Guest blog: Third-party funding in international arbitration in the Middle East
Inji Fathalla, Counsel and member of Shahid Law’s International Business and Dispute Department, and Mohamed El Mahdy, Senior Associate and member of Shahid Law’s International Business and Dispute Department, analyse the state of play of third-party funding in arbitration in the Middle East.
Globally speaking, the third-party funding agreement (TPF) is certainly not a novel concept, yet it is still to find its way in the Middle East. The main reason for funders being reluctant to enter the Middle Eastern market is the negative perception of certainty and enforceability of awards.
However, this perception is changing due to the progress that has been happening in the region, especially in the UAE. In addition, changes in different institutional rules have been supporting this process. For example, the latest amendments to the ICC Rules require the parties to “promptly inform the Secretariat, the arbitral tribunal and the other parties, of the existence and identity of any non-party which has entered into an arrangement for the funding of claims or defences and under which it has an economic interest in the outcome of the arbitration”. Since the local laws and regulations are somehow silent with regard to TPFs, having provisions in the applicable institutional rules will definitely assist in the process and give more certainty and comfort to the parties when dealing with TPFs.
The rising need of funding and the process behind it: to file or not to file?
The inclusion of arbitration clauses may be overused sometimes. While drafting the agreement, the concerned parties often believe that an arbitration clause is more convenient for their relationship in case of any kind of dispute or disagreement, without taking into account the value of the contract. However, one important aspect they forget is the cost of filing an arbitration case. It is not debatable that arbitration, as a dispute resolution mechanism, is costly in comparison to litigating the case before courts.
Costs are a fundamental variable in the decision on filing a case, and sometimes its repercussion could be so severe that it undermines the parties’ “access to justice”. In some cases, the relief sought is equal to or even less than the costs of the procedure itself. In addition, you should always factor in the risks that come along with filing a case.
Further, and especially in the post-pandemic era, liquidity is not as easy as it used to be, and companies need to justify any amounts they spent and the percentage of how much they recovered.
All these factors have a huge impact on the decision to file or not to file an arbitration case.
TPFs could be a good compromise since they involve another entity which shares the risk (and enforcement) of the case. TPFs should not be, and recently have not been, an exclusive resort to parties with financial distress. TPFs are, to a certain extent, a financial facility for companies to seek their dues and rights and be lawfully compensated.
The main pros of TPFs are (i) assisting the company in seeking its dues without the need to burden it financially, (ii) sharing the risk with someone else (who has also done the homework – due diligence – to finance this case), (iii) showing the counter party that the company is serious and ready to take all measures to pursue its claims, and (iv), as mentioned, having a third-party diligently scrutinise the merits of the case, give a more objective opinion on whether to pursue it or not and help the management of the company feel more confident about their decisions.
However, one must also highlight that the perception of seeking the dues will change, from seeking what a party sees as its rights to having a case that represents an investment opportunity. In any event, from a business standpoint, it is more beneficial to see it as an investment.
The Middle East is still new to TPFs and, in fact, local laws and regulations are not articulate and do not give any guidance. This could be considered a benefit as this will give more and more flexibility to the parties of TPFs when agreeing on terms and conditions.
One important challenge, however, is the enforceability of the awards. Some jurisdictions in the region could face practical challenges with enforcing arbitral awards. This could heavily affect TPFs.
Further, the reaction of local courts is unpredictable. As an example, in a recent decision of the Egyptian Court of Cassation, the court did not negatively comment on it despite the fact that it had not reviewed the merits of the case nor had gone in depth on the funding matter. This could mean that courts are starting to accept and embrace the concept of TPFs, and may support their development in the future.
While most of the jurisdictions in the Middle East do not regulate TPFs, the general trend is that the concept of TPFs is being embraced by courts in the Middle East. More specifically, because of the rise of the use of arbitration in the Middle East, the developments in support of arbitration and the increasing costs of arbitration, there is a growing interest by both third-party funders and disputing parties in the Middle East.
*Disclaimer: The content of this article does not reflect the official views of the International Chamber of Commerce. The opinions expressed are solely those of the authors and other contributors.