An Introduction to Third Party Dispute Funding

The financing of legal actions by third parties has grown exponentially since the early 2000s and is now common across many common law and civil law jurisdictions. It is still in its infancy in Qatar, but the Qatar International Centre for Conciliation and Arbitration (the “QICCA”) expressly recognised third party dispute funding in its 2024 rules update (the “QICCA Rules”).

This article seeks to provide a brief introduction to third party funding, and how it can make justice more accessible in a time when arbitration has become an expensive endeavour. While third party dispute funding may allow greater access to arbitration, it requires a careful balancing act between the interests of the claim’s stakeholders, and indeed those of the adverse party, with private equity investment demands. +

The QICCA has taken Qatar’s first step in recognising the risks, and time will tell how the legislative framework develops to further protect the interests of those seeking justice.

The QICCA Rules

Article 9 of the QICCA Rules was introduced in the latest rules update and provides the following:

Where an arbitration is funded or financially supported by a third a party, the parties to the arbitration proceedings are, upon commencing and throughout the proceedings, obliged to disclose details of such funding in writing to the Center or the Arbitral Tribunal whether such funding concerns the arbitration Claim or Counterclaim. The disclosure statement shall include the nature of the funding, and the identity of the funder.

This provision closely follows Article 111(7) of the 2021 rules of the International Chamber of Commerce:

In order to assist prospective arbitrators and arbitrators in  complying  with their duties  under Articles 11(2) and 11(3), each party must 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.

While third party funding was not prohibited in Qatar prior to the rules’ change, the QICCA has come into line with other arbitration institutions in recognising that it is now a common practice that needs to be managed.

Unlike other more developed jurisdictions, there is currently no legislative framework in Qatar to provide further guidance. However, once a funder is disclosed, tribunals in Qatar will need to consider arbitrator independence and conflicts, potential applications for security for costs, and whether any case-management measures are required to ensure procedural equality and that control of the arbitration remains with the funded party rather than the funder. All these issues are critical in ensuring that an award is recognised and can be enforced.

What is third-party dispute funding?

At its simplest, third party dispute funding is where a third party with no connection to the dispute agrees to finance all or part of the legal costs of the dispute in return for a fee payable from the proceeds recovered by the funded party if successful. Funding is usually on a non-recourse basis, that being that fees are limited to recovered proceeds, and no fee is payable if the funded party is not successful and there is no recovery. A funded party can protect itself further by acquiring ‘after the event’ insurance, which insures against the risk that the party will be ordered by an arbitral tribunal to pay the opposing party’s legal costs.

Why would a party seek third-party funding?

Third party dispute funding comes at a cost. If the party seeking finance wins its claim, it will have to share the proceeds of that claim with the funder. There are multiple reasons that a party may exercise the option doing this:

• The cost of arbitration is high. For an amount in dispute of US $10 million, a relatively small claim, an arbitration with a tribunal of three arbitrators before the ICC would typically cost in the region of US $350,000 in arbitrator’s fees alone; on top of this there are lawyers’ fees, experts’ fees, and other external costs (hearing costs) that need to be accounted for. For many companies, the cost is prohibitive notwithstanding that it may have valid claims.
• The party prefers to share the risk of pursuing the claim.
• Funds that would otherwise be used for legal expenditure can be used for business opportunities.
• Reserves held on a balance sheet for litigation can be reduced or removed where the legal spend or risks are transferred to a third party.
• Third party funding allows a company with multiple claims to finance more claims that its limited legal budget would otherwise allow.

What costs does third-party funding cover?

This is ultimately a matter to be agreed between the party and the funder, but costs covered would typically include: lawyers’ fees, experts’ fees, tribunal costs and arbitration institution costs, security for costs (if applicable), costs of taking and collecting evidence, adverse party fees (in case of loss), and all out -of-pocket expenses associated with the claim.

The funding process

This will differ according to the funder, but typically due diligence is carried out in detail by the funder to determine how viable the case is to invest in. Alongside merits of the case, a funder will place significant focus on risk as to mitigate future losses. A funder will only make money if the claim is successful, and a rigorous due diligence is undertaken to assess both the merits of the case, and the financial credit of the opposing party – there is a little value to a funder in obtaining a positive award if there is no cash to pay that award.

Before putting capital at risk, a funder needs to be convinced that a case has a very high probability of success, that the damages awarded will be sufficient to cover the targeted remuneration, and that the award will be paid voluntarily or is recoverable though reliable enforcement proceedings. This requires a rigorous assessment of all aspects of the case, and typically encompasses three stages:

• The first phase of due diligence examines the key issues of the claim and proceedings in order to understand if it is suitable for funding. Depending on the experience of the funder, this may be carried out by the internal team, which can have a notable impact on the speed at which an initial decision is made. 
• In the event of a positive phase 1 due diligence process, the claim then progresses to phase 2, encompassing detailed due diligence of the proceedings, details and risks of the claim, along with the economics of the investment. At this point, it can be common for a funder to gain the objective view of an independent third-party expert on the merits of the case.
• If a case passes both phases 1 and 2, it is then normally escalated to something commonly referred to as an Investment Committee. This is where a decision is made to fund and on what terms. Depending on the complexity of the case, this process could take a number of weeks and possibly months.

Some of the key issues that funders will look at are:

• Damages – Third party funders will want to conduct an assessment of reasonably-to-be-expected damages; will the plausible damages value offer a sufficient rate of return against the investment and risk.
• Budget and timeline – Critical will be the anticipated costs and the expected timeline for recovery.
• Recoverability – This will typically include data on the respondent’s financial position, with particular focus on their current and anticipated financial strength, asset location, and any information on historical attitude towards payment of judgments and awards.
• Strength of legal claims – A very detailed analysis that provides a summary of the facts, affirmative arguments, anticipated arguments and counterclaims, and, in common law jurisdictions, the relevant case law supporting each party’s position.
• Factual Evidence – The availability of fact witnesses will be key, together with financial statements, transcripts, available documentation, and other evidence to support both parties’ positions.

Ethical considerations

Third party funding in Qatar is in its infancy, and unlike common law jurisdictions such as England and Wales, there has not been a development of case law to ensure that litigation funders do not assert too much control over the dispute process. This is the balancing act that must be achieved to protect the interest of the dispute parties with the investment requirements of the funders. Funding agreements in Qatar will need to be carefully drafted so as to ensure they are not voided by violating issues of public order and/or exploiting litigants. There is no jurisprudence in Qatar on the issue of third party dispute funding, but it is one that has been explored in common law jurisdictions.

“Champerty” is a common law doctrine describing an agreement in which a person with no previous interest in a lawsuit finances it with a view to sharing the disputed property if the suit succeeds. Historically such agreements were not permitted, but the laws of England and Wales have evolved so that a funding arrangement must involve a level of impropriety to be in breach of  the doctrine; impropriety would include actions such as the funder extending too much control over the case (having the authority to accept or reject settlement offers), the ability to influence strategic decisions, or the right to withdraw funding. While this doctrine is not applicable in Qatar, if such issues arise during an arbitration, and those issues are not dealt with, there may be grounds to question the validity and enforceability of an arbitral award generally under the Qatar arbitration law.

The future

While not yet developed in Qatar, undisclosed or poorly managed funding could potentially be relied upon to challenge or resist enforcement of an award on due-process or public policy grounds, particularly where it gives rise to conflicts of interest or affects procedural fairness during the arbitration.

While Qatar has made good progress in recognising that third party funding exists, time will tell whether it goes the next step and legislates to provide more certainty in ensuring that third party funding is properly contained to ensure that the parties to the dispute do not have their rights limited, and to ensure that third party funders remain just that, funders to an independent process.