Third party funding in international arbitration

With the impact of COVID-19 affecting cash flow and available funds, parties may be considering alternative ways of funding the commencement or continuation of arbitral proceedings, which is likely to result in a growing reliance on third party funding (“TPF”), the key features and benefits of which we summarise in this bulletin. We also consider some of the nuances of TPF in the UAE.

Key features

What is it?

As the name suggests, TPF involves a party (sometimes referred to as a “litigation funder” or “arbitration funder”), who is not involved in the dispute, agreeing to fund some or all of a party’s legal costs in return for a proportion of any damages awarded and recovered by the funded party.

Generally, TPF will only be available to a claimant or a respondent with a counterclaim. Such funding is usually provided on a “non-recourse basis”, meaning that:

• if the claimant obtains an award or reaches settlement in its favour, the funder will recover the capital it invested and obtain a rate of return on the capital invested; or
• if the claimant is not successful following the award or the conclusion of settlement, the funder will not recover the capital it invested nor will it receive a rate of return on the investment.

Choosing a funder

We recommend that the party seeking funding approaches a range of potential funders to increase the chances of receiving funding and drive competitiveness. Some factors to consider when choosing a funder include the following:

• The funder’s financial standing: It is crucial to ensure the funder has enough capital to cover the funds that it has agreed to provide;
• The reputation of the funder in the market in terms of reliability, expertise and fairness: Some dispute funding entities have a team of experienced former dispute lawyers who can provide added value during the investigation process by advising on the likeliness of success and provide legal, technical and strategic expertise; and
• The proposed terms of the funding agreement: Funders will structure the agreement in different ways, and it is important that the claimant chooses a funder that offers fair and advantageous terms.

Rate and structure of return

Typically, the return could be structured as a percentage of the claim proceeds or as a multiple of the capital invested. Funders usually ask for a success fee of 20%-40% of the claim proceeds or the greater of 2-3 times of the capital invested. The riskier the investment is in the funder’s eyes, the higher the funder’s proposed fee.

Overview of procedure

This may differ slightly depending on the approach of the funder, but in our experience, the process can be briefly summarised as follows:

• The claimant (or the claimant’s lawyer) will approach the funder with initial details of the claim and may need to submit a written application along with the request for funding;
• The funder and the claimant will enter into a non-disclosure agreement before any confidential information is provided;
• The claimant will provide the funder with the key documents, the respondent’s position (if known), any legal opinions, an overview of the budget, etc. To assess whether such funding will be provided, the funder will then conduct an investigation into the claim, including the merits and prospects of success;
• Such investigations may also involve external counsel and/or technical experts. Approval may be required from the funder’s board/investment committee before any final decision is made;
• If the funder is satisfied with the claimant’s prospect of success and agrees to provide funding, a funding agreement will be entered into between the claimant and the funder; and
• Thereafter, the funds are provided to the claimant.

Factors impacting a funder’s decision to fund

• Whether the sums likely to be recovered are sufficient to justify the level of investment required to finance the dispute;
• The quantum of the claim. Funders are more likely to approve the funding if the value of the claim is significant. However, some funders focus on funding claims with a smaller value or adopt a “portfolio” based approach, i.e. funding a group of claims, some with very strong prospects of success and others with weaker prospects with the aim of being “in the black” overall;   
• Risks, if any, in enforcing and obtaining the claim proceeds under the award. This includes the ability of the respondent to satisfy the award in addition to the location and value of the respondent’s assets in the event that enforcement is necessary;
• Whether the respondent seeks to challenge the jurisdiction of the tribunal and the grounds for doing so; and
• Any counterclaims being pursued by the respondent.

Benefits of TPF

• Removes the costs of the arbitration from the balance sheet of the funded party;
• Provides a more convenient financing structure that allows funds that would otherwise be spent on the arbitration to be allocated to other parts of the business;
• Acts as a “stress test” on the legal merits of the case;
• Provides access to justice for under-resourced parties (particularly in investor treaty disputes) enabling a party to pursue a case that a lack of funding would have otherwise prevented;
• Demonstrates that the funded party is taking the matter seriously and has a “fighting fund” to pursue its claim(s); and
• Removes the risk of “losing” in that if the funded party is unsuccessful, the funder bears the costs.

Other considerations

• Timing: Obtaining funds on an urgent basis can be difficult since the investigation phase outlined above can take some time depending on, inter alia, the complexity of the dispute. If funds are needed urgently, this must be communicated to the funder, who will assess whether it can meet the timeframe. Alternatively, a claimant may enter into an ad-hoc arrangement with a company within the corporate group to provide funding (for the whole dispute or until the claimant can obtain funds via a third-party funder).
• Confidentiality and privilege: The process of obtaining funding will involve sharing confidential information that may also be privileged. Confidential information must be protected and privilege should not be lost. A non-disclosure agreement should be entered into before the sharing of any information. In the first instance, the claimant should obtain legal advice on this issue before approaching the funder.
• Settlement: The claimant will need to consult with the funder during this process, which may cause some disagreement. The funding agreement should therefore provide that if there is a disagreement between the claimant and the funder over the settlement terms, it will be referred to independent counsel who can assess the merits of the settlement offer and provide its opinion on whether such terms should be accepted.
• Control of claims by funder: While there may be some concerns over the extent to which the funder will exert control over the proceedings, arrangements tend to be structured in a way so that the funder does not have control over proceedings and the claimant. That said, funders will usually ask for periodic reports detailing the progress and significant developments in the case as well as fees incurred to date.

TPF in the UAE

 
ADGM Courts: TPF is also permitted by the ADGM Courts and is dealt with in the Litigation Funding Rules (“LFR”) issued in 2019. In addition to the requirement to notify the other parties that a TPF agreement has been entered into, the LFR regulate what must be included in the TPF agreement and sets out the minimum requirements for a funder to qualify as a litigation funder in the ADGM Courts.
 
Arbitration: There are no express provisions covering TPF in respect of arbitrations seated in the DIFC, ADGM or onshore. However, given that the DIFC and ADGM Courts expressly permit TPF, we do not consider there to be any issues regarding the recognition and enforcement of an arbitral award where the party was provided with funding in a DIFC/ADGM arbitration. In respect of onshore arbitration, consideration should be given to Sharia principles, which may be helpful in determining the approach of the onshore UAE Courts regarding the enforcement of an award that was obtained with the benefit of TPF. Although, we do not consider the existence of TPF to be a barrier to enforcement.

Conclusion

There is a growing appetite for TPF in the Middle East due to the rise in high-value disputes and significant reforms to the law, particularly concerning enforcement, in recent years.

It is expected that the impact of COVID-19 will also encourage parties to consider TPF as a method of improving cash flow and removing the costs of arbitration off the balance sheet.

Get in touch

Our team in Dubai regularly advises and represents some of the most high-profile companies, government institutions and individuals in arbitration proceedings worldwide and have worked on numerous funded matters.

Should you have any questions or require specific advice in connection with TPF, our team members below will be ready to assist you.