Arbitration Funding in Egypt

Introduction:

In recent years, arbitration has increasingly been relied upon as an effective alternative means of resolving commercial disputes, owing to the speed, confidentiality, and specialized expertise it offers. However, arbitration often suffers from high costs, which may hinder certain parties from resorting to it, particularly in disputes of an international or highly significant commercial nature. From this perspective, the concept of Third-Party Funding (TPF) has emerged as a novel mechanism that enables parties to obtain external financing to cover the costs of arbitration, in return for a share of the proceeds should the arbitral claim succeed.

Third-Party Funding (TPF) has become one of the influential factors shaping the structure of international commercial disputes, particularly in light of the efforts undertaken by countries, including Egypt, to improve the investment climate and attract foreign investment. Nevertheless, the absence of a clear legal framework regulating arbitration funding in Egypt raises questions as to the viability of utilizing this strategic tool domestically and underscores the need to establish a legal framework that aligns with international trends.

What is Arbitration Funding?

Third-Party Funding in arbitration is a contractual arrangement entered into between a party to the arbitral dispute (most commonly the claimant) and an external funder with no connection to the dispute, whereby the funder undertakes to finance all or part of the costs of the arbitral proceedings in return for a percentage of any compensation or monetary award recovered.

Typically, the funding arrangement involves three parties: the Funded Party, the Funder, and the Legal Counsel or Advisors. This funding is not considered a loan; rather, it constitutes a risk-based investment. In the event that the claim is unsuccessful, the funded party bears no obligation to reimburse the amounts advanced.

Third-Party Funding (TPF) in arbitration is, in essence, a form of investment, regardless of the justifications advanced by its proponents. Some commentators have expressed this view by stating that Third-Party Funding constitutes an investment in arbitration per se –albeit a high-risk investment– more akin to a portfolio investment than to a direct investment.

Legal and Regulatory Developments in Arbitration Funding at the International Level:

The past three decades have witnessed a rapid development in the field of third-party funding, both in the context of litigation before courts—albeit to a lesser extent than in arbitration proceedings, given that court litigation is generally less costly than arbitration. This development represents a double-edged indicator: on the one hand, it reflects an expansion in access to justice; on the other hand, it raises regulatory and legal challenges for the parties and institutions involved in dispute resolution, particularly with respect to the role of funders and funded parties, as well as the integrity and independence of arbitral tribunals.

While certain national courts have responded to the growing use of Third-Party Funding by imposing rules that require disclosure of specific details of funding arrangements, the situation differs somewhat in the context of arbitration. This is due to several factors, chief among them the contractual nature of arbitration proceedings between the parties to the dispute, and their generally confidential character, making the involvement of a third party (the funder) an exceptional element that necessitates careful consideration of the particularities of such proceedings.

As highlighted by the Chartered Institute of Arbitrators (CIArb) in its guidelines on the subject, arbitration differs from litigation in certain legal systems by allowing the arbitral tribunal to award the funded party the costs of Third-Party Funding where that party prevails in the dispute, an option rarely available before national courts.

Practices relating to Third-Party Funding in arbitration remain fluid and continuously evolving, whether at the legislative, regulatory, or institutional rule level. Accordingly, the guidelines emphasize that they constitute an overview rather than binding rules, as the specific details vary depending on the law applicable to the parties and the funder, the seat of arbitration, and any related judicial proceedings before national courts.

Accordingly, legal practitioners and arbitration professionals should take these developments into account when dealing with third-party funding arrangements and adopt appropriate legal safeguards tailored to the specific circumstances of each dispute.

Advantages and Disadvantages, or Challenges, of Arbitration Funding:

• First: Advantages:

In light of the high costs associated with arbitration proceedings, Third-Party Funding emerges as an effective tool that enables individuals and companies to pursue disputes without bearing the financial burden directly. However, the benefits of this type of funding are not limited to the financial aspect alone; they also extend to positive effects on access to justice, risk management, and the overall quality of cases. The following sets out the main advantages of resorting to third-party arbitration funding:

- Promoting Access to Justice and Equality of Arms: Third-Party Funding assists financially disadvantaged parties in accessing arbitration, thereby enhancing their ability to defend their rights without compromising the quality of legal representation.

- Improving Cash Flow: Funding alleviates financial pressure on companies, allowing them to deploy their resources toward operational or expansion activities rather than tying them up in prolonged legal disputes.

- Preliminary Professional Case Assessment: The funder typically conducts a thorough review of the claim before approving funding, enabling the funded party to understand the strengths and weaknesses of their case at an early stage.

- Enhancing Settlement Prospects: When the opposing party is aware that a funder has confidence in the strength of the claim, this may serve as an incentive to negotiate more seriously, potentially leading to an amicable settlement that saves time and costs for all parties.

- Reducing Financial Risk: In the event of an unsuccessful claim, the funded party is not required to reimburse the funder, thereby mitigating the financial risk associated with the proceedings.

• Second: Disadvantages or Challenges:

Third-Party Funding in arbitration is a complex matter that involves a delicate balance among multiple interests. While each party seeks to achieve its own objectives, fundamental challenges arise that may affect the course of justice and the integrity of the arbitral process. The following outlines the main disadvantages –or, more accurately, the challenges– associated with third-party funding in arbitration:

- Divergent Interests: The parties to arbitration seek swift justice and access to resources, the funder aims to achieve a return on its investment, while the arbitral tribunal strives to maintain neutrality, independence, and integrity.

- Potential Conflicts of Interest: The funder’s involvement in strategic decision-making may give rise to conflicts with the parties’ interests or compromise the neutrality of the arbitral tribunal.

- Lack of Transparency: Failure to disclose the presence of a funder may affect the integrity and conduct of the arbitral proceedings.

- High Costs: The funding fee requested by the funder may range between 25% and 40% of the compensation or monetary award, thereby increasing the financial burden on the claimant.

- Limited Negotiating Control: The funded party may be subject to conditions that restrict its ability to make independent decisions during the arbitration.

Types of Third-Party Arbitration Funding:

The Third-Party Funding market comprises a diverse range of actors, each with specific investment strategies with varying levels of risk tolerance. These categories include:

1- Litigation- and Arbitration-Focused Funders:

These are entities that focus exclusively on investing in legal claims, including arbitration and litigation. They possess specialized expertise in assessing the merits of legal claims, managing litigation risks, and negotiating funding agreements. Prominent examples of such funders include Burford Capital, Omni Bridgeway, and Therium Capital Management. Typically, these funders have teams of legal specialists and financial analysts who evaluate potential cases and manage their investments.

2- Insurance Companies:

Some insurance companies provide policies covering litigation and arbitration risks, often in the form of legal expense insurance or after-the-event (ATE) insurance. These policies cover the legal costs incurred in pursuing or defending legal claims. Although not strictly considered third-party funding, such insurance products perform a similar function by mitigating the financial risks associated with litigation and arbitration cases.

3- Private Investors and Hedge Funds:

In recent years, private investors and hedge funds have increasingly recognized the potential return on investment offered by arbitration claims. These financial institutions view arbitration claims as alternative investment opportunities and may allocate a portion of their portfolio to funding legal disputes. Their participation has introduced additional capital into the third-party funding market, contributing to its rapid growth.

4- Law Firms:

In certain jurisdictions, law firms are permitted to enter into contingency fee arrangements or success-based financing. Under these arrangements, the law firm’s fees are tied to the successful outcome of the case. Although these arrangements are not strictly considered third-party funding, they share certain features, as the law firm bears a portion of the financial risk associated with the dispute.

The International Legal Framework for Arbitration Funding:

States’ approaches have varied between legislative regulation, self-regulation, and judicial oversight with respect to Third-Party Funding. As the need for innovative financial solutions has grown, many states have moved to codify or regulate third-party arbitration funding either within their legislation or through arbitration rules. These experiences serve as models for countries that have yet to establish a clear legal framework, in light of the global trend toward an organized and balanced acceptance of this type of funding. The following outlines the main national approaches:

1- Singapore:

Singapore enacted the Civil Law (Amendment) Act 2017, which legalized third-party funding in international arbitration. The Act includes specific requirements regarding the eligibility of funders and mandates disclosure of funding arrangements to the arbitral tribunal to avoid conflicts of interest.

Additionally, the Singapore International Arbitration Centre (SIAC) and the Law Society of Singapore have issued guidelines regulating Third-Party Funding, aiming to establish a fair and transparent mechanism. The new rules emphasize that funding arrangements must not create a conflict of interest with any member of the arbitral tribunal. These principles were also adopted in Singapore’s 2017 Investment Arbitration Rules, which recognized the legitimacy of Third-Party Arbitration Funding.

2- Hong Kong:

Hong Kong introduced the Arbitration and Mediation (Third-Party Funding) Amendment Ordinance 2017, which expressly permits Third-Party Funding in arbitration. Similar to Singapore, the law requires full disclosure of funding arrangements to ensure transparency.

3- United Kingdom:

The United Kingdom adopts a self-regulatory model through the Association of Litigation Funders (ALF). Although third-party funding in arbitration is common in the UK, funders are subject to ALF’s Code of Conduct, which ensures ethical compliance and financial stability. English courts have also recognized the validity of funding agreements.

4- Australia:

Australia was among the first countries to adopt Third-Party Funding in arbitration, particularly in class actions and arbitration proceedings. Australian courts have recognized the validity of such agreements, provided they are not tainted by fraud or exploitation. Despite the absence of a legislative framework, Australia relies on judicial oversight to prevent the misuse of funding.

5- France:

France does not have specific legislation on Third-Party Arbitration Funding; however, French courts have shown a flexible approach to this type of funding, particularly in international arbitration, provided that it does not compromise the independence of the parties or undermine justice.

Arbitration Funding in Egypt:

Egyptian Arbitration Law No. 27 of 1994 does not explicitly address Third-Party Arbitration Funding. It is worth noting that, in this regard, the Egyptian Arbitration Law aligns with most legal systems that follow the UNCITRAL Model Law issued by the United Nations Commission on International Trade Law (UNCITRAL). Furthermore, there appear to be certain Third-Party Funders active in the Egyptian market.

There are also no clear judicial precedents addressing this form of funding, and the courts have not yet had the opportunity to thoroughly consider the controversial issues associated with Third-Party Funding. Nevertheless, this judicial stance does not, in itself, prevent arbitral tribunals from adopting a practice that has become increasingly significant in recent years.

Until 2018, there was no mention of Third-Party Funders in Egyptian judicial practice. The year 2018 demonstrated that funders may indeed be active in the Egyptian arbitration market. In this context, the Al-Kharafi case involved a request from a funder to join annulment proceedings concerning an arbitral award in an investment dispute valued at USD 1 billion.

In this case, the court did not have sufficient opportunity to examine the legal framework for funding by the funder, as it dismissed the claim. Consequently, there was no occasion to consider the request submitted by the funder, Financiére CER.

Furthermore, the same funder submitted a request to join annulment proceedings in 2020, which was explicitly rejected by the court. On this occasion, the court did not engage in a detailed analysis of the legal framework for third-party funding from the perspective of Egyptian law.

Also, in 2024, the Cairo Regional Centre for International Commercial Arbitration (CRCICA) adopted new rules requiring parties to disclose any Third-Party Funder. Similarly, the draft model agreements for Egypt’s modern bilateral investment treaties (BITs 2022) include comparable provisions.

Conclusion:

Third-Party Arbitration Funding represents a modern mechanism that contributes to enhancing access to justice and achieving a balance between disputing parties, particularly in major commercial disputes. Although many countries have adopted this system, Egypt remains at an early stage. With the state’s efforts to promote a business-friendly environment, introducing clear regulation of this practice would constitute a significant step toward a more transparent legal framework and a more attractive investment climate.

Prepared by:

Alaa Mamdouh

Senior Attorney, PhD Researcher

Ragy & Partners Law Firm - Attorneys & Counselors at Law LLP

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