Third-Party Funding in Arbitration: Benefits, Drawbacks and Regional Perspectives

Arbitration has witnessed significant growth globally, with third-party funding (TPF) emerging as a notable aspect in recent years.  TPF involves an entity unrelated to the dispute providing financial assistance to one party in exchange for a share of the proceeds if the case is successful.

In the Middle East and North Africa (MENA) region, countries like the UAE, Egypt, Saudi Arabia, Oman, Kuwait, Bahrain, Turkey and Qatar have shown increasing interest in TPF, reflecting its evolving legal landscape and commercial dynamics.

Third-party funding in arbitration is a practice where an external entity finances some or all of the costs associated with a party's pursuit or defense of a claim in exchange for a portion of the proceeds recovered from the successful resolution of the dispute. This funding model is particularly prevalent in complex commercial disputes where the cost of arbitration proceedings can be substantial.

What are the Advantages of Third-Party Funding

•  Access to Justice: Enables parties with limited financial resources to pursue meritorious claims.
•  Risk Mitigation: Funders conduct due diligence, increasing the likelihood of success and mitigating risk.
•  Cost Management: Transfers financial risk to the funder, allowing efficient allocation of resources.
•  Levelling the Playing Field: Helps rebalance power dynamics in financially unequal disputes.

Disadvantages and Risks

•  Loss of Control: Funded parties may cede control over proceedings to the funder.
•  Conflicts of Interest: Funders may have conflicting interests with stakeholders.
•  Cost of Capital: Financing comes at a cost, diminishing the value of the award.
•  Enforcement Risks: Enforcement of funding agreements may pose challenges in some jurisdictions.
•  No Win No Fee: In the "No Win No Fee" model, if the funded party does not succeed, the funder absorbs the entire cost of the proceedings.

The Funder's Involvement and Compensation

Funders play an active role in the arbitration process, collaborating with legal teams. If the claimant prevails, the funder receives a predetermined share of the damages awarded.

TPF offers opportunities for increased access to justice and risk mitigation but presents challenges related to control, conflicts of interest and cost implications. Regulatory frameworks and ethical standards will shape its future trajectory.

(Seyaad Arif is a barrister practicing via SOA LAW, a regulated Bar Standards Board Entity in England & Wales, specialising in Adjudication, Construction Law, Dispute Resolution, International Arbitration and Litigation. He also assists clients in Egypt, Oman, Saudi Arabia and the United Arab Emirates)

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