Despite being a hub for global trade and, consequently, fertile ground for the funding of high-value disputes between sophisticated parties, the Middle East has not been a go-to market for third party funders.
The slow uptake of third party funding in the region has undoubtedly been fuelled by funders’ historic discomfort with the regional legal landscape. Sceptical about the predictability and stability of the regional legal systems, judicial processes and their outcomes, funders tended to approach this region with extreme caution and reservation.
One of the key concerns from a third party funder’s perspective is the applicability of Sharia law, compliance with which is public policy in certain Middle Eastern jurisdictions. Unfamiliar with the workings of this legal system, and, consequently, unable to even attempt to predict outcomes of Sharia law governed legal proceedings, funders preferred to overlook potential investment opportunities.
This being said, Sharia law is an impediment to third party funding only in so far as it is perceived as such. Professional and experienced funders have the knowledge, experience, and means to overcome potential hurdles posed by the applicability of Sharia law.
Third party funding does not conflict with Sharia Law
First and foremost, it bears noting that Sharia law contains no formal contradictions to a party, foreign to the dispute, having an economic interest in case. Contrary to jurisdictions such as England, Australia, Hong Kong and Singapore, there is no doctrine in Sharia law similar to champerty and maintenance which could constitute an impediment to third party funding.
There are three prohibitions in Sharia law which could be seen to be in tension with the concept of third party funding: (1) Riba, the prohibition of interest, (2) Gharar, the prohibition of any transaction involving uncertainty and speculation, and (3) Maisir, the prohibition of gambling.
However, when juxtaposed with the simple definition of what third party funding is and what it is not, it is clear that neither of the aforementioned Sharia law prohibitions are violated by third party funding.
To briefly recall, third party funding is, in its most basic form, a simple financing arrangement pursuant to which a party foreign to the dispute, the funder, undertakes to pay a disputing party’s legal fees and expenses within an agreed budget on a non-recourse basis. In the event of a successful litigation outcome, the funder recuperates its investment and either a multiple of the money invested, an agreed percentage of the recovered damages, or a combination of the two.
The terms of the agreement between the funder and the disputing party, often advised by experienced counsel, are reflected in a funding agreement which is negotiated and entered into by the client, the client’s lawyers and the funder. Professional funders will tailor the funding terms in order to take in to account, the specifics of each case, early settlements, quantum increases, and the payment date.
It is important to underline that third party funding is not a loan or other type of recourse financing. The funder is not awarded interest in exchange for advancing the funds to litigate the dispute. Rather, in the event of a successful outcome, the funder recuperates a share of the recovered damages in a proportion that has been carefully negotiated and agreed with the client. If the claim is unsuccessful, the client will not have to pay or reimburse anything and consequently, the funder loses its investment.
When considered alongside an accurate definition of the concept of third party funding, as demonstrated below, it is clear that the Sharia law prohibitions of Riba, Gharar, and Maisir, are in fact, inapposite to the practice.
Riba means "an excess". The prohibition of Riba¸ is interpreted to forbid an unjustified increase of capital be it in respect of loans or sales. Thus, if a contract provides for an excessive profit margin and is deemed to be unconscionable, oppressive or abusive, it will be considered to be a form of Riba.
A carefully negotiated third party funding agreement between two sophisticated and well-advised parties is neither unconscionable, oppressive, nor abusive. On the contrary, third party funding is often a means of providing access to justice for impecunious claimants with meritorious claims. Consequently, not only does third party funding not fall foul of the Sharia law prohibition of Riba, it is fact aligned with the Sharia principle of Maslahah which requires that a transaction serve the public interest.
Similarly, third party funding is not in violation of the prohibition of Gharar. This Sharia law prohibition covers all forms of speculation where the contracting parties do not know the exact scope of the agreement. For example, a modern-day insurance contract, where the timing of the benefits is uncertain, would be void under Sharia law as it would fall squarely within the prohibition of Gharar.
In the case of third party funding carried out by professional third party funders, where the terms of the agreement, including the amount and timing of payment, are set out with precise detail, the prohibition of Gharar is not at cause.
Equally inapposite in the context of the funding of a dispute by a serious and professional third party funder is the prohibition of Maisir. Both aimed at avoiding betting and gambling, the prohibition of Maisir and professional third party funding are in fact aligned. The comprehensiveness and rigour of a serious professional funder’s extensive due diligence process proves the point. Investment decisions of professional funders are extremely careful and researched. Serious and professional funders simply do not fund spurious or unmeritorious claims. Quite to the contrary, professional funders often engage internally and externally recognised legal experts in the specific type of dispute under consideration to assess the merits of a case. In addition to top tier legal counsel, external quantum, industry, technical, and asset recovery experts will be consulted as and when required by the specifics of each case. Gamblers do not and would not last long in the third party funding industry.
Third party funding is not any different from traditional private equity investment which may prove to be a loss despite the extensive analysis of the activity of the acquired company. If traditional investment activities do not violate the prohibition of Maisir, neither does third party funding.
Uncertain application of Sharia law
From the third party funder’s point of view, the main concern when it comes to Sharia law is not its applicability per se but rather its interpretation and resultant application. Sharia law is an uncodified living organism, and is thus subject to adaptation, interpretation and development. This results in uncertainty as to how Sharia law will be applied by decision makers and the ensuing effects and consequences.
In all fairness, this critique can be equally made with respect to most legal systems in the world. However, in the case of Sharia law, the uncertainty in its application is further exacerbated by conflicts between Sharia law and the current international framework. Developed in a historical and cultural context of the past, Sharia law is sometimes at odds with today’s international legal context. This in turn translates into uncertainty as to whether the hierarchy of norms, and the requisite interaction between international norms and Sharia law will be respected by the judge.
The solution of bespoke funding arrangements
As noted at the outset of this article, the applicability of Sharia law is only a difficulty in so far as it is perceived as such. Indeed, rather than overlook potential funding opportunities due the uncertainties posed by Sharia law, sophisticated funders have developed solutions to work with and within this legal system.
One such solution is the tailoring of bespoke funding agreements to ensure compliance with Sharia law. Sophisticated professional funders are aware of the various implications of Sharia law and its potential effects on the funding agreement and, consequently, their investment. Empowered with this knowledge, funders are able to collaborate with the client and its counsel so as to ensure the legality of any agreed arrangement. This enables professional funders, well-versed in the intricacies and particularities of the regional legal systems, to seize the interesting and potentially lucrative investment opportunities in the Middle East.