At Youssef + Partners, we recognize that third-party funding (TPF) is transforming international arbitration by enabling claimants to pursue meritorious claims without shouldering the full financial burden. This financing mechanism is particularly valuable in high-stakes disputes, where legal fees, expert costs, and tribunal expenses can be substantial.
In the MENA region, international arbitration has gained prominence alongside the region’s expanding global economic ties. As a key hub for cross-border trade, infrastructure, and investment, MENA has seen a rising demand for efficient dispute resolution, making arbitration the preferred choice in many jurisdictions.
However, TPF remains a relatively new concept in MENA, with varying levels of regulatory clarity. Concerns regarding its compatibility with Sharia law, its influence on procedural fairness, and its broader implications for arbitration continue to spark debate among legal professionals and policymakers.
This article examines the role of Third-Party Funding in Arbitration, its benefits and challenges, and its evolving impact on the arbitration landscape in MENA.
What is Third-Party Funding in International Arbitration?
Third-party funding involves an external entity, typically a specialized finance company, funding the legal expenses of a claimant in exchange for a share of any financial recovery. This arrangement allows claimants to mitigate the financial risks associated with arbitration while funders benefit from high-return opportunities.
TPF agreements often include provisions outlining:
- The percentage of the recovery allocated to the funder.
- Control over litigation or arbitration strategy (if any).
- Confidentiality and disclosure requirements.
While commonplace in jurisdictions like the UK, Asia, the United States, and Australia, TPF remains a developing concept in the MENA region. The main reason TPF has not gained traction in the Middle East is because of some negative perception concerning the clarity and predictability of legal determinations.
The Rise of Arbitration in MENA
MENA has emerged as a hub for international arbitration, driven by the region’s strategic location, increasing foreign investments, and robust arbitration institutions. Key arbitration hubs include:
- Abu Dhabi Global Market (ADGM): Known for its pro-arbitration stance and modern rules.
- Cairo Regional Centre for International Commercial Arbitration (CRCICA): Egypt’s premier arbitral institution and a leading arbitral institution in the Middle East and Africa.
- Dubai International Arbitration Centre (DIAC): A leading center for international disputes.
- Qatar International Court and Dispute Resolution Centre (QICDRC): Facilitating arbitration within Qatar.
The region’s adoption of international arbitration standards, including the UNCITRAL Model Law, underscores its commitment to becoming a global player in dispute resolution. As arbitration flourishes, so does the need for innovative funding solutions like TPF.
The Legal Framework of Third party Funding in Arbitration in MENA
The legal landscape for third party funding in Arbitration in the MENA region is diverse, reflecting the interplay between local legal traditions, Sharia law principles, and international arbitration standards. While TPF is increasingly recognized in global arbitration hubs, its acceptance and regulation in MENA are still evolving, with key jurisdictions demonstrating varying levels of readiness to embrace this financing model.
Sharia Compliance
A critical factor shaping the adoption of TPF in MENA is its compatibility with Sharia law, which forms the foundation of legal systems in many countries in the region. Sharia law prohibits speculative or high-risk transactions (gharar) and practices deemed exploitative or usurious (riba). As a result, TPF arrangements must be carefully structured to avoid violating these principles.
Emerging innovations include:
- Profit-sharing models: Some funders explore profit-sharing agreements that align with Islamic finance principles, replacing fixed returns with variable outcomes based on case success.
- Murabaha-style funding: In this model, the funder provides financing through a deferred payment structure, ensuring compliance with Sharia by avoiding interest-based returns.
These adaptations highlight the potential for Sharia-compliant TPF models tailored to the MENA market.
Regulatory Clarity
The level of regulatory clarity regarding TPF varies significantly across MENA jurisdictions:
- United Arab Emirates (UAE): The UAE is leading the way in arbitration-friendly reforms. Within the Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM), TPF is explicitly permitted under their respective arbitration rules. Both jurisdictions provide a common law framework that aligns with international arbitration practices, offering a conducive environment for TPF agreements.
- Egypt: The issue of TPF in arbitration is not expressly addressed under neither the Egyptian law in general or the arbitration act more specifically. Therefore, it may not be argued that TPF is necessarily prohibited under Egyptian law as long as the funding agreement is not found to amount to a gambling contract and counsel funding is not in the form of champerty. Despite the absence of legislation when it comes to TPF in arbitration in Egypt, recent versions of the Egyptian Model BIT as well as the new 2024 CRCICA Arbitration Rules of the leading arbitral institution in Egypt have included new provisions pertaining to the disclosure of any TPF. It is expected that, in due course, the matter will be subject to clear regulation in order to determine the practices that will be legally permissible in this increasingly important area of arbitration practice.
- Qatar: The Qatar International Court and Dispute Resolution Centre (QICDRC) has not yet issued specific TPF rules, but its broader pro-arbitration stance suggests potential receptiveness to the concept.
- Saudi Arabia: Despite strides in modernizing its arbitration laws, the Kingdom’s legal system is deeply rooted in Sharia, creating challenges for adopting traditional TPF models. However, initiatives like Vision 2030 and efforts to attract foreign investment may pave the way for more innovative dispute-resolution mechanisms, including tailored funding solutions.
Judicial Precedents and Market Practices
Judicial decisions regarding TPF remain limited in MENA. However, global precedents and increasing awareness are gradually influencing market practices:
- In some jurisdictions, arbitral tribunals have recognized the importance of disclosure obligations, requiring parties to disclose the involvement of a third-party funder to ensure transparency and avoid conflicts of interest.
- Discussions are emerging about the implications of TPF on adverse cost orders and whether funders can be held liable for costs if the funded party loses the case.
Institutional Frameworks
Arbitration institutions in MENA are gradually addressing the topic of TPF:
- The DIAC Arbitration Rules and other local institutions have yet to incorporate specific provisions on TPF. However, the rising prominence of TPF in disputes handled by international arbitral institutions with a presence in the region, such as the ICC and LCIA, is driving discussions on its integration.
- The CRCICA Arbitration Rules are yet to address TPF in an express manner under any provisions. However, the 2024 CRCICA Arbitration Rules include new provisions pertaining to the disclosure of any TPF and it is expected that the matter will be subject to clear regulations in the future.
- The QICDRC is yet to issue any provisions directly addressing TPF. However, its broader pro arbitration stance may suggest a potential degree of acceptance to this concept.
The Role of International Standards
MENA jurisdictions that have adopted or harmonized their arbitration laws with international standards, such as the UNCITRAL Model Law, are better positioned to adapt to TPF. These standards provide a foundation for regulating TPF to balance fairness, transparency, and the interests of all parties involved.
Key Challenges
Despite these developments, several challenges persist:
- Fragmented Legal Systems: The diversity of legal systems within MENA makes it difficult to establish a uniform approach to TPF.
- Perceptions of Control: Funders must be careful to avoid exerting undue influence over claimants, as this could conflict with arbitration’s principle of party autonomy.
- Cultural Resistance: In some MENA jurisdictions, there remains skepticism about TPF, with concerns that it might undermine the fairness of proceedings.
Advantages and Challenges of TPF in MENA
As third-party funding (TPF) gains recognition globally, its implementation in the MENA region brings both significant advantages and unique challenges. Understanding these factors is essential for claimants, funders, and practitioners navigating the complex arbitration landscape in this region.
Advantages of TPF in MENA
- Access to Justice
For many claimants, the high costs associated with arbitration are a barrier to pursuing valid claims. TPF levels the playing field, particularly for smaller businesses and individuals who might otherwise lack the financial resources to engage in complex arbitration cases.
Example: A regional subcontractor facing a dispute with a multinational corporation may lack the capital to engage top-tier legal counsel. With TPF, the subcontractor can pursue the claim on equal footing, knowing that the funder has vetted their case for its merits.
- Risk Mitigation
TPF shifts the financial risk of pursuing a claim from the claimant to the funder. This arrangement is particularly appealing for companies that want to preserve liquidity while still seeking to enforce their rights through arbitration.
In the MENA region, where industries like construction and energy frequently encounter disputes, businesses can use TPF to pursue claims without jeopardizing operational budgets.
- Enhancing Credibility
The involvement of a reputable funder often signals to arbitral tribunals and opposing parties that the claimant’s case has strong merits. Funders conduct rigorous due diligence before committing to financing, which can add weight to the claimant’s position.
This can also encourage early settlements, as respondents recognize the financial and legal resources backing the funded party.
- Tailored Solutions for MENA Markets
Funders are increasingly exploring innovative funding models to align with the unique characteristics of MENA jurisdictions, including Sharia-compliant arrangements. These tailored solutions make TPF more accessible and acceptable in the region, fostering greater adoption.
Challenges of TPF in the MENA Region
- Ethical and Governance Concerns
One of the most debated aspects of TPF is the potential for funders to exert undue influence over the proceedings. In arbitration, where party autonomy is a cornerstone, any perceived interference can undermine the fairness of the process.
For instance, disputes over the extent of funder control in strategy decisions or settlement negotiations can create tensions between claimants, funders, and their legal teams.
- Conflicts of Interest
Arbitration relies heavily on trust in the impartiality of tribunals. The involvement of a third-party funder may introduce concerns about conflicts of interest, particularly if arbitrators have past or ongoing relationships with funders.
Example: Tribunals may need to disclose any connections with funding entities to address potential biases, which can also raise confidentiality concerns.
- Lack of Legal Uniformity
The absence of a harmonized legal framework across MENA jurisdictions creates operational uncertainties for funders. While the UAE’s DIFC and ADGM have embraced TPF, other jurisdictions offer limited guidance, leaving room for inconsistent treatment of funding agreements.
Claimants and funders operating across multiple MENA jurisdictions must navigate these disparities, adding complexity to arbitration planning.
- Disclosure and Transparency
Transparency is critical in maintaining the fairness and integrity of arbitration. However, there is ongoing debate over the extent to which TPF arrangements should be disclosed. While disclosure can help prevent conflicts of interest, it might also expose claimants to strategic disadvantages, such as challenges from opposing parties and applications for securities that otherwise may not have been made.
For instance, respondents may argue that the presence of a funder demonstrates the claimant’s financial weakness, potentially influencing tribunal decisions on security for costs.
- Cultural and Perceptual Barriers
In some MENA jurisdictions, skepticism persists about the compatibility of TPF with local values and arbitration practices. Critics argue that TPF might prioritize profit motives over the pursuit of justice, creating a perception of commercialization in what is traditionally seen as a neutral dispute resolution mechanism.
- Operational Risks for Funders
Entering the MENA market involves navigating regulatory ambiguities and assessing the enforceability of arbitral awards. Funders must also evaluate whether local courts will respect funding agreements, particularly in jurisdictions where the concept is still unfamiliar.
Impact on Arbitration Proceedings
TPF introduces new dynamics to arbitration, particularly in terms of:
- Disclosure Obligations: In jurisdictions where TPF is permitted, parties may be required to disclose funding agreements to ensure procedural fairness.
- Tribunal Considerations: Arbitrators must assess the implications of TPF on costs, adverse cost orders, and security for costs.
- Perceived Bias: Opposing parties may challenge TPF arrangements, questioning the independence of funded claimants.
Future of TPF in MENA
As arbitration gains momentum in MENA, TPF is poised for growth. Key trends include:
- Increased Legislative Clarity: MENA policymakers are likely to introduce clearer regulations to address ambiguities around TPF.
- Demand from Multinational Entities: The region’s expanding energy, construction, and technology sectors will likely drive TPF demand.
- Sharia-compliant Innovations: Funders may develop Sharia-compliant TPF models to cater to the MENA market.
Conclusion
Third-party funding offers significant opportunities to enhance access to justice and promote fairness in international arbitration. While its adoption in MENA faces legal and cultural challenges, the region’s pro-arbitration stance suggests a bright future for this innovative financing tool.
As TPF gains acceptance, MENA will play a crucial role in shaping global practices and balancing the interests of funders, claimants, and arbitrators alike.