Litigation funding is an arrangement where a third party finances the cost of litigation or arbitration proceedings in exchange for a return upon success.Typically, this is fully non-recourse funding in that the claimant is not obliged to repay the funder unless they recover proceeds by judgment, award or settlement.

The litigation funding industry is big business in the US and other common law jurisdictions and has been well-established for many years. In recent years, and particularly in the post-Covid era, the interest of funders has been on the rise in the UAE and the Middle East. With this, the legal landscape has adapted to accommodate, yet claimant awareness and comfort with this model has somewhat lagged behind.

The UAE does present some unique challenges in terms of its mixture of financial free zone courts and national, civil law courts, and the interplay between onshore Federal law and the application of foreign choices of law. However, with a carefully planned legal strategy, there remain credible opportunities for deployment of litigation finance, irrespective of the specific forum.

This is intended as a practical guide for parties seeking to de-risk or even monetise claims.

First, it is useful to recap on the key benefits litigation funding offers.

1.Source of Finance

Financial Accessibility: Litigation or arbitration can be prohibitively expensive. Third-party funding enables claimants lacking the financial resources to cover legal fees and expenses to pursue claims which would otherwise have to be severely compromised or written off.

Access to High-Quality Legal Representation: Funding can allow claimants to retain higher quality and more specialised legal teams who might have been beyond their financial reach otherwise.

Level Playing Field: Third-party funding can help balance the scales when claimants face well-funded defendants, ensuring that financial disparity does not affect the outcome of the case.

2.Risk Management: Litigation funding enables claimants and law firms to de-risk the litigation by transferring it to the funder. This is particularly valuable in uncertain or high-stakes cases. Where funders are not taking adverse costs risk in the event that the claimant fails in the litigation, claimants are well-advised to seek after-the-event (ATE) insurance if available.

3.Cash Flow Management: Litigation funding relieves the cash flow burden and enables claimants to preserve operational budgets.

4.Strategic Partnership: Third-party funders often provide more than just capital. They can offer strategic insights, resources, and expertise in managing complex litigation processes, contributing to a higher chance of success.

5.Litigation Budgeting and Planning: Funders usually require detailed case assessments and budgets as part of the Investment Memorandum phase and beyond, which can help claimants and their legal teams plan more effectively and avoid unforeseen expenses.

6.Enhanced Settlement Negotiations: Having a litigation funder can strengthen a claimant’s bargaining position in settlement negotiations, as the opposing party knows that the claimant has the financial backing to see the case through to trial if necessary.

On the other hand, litigation funding is not without its risks and potential downsides. The main consideration is the cost. Claimants can generally expect to give away around 30% of any recovery. While this is significantly more costly than traditional finance, one needs to balance this against the non-recourse nature of the financing.

Funded claimants also relinquish a degree of autonomy (even if only indirectly), by the need to satisfy the funder’s ongoing requirements and expectations. This may be felt particularly in the context of settlement negotiations, as claimants weigh up the consequences for settling at a lower range than their funders expect, or may even be bolstered by the fact that a funder is sitting behind them, making them less inclined to consider sensible settlement proposals.

Claimants may also be frustrated with the initial due diligence exercise adopted by funders, which naturally has the tendency to delay commencement of proceedings, and generally carries additional up-front cost.

As a practical guide for General Counsel (GC’s) and decision makers for claimants seeking to de-risk their claim recoveries, the following are key criteria that need to be met for a realistic chance of obtaining funding:

Merits: Funders require the claim to have ‘good to strong’ merits, which generally means that the prospects of success are at least 60% according to a reasonably detailed and considered opinion from a senior legal counsel. If the governing law is English law, this generally means a Kings’ Counsel. If other expert evidence will feature heavily in the case, a similar opinion is needed.

Quantum: The realistic claim value must be substantial and fit within the funder’s financial ratio in terms of legal cost vs. recovery. A rule of thumb is that the realistic claim value should be at least US$10 million or equivalent. However, in recent years, funders looking at the Middle East market are more willing to consider funding claims in the $1 million to $10 million range (although claims in this range may affect the required ratio and the threshold for claim merits). A funding to damages ratio is normally not less than 1:6 but more often closer to the 1:10 range.

Risk sharing: Although not mandatory for all funders, the extent to which the claimant and their lawyers are willing to bear at least some financial risk of the legal fees and other litigation or arbitration expenses will determine whether funders are willing to invest and the commercial terms of the financing offered.

Recoverability: The identity, location and financial position of the defendant is vital, and its importance frequently overlooked. There must be a clear path to recovery. A well-known multi-national or state-owned corporate defendant is naturally more likely to satisfy funders criteria than a special purpose vehicle located in a less-than-friendly jurisdiction for enforcement. It must also be remembered that the location of establishment is not necessarily the location of the relevant asset/s against which enforcement would take place.

Claim type and complexity: The claim should be for monetary compensation rather than another form of remedy such as specific performance. Claims which are less fact-heavy and which depend more on legal questions such as contractual interpretation are better candidates for funding. Non-performing loans are also a prime candidate for funding, and several funds have been set up expressly for this purpose.

On the other hand, obtaining funding for construction claims tends to be more difficult as these often require delay analysis, involve vast quantities of factual evidence, and are highly dependent on a court or tribunal’s acceptance of competing expert evidence. However, if armed with a robust legal and expert opinion up front, these claims still can be funded.

Suitable regulatory conditions: Certain jurisdictions have laws or regulations that prohibit third party funding or severely restrict it. The DIFC and ADGM Courts permit third party funding and have established rules for its operation (principally that the existence of the funding is disclosed, as well as whether the funder is taking adverse costs risk). The 2022 DIAC Arbitration Rules 2022 and the current Arbitration Rules of the Abu Dhabi International Arbitration Centre (now branded as arbitrateAD) contain similar requirements, but additionally require disclosure of the funder’s identity. For litigation in the onshore courts, third party funding is not expressly prohibited. However, the type and scope of acceptable third party funding arrangements is relatively untested in this jurisdiction, and care is required with structuring and drafting funding agreements.

Aside from traditional third party funding models, certain funders in the market are willing to adopt alternative structures such as straight acquisition of claims, or assignment of claims with a shared distribution, especially for non-performing loan claims. These provide a far cleaner model for claimants, but require careful attention to the legal structure of the arrangement to ensure it achieves its intended legal effect.

Authors: Josh Kemp and Arthur Dedels

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