04 May 2017

An overview of Third Party Funding

Authored by: Michael Dunmore

In Brief:

  • Third party funding is used when a party cannot pay for the costs of litigation / arbitration or when a party wants to manage the financial risks associated with litigation/arbitration.
  • The DIFC has recently issued a practice direction on third party funding.
  • Third party funding is an effective tool to mitigate the increasing costs incurred in court and arbitration proceedings.

What is TPF?

Third party funding (“TPF”) is the provision of funding for litigation or arbitration by a funder that is unrelated to either party.

There are a number of “Funders” that provide funds to parties, ranging from large international Funders with capital of over USD300 million that have publicly traded shares, to smaller Funders with relatively limited capital.

TPF is a burgeoning industry in a number of countries, including the UK and the USA. TPF has not been widely used in the UAE. Currently, only minimal regulations apply to TPF in the UAE. These regulations are set out in a recent Practice Direction (defined below) issued by the DIFC Court. Other than the DIFC Practice Direction, no other regulations regarding TPF exist in the UAE.

The most common type of TPF funding arrangement is “after the event” funding (ATE) where the funder agrees to fund the party in return for the party paying the Funder a proportion of any amount recovered. Parties can also agree to arrangements for funding prior to the event (before the event – BTE) giving rise to the claim occurring. In all types of TPF funding arrangements, the Funder is entitled to a proportion of any amount recovered.

Due to the uncertainty of litigation and arbitration, the claim for which a party is seeking TPF is subjected to a considerable scrutiny process to determine the merits of the claim. TPF is usually available only for those claims that have a good chance of succeeding. In practice, a very limited number of the applications that each Funder receives for funding will be successful. Those clients that do receive funding must agree to onerous funding arrangement terms, which are in place to optimise the likelihood of the best return possible for a Funder.

Recently various Funders have attempted to penetrate legal markets in a number of Asian jurisdictions, notably Hong Kong and Singapore. With so many available forums for dispute resolution in the UAE, it is only a matter of time before Funders turn their attention to funding parties that are involved in disputes in the UAE. The UAE has many suitable forums for TPF including the Abu Dhabi Global Markets Courts, the DIFC courts, the UAE Federal courts, the Dubai Courts, and the Abu Dhabi Courts, as well as local courts in other emirates.

Why use third party funding?

Parties generally use TPF for two main reasons. The first is where a party may be deterred from commencing or participating in legal proceedings (arbitration or litigation) due to the high costs associated with doing so. The second is when a party is dissuaded from taking part in litigation or arbitration due to the financial risks associated with losing a case. In both of these situations, TPF has the potential to provide parties who are faced with these issues with an alternative that will allow them to effectively participate in litigation or arbitration proceedings. In respect of the former, TPF provides a party with the means to pursue or defend a claim that it would otherwise be precluded from for financial reasons. In the latter situation, TPF provides a party with a tool to mitigate its risk in relation to the legal proceedings.

DIFC Practice Direction

On 14th March 2017, the DIFC Courts issued Practice Direction 2 of 2017 – Third Party Funding in the DIFC Courts (the “Practice Direction”).[1]

This is a major step in regulating TPF in the DIFC courts and could foreshadow how TPF is regulated across the rest of the UAE. There are a number of key aspects of the Practice Direction that should be highlighted:

  • A party that is funded must put all other parties in a dispute on notice that the party has entered into a funding arrangement. The notice must consist of the name of the Funder, but does not need to contain the details of the funding arrangement.
  • For claims made in the Small Claims Tribunal, notice to other parties is not required unless and until such claim is transferred, or appealed, to the Court of First Instance.
  • The DIFC Courts may take into account that a party is funded when making determinations on applications for security for costs, but the fact that a party is a funded party shall not by itself be determinative in considering applications for security for costs.
  • The DIFC Courts have jurisdiction to make costs orders against third parties, including Funders, where the Court deems it appropriate, given the circumstances of the case.

As a general observation, the Practice Direction is in line with international best practice, followed in other countries. 

Future Considerations

The Practice Direction is particularly significant for TPF across the UAE, as it is the first major step in regulating TPF in the jurisdiction, which may initiate the enactment of additional TPF regulations.

One recent change that could lead to an increase in the use of TPF in Abu Dhabi is the removal of the cap on Abu Dhabi court fess.[2] 

The removal of the cap has increased the cost of litigating high-value disputes. TPF provides a mechanism to counteract these increased court fees and allows parties to participate in litigation if they are short on funds. It should be noted that when the Abu Dhabi courts issue an award for costs, these orders cover court fees and only a small percentage of legal fees.  

As the dispute resolution forums in the UAE listed above increase their caseloads, it can be anticipated that TPF will become more prevalent. As such, one can anticipate that the importance of TPF in the UAE will increase, as will its regulation.

[1] http://difccourts.ae/practice-direction-no-2-2017-third-party-funding-difc-courts/

[2] Law No. 6 of 2013 concerning the Judicial Fees payable in the Emirate of Abu Dhabi.

 

 
 

This article, including any advice, commentary or recommendation herein, is provided on a complimentary basis without consideration of any specific objectives, circumstances or facts. It reflects the views of the writer which may, in some cases, differ from those of the firm, especially in the developing jurisdiction of the UAE.