ltd [2], however, saw the English High Court upholding an arbitrator's decision to award a funding premium (i.e. the cost to the Claimant of seeking investment from a funder) as part of the Claimant's claim for costs. Although it remains largely dependent on the seat of arbitration, the ruling may embolden arbitral tribunals to consider awarding the funding premium to a successful party in certain circumstances.

Issues to consider

Potential recipients of litigation funding should be aware that 100% payment of their legal costs comes at a price. Funders will either take a multiplier of the costs invested or a portion of the damages received (potentially between 20% and 40% depending on the particular case).

It is important to note that the funding premium may not necessarily be recoverable from the other side. In the Norscot case, the Respondents were said to have acted in a particularly egregious manner and Norscot had no alternative but to seek funding in order to recover its losses. Potential litigants should not take for granted that their funding premium will be recovered, particularly if they are taking advantage of funding for budgetary purposes rather than out of necessity.

There is also an issue of whether or not a party must disclose the existence of third party funding in order to be able to recover those costs. The upside is that, tactically, it increases pressure on an opponent if they face an increased claim for costs in addition to the underlying quantum. The downside is that a respondent will likely seek security for costs upon learning of the funding arrangement (although this can be overcome by obtaining After the Event Insurance).

What happens next?

During times of tightened liquidity, litigation funding gives potential claimants the budgetary certainty to proceed with significant pieces of litigation whether through the Courts or in arbitration. Funding is not a one size fits all solution – it can be a claimant's only option in order to pursue a claim, or a sophisticated balance sheet management tool.

With the increase in funded cases in the DIFC Courts, the fact the Courts are set to issue specific guidance on litigation funding and with the recent Norscot decision, it is likely we will begin to see a significant increase in the number of funded disputes in Dubai and the wider GCC.

[1] (CFI 026/2009 (1) Rafed Abdel Mohsen Bader Al Khorafi (2) Amrah Ali Abdel Latif Al Hamad (3) Alia Mohamed Sulaiman Al Rifai v (1) Bank Sarasin-Alpen (ME) Limited (2) Bank Sarasin & Co. Ltd).

[2] [2016] EWHC 2361 (Comm)