What are the key provisions of the Practice Direction that is being introduced in Dubai? Read more about the novel guidelines that recognise the much sought after certainty that litigation funders require before entering a jurisdiction.

Landscape

Historically, the GCC has not been an attractive market for litigation funders due to concerns regarding the certainty of process and enforcement of claims, as well as the lack of recoverability of legal costs. However, with the increasing role of arbitration in the GCC and the set up of financial free zones with their own courts and systems of law, funders are finding the region increasingly attractive.

Whilst courts have historically been wary of funded litigation on the grounds that it may "sully the purity of justice" (maintenance and champerty anyone?), they are increasingly receptive to a mechanism by which professional funders facilitate access to justice for those who might otherwise not be able to afford it or who would be unwilling to make a further financial outlay in the pursuit of a legitimate claim.

The introduction of the Practice Direction provides recognition of the legitimacy of funding arrangements, brings with it the certainty of process that funders crave and, is likely to lead to an increase in the flow of third party funding into Dubai.

Key provisions

We highlight below what we see as the three key provisions of the Practice Direction: 

1. The obligation on a party to put its opponent on notice of the fact it has entered into a Litigation Funding Agreement (LFA) and to disclose the identity of the Funder (as defined in the Practice Direction);
2. The express reference to the Courts' discretion to make an adverse costs award against a Funder if the circumstances of the case so dictate; and
3. The fact that a party is funded will not, in itself, be determinative in an application for security for costs.

Comment

Obligation to disclose the existence of funding

For us, the most interesting part of the Practice Direction is the fact that all LFAs entered into in relation to DIFC Court Proceedings are disclosable, no matter what their terms (although the terms of the LFA itself will not be disclosable unless the Court orders otherwise). This is a novel departure from the requirements of the English Courts, upon which the DIFC Courts are largely modelled.

Historically, the English Court's Civil Procedure Rules included a requirement to notify your opponent if you had engaged your lawyers on a success fee basis because these success fee premiums were recoverable from the 'losing' party. As such, it was considered desirable that a litigation opponent should be on notice of the "additional liability" (as it was termed) which it might be liable to pay if it was unsuccessful.

However, as matters currently stand in the English Courts, such considerations do not apply in the case of third party funding because the opponent does not have any additional liability to meet the premium (i.e. the uplift in fees or percentage of damages which the funded party is obliged to pay its funder) if it loses the case.

Could it be, therefore, that by ensuring an opponent is fully aware of the existence of funding and, thus, a potential additional cost liability, the doors are open for the funding premium to be recoverable? It certainly begs the question that if the premium is prima facie unrecoverable, what is the policy reason behind deviating from the English system and compelling a party to reveal the existence of its third party funder?

The Practice Direction neither confirms nor rules out the recoverability of funding premiums. It could, therefore, be that recoverability is left to the discretion of the Courts and is to be judged on a case by case basis.

We may not know the answer to this until further funded cases are brought and tested before the DIFC Court but it may be that the Court will take its lead from the English High Court, which recently confirmed the recoverability of funding premiums in arbitration. The case in question is Norscot [1], where the English Court upheld an arbitrator's ruling that a funded party could recover its funding premium on the basis that the cost of third party funding falls within the recoverable costs that an arbitrator has the power to award. In that case it was particularly notable that the premium was on standard terms in the market and the funded claimant had been put in a position by the defendant where it could not fund the arbitration out of its own resources.

Given the pro-ADR stance of the DIFC Courts, it could take its lead from such case law when deciding on the recoverability of funding premiums.

The prospect of an adverse cost order against the Funder

The Practice Direction expressly confirms that the DIFC Courts have inherent jurisdiction to make costs orders against third parties (including Funders) where the Court deems it to be appropriate given the circumstances of the case. Our interpretation of this is that a Funder may well be on the receiving end of a costs order if it backs a case or application that was clearly unmeritorious.

Although funders, as a rule, tend to avoid unmeritorious claims, it does occasionally happen and funders have been punished accordingly in the past – see the English Court of Appeal case; Excalibur Ventures LLC v Texas Keystone Inc & Ors [2], where it was held that commercial funders who had funded a "hopeless" case, even where their conduct was not "objectively discreditable" should pay the successful defendant's costs on the indemnity basis.

The thorny issue of security for costs

One of the arguments against an obligation to disclose the existence of third party funding is that it encourages one's opponent to respond with an immediate application for security for costs (where a claimant, or counterclaimant, is required to make a payment or provide other sufficient security to cover its opponent's costs before it can continue its claim).

The Practice Direction specifically addresses this issue by confirming that although the Courts may "take into account" the fact that a party is funded, this will not in itself be determinative. The suggestion is, therefore, that a party applying for security for costs will still need to evidence one of the conditions set out in RDC 25.102, and will need to provide evidence over and above the fact that its opponent is privately funded in order to be successful in its application.

Conclusion

In keeping with the DIFC Courts' forward looking approach, the Practice Direction introduces some novel guidelines in an effort to provide the much sought after certainty that litigation funders require before entering a jurisdiction.

It is a clear signal that the DIFC Courts are responsive to the needs of the legal market, and will continue to embrace the changing nature and demands of international commercial litigation and arbitration, making it an even more attractive jurisdiction for those seeking to resolve their commercial disputes swiftly and with certainty.

It is against this backdrop, and as a result of challenging market conditions where there is an increasing need for parties to manage their legal costs budgets, that Addleshaw Goddard operates at the forefront of providing innovative and tailored cost solutions to its commercial disputes clients.

For further information on how AG Cost Control can be utilised to suit your litigation needs, please contact us.