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  • Writer's pictureEvelina Gurtskaya

Emergence of Litigation Funding in the UAE




What is Litigation Funding?

Litigation funding (LF) is an arrangement wherein a third party, typically a specialized funder, allocates funds to a party involved in a dispute to cover legal fees and expenses. This is usually done in exchange for a portion of any awarded proceeds.

The primary aim of LF is to enable potential claimants to pursue legal claims that might be financially out of reach due to the hefty costs associated with litigation. However, LF is not just for those who can’t afford to engage in legal proceedings. It can also serve as a strategic tool for claimants who do have sufficient funds but, for commercial reasons such as removing legal expenses from a party’s balance sheet, would prefer to opt for external financing.

Prevalence of Litigation Funding

The last decade has witnessed a surge in the use of LF across various civil and common law jurisdictions, including the UK, US, continental Europe, and Australia. The driving force behind LF's popularity in these countries is the high cost of litigation, which imposes stringent budgetary constraints on parties considering legal action. This, coupled with the desire to minimize financial risks associated with the unpredictable nature of litigation outcomes, makes LF an attractive option for potential claimants.

Traditionally, funders gravitated towards markets characterized by large, well-established legal systems, and seemingly reliable enforcement processes. However, the landscape is shifting, with the UAE’s growing track record of successful legal enforcement capturing funders’ attention. Such growing interest among funders is spurred by the region’s increase in the number, complexity, and magnitude of legal disputes. Additionally, the prevalence of arbitration, combined with the existence of the DIFC and ADGM Courts, whose operational and procedural frameworks closely reflect those of traditional common law systems, has significantly contributed to this paradigm shift.

Currently, the UAE hosts a number of globally recognized funders, complemented by a growing presence of more specialized funders marking their entry into the market more recently. While the LF market in the UAE may not be as mature as those in other jurisdictions, the confidence in the UAE's legal framework is on the rise, fuelling an expansion in LF activities. This uptrend is especially notable following the entry into force of Federal Decree Law No. (16) of 2021 on Factoring and Assignment of Receivables (Assignment Law), which has laid a more solid foundation for LF. By clarifying the legal framework for the assignment and security of receivables, the Assignment Law has made it easier for funders to recoup their investments, thereby enhancing the region’s appeal as a hub for such operations. This legislation streamlines the funding process by allowing for the assignment of future receivables without the need for additional agreements for each case, simplifying the approach to financing legal claims.

Litigation Funding in the UAE

Onshore Courts

LF has traditionally found little foothold in the onshore UAE courts, primarily due to the lack of a binding precedents system. Unlike common law jurisdictions, where past decisions may set binding precedents, the UAE courts rely on codified statutes. Additionally, a notable deterrent for funders, typically seeking cases with a high likelihood of success and cost recovery, is the UAE courts' practice regarding cost recovery, which does not award actual costs to claimants.

Financial Centre Courts

In contrast, the DIFC and ADGM Courts offer more promising prospects for LF. These jurisdictions are perceived as more predictable and, therefore, more attractive to funders, partly because they are based on a common law framework that allows past court decisions to serve as binding precedents for future cases. Additionally, in DIFC and ADGM courts, parties have the opportunity to recover their litigation costs, making these venues more appealing for those considering LF.

Regulation of LF in the UAE

There are no specific rules or regulations governing LF in onshore court proceedings. However, when entering into funding arrangements under UAE law, parties must still ensure compliance with the general principles of UAE law. This includes adhering to the principle of good faith and avoiding transactions that are speculative or highly uncertain.

In the DIFC, regulations are more explicit. A party receiving LF is required to notify other parties to the proceedings of the funding arrangement and to disclose the funder’s identity.

Similarly, in the ADGM, any litigant entering into an LF agreement must notify all other parties to the proceedings in writing about the arrangement.

Regardless of whether a claim is pursued before the local  or free zone courts, the funder does not become a party to the legal proceedings. However, in cases before the DIFC or ADGM Courts, the party receiving funding must comply with the disclosure of LF requirement.

Types of Litigation Funders

In the UAE, funders generally fall into two main categories based on their approach to finding. Despite the varied funding methods often observed in other jurisdictions, the following two types are prominent in the UAE:

Legal Financing Companies: these firms provide financial support to potential claimants for the legal expenses associated with pursuing a case. In return, they receive a portion of the settlement or judgment amount if the case is successful. This model is particularly appealing to litigants who have strong confidence in the merits of their case but lack the necessary financial resources to proceed.


Debt Purchasing Companies: these companies focus on acquiring the entire debt from the original creditor. This approach offers an immediate exit for creditors looking to avoid the legal challenges and uncertainties associated with debt recovery. After purchasing the debt, these companies step into the creditor’s shoe, taking over the litigation or recovery efforts themselves. This method of LF has gained more traction following the introduction of the Assignment Law.

This is particularly relevant in the context of banks and financial institutions grappling with non-performing loans (NPLs). These institutions often face difficulties with loans left unpaid due to borrowers defaulting or leaving the country. By selling these loans to debt purchasing funders, banks can significantly expedite the debt recovery process, mitigate risks, and reduce procedural and legal overheads associated with chasing down delinquent debtors abroad.

The Evolving Landscape of Litigation Funding in the UAE

Whether in the UAE or other jurisdictions LF is faced with criticism regarding the level of involvement by funders in the proceedings, including settlements.

The traditional view of LF prioritizes minimizing conflicts of interest and upholding a clear demarcation between funders, clients, and legal counsel. This model is predicated on the belief that funders should refrain from influencing case strategy or legal decisions to ensure the sanctity of the attorney-client relationship remains impervious to external financial influences.

Conversely, a more modern perspective has gained traction in recent years, advocating for a heightened role of funders in the litigation process. This view recognizes the potential benefits of committees formed by funders working in concert with legal counsel, offering strategic insights and resources to fortify the case.

It is clear that both views have merit. On the one hand, legal practitioners are bound by duties to avoid conflicts of interest, maintain independence, and safeguard client interests, principles that are foundational to the legal frameworks of both DIFC and ADGM. The potential for active involvement of funders introduces the risk of compromising these duties, for instance, by enabling legal practitioners to accept commissions or referral fees from funders. This scenario feeds the argument for imposing tighter restrictions within the LF sphere.

On the other hand, funders share a vested interest in the successful outcome of proceedings alongside the claimants, suggesting a rationale for their involvement. The current freedom to contract under the UAE framework accommodates this dynamic. Given that much of the LF activity in the UAE engages corporations and banks—entities that are not only commercially astute but often have internal legal departments—the likelihood of claimant interests being compromised under a balanced framework appears slim.

Forging a more equitable LF system might entail allowing funders a participatory role that is more consultative than directive, ensuring their input while reserving final decision-making authority for the client and their legal counsel. However, regardless of the stance one takes, the indispensable role of LF in enabling claimants to assert their legal rights, particularly in managing litigation costs within the UAE’s dynamic legal landscape, is undeniable.

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At NHB Legal, we recognize the significance of LF in facilitating access to justice and supporting our clients through their legal challenges. We actively engage with both existing and new funders in the UAE market, valuing the innovative solutions and financial support they bring, all aimed at securing the most favourable outcomes for our clients.

Building on this foundation, we have fostered relationships with a variety of funders to provide our clients with easy access to their services, ensuring swift and thorough assessments of claims. This strategy not only accelerates the litigation process but also boosts our ability to navigate the financial hurdles our clients face, empowering them to assert their legal rights with confidence.

Our involvement with LF goes beyond mere facilitation. We have actively worked on and continue to engage in numerous cases where we are instructed directly by funders or by parties they support. Our track record is a testament to our success, with numerous high-value awards secured by our team.

Moreover, our expertise in UAE law has established us as the preferred partner for international law firms active in the LF arena. We offer comprehensive support on UAE law, bridging the gap between international legal practices and the distinctive aspects of the UAE legal system.

We pride ourselves on leading the way in the LF landscape in the UAE, dedicating our expertise and extensive network to support our clients and partners in securing the most favourable outcomes in their legal endeavours.

For more insights into Litigation Funding or other alternative funding arrangements available in the UAE, feel free to reach out to our team. We're here to address your queries and steer you in the right direction, ensuring informed decisions in your legal pursuits.


Evelina Gurtskaya 

Associate

NHB LEGAL

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