Driver Trett Digest Issue 21 03.2021 - Flipbook - Page 14
DIGEST | ISSUE 21
WHY CONTRACTORS ARE TURNING TO THIRD
PARTY FUNDING.
Construction disputes are on the rise. There has been the
announcement across GCC jurisdictions of the insolvency
of several high-profile contractors, which has had a domino
effect on the supply chain.
When dispute finance is used in this manner, more
commonly known as corporate portfolio financing, it
results in a company being able to:
The DIFC-LCIA recorded a 300% increase in cases registered
in 2017 which had doubled by the first half of 2018. All other
major arbitration institutions have shown increases in
disputes registered.
The construction industry has been further disrupted by
the impact of COVID-19 with reduced profit margins, late
payments and time overruns.
THE
EMERGENCE
OF THIRD
PARTY
FUNDING
Joe Durkin, an Investment Manager at third party
funder, LCM Finance, gives insight into how contractors
are increasingly turning to litigation funding across the
Middle East and Asia Pacific.
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News in the legal press towards the end of last year, that
a global construction firm had entered into a funding
arrangement, supporting the funding of up to 20 arbitrations
seated in jurisdictions ranging from London to Dubai, seeing
the engagement of several international law firms, claims
consultancies and expert service providers, has created a
stir and caught the attention of contractors, experts and
arbitrators across the GCC and APAC (Asia Pacific).
What grabbed the attention of CEOs of regional and
international construction firms, from Turkey to Korea and
further afield, was that there had been up until then, little
insight of funders involvement in construction disputes in the
Middle East.
Where third party funding has long been a resource to
contractors involved in disputes in common law arbitration
hubs such as London, New York and Sydney, what is really
interesting now is the sea change in how third party funding
is being used by contractors across the Middle East and Asia,
which appears to be the tip of the iceberg.
There are several reasons for why this change has come
about and how contractors are benefiting from it.
This portfolio approach considerably lowers the cost for the
business as the risk is spread across multiple cases and
has the additional benefit of potentially creating a financial
provision for any defense cases.
Prior to the disruption caused by COVID-19, the numbers of
disputes in the construction sector had been increasing. PreCOVID there had been the insolvency of several high-profile
contractors across the GCC, which has worsened in the past
year, having had a domino effect on the supply chain.
The construction/engineering and energy sector often
generates the most cases in leading arbitration institutions.
It was the largest sector in the ICC accounting for 40% of the
ICC caseload. It is also a significant sector in the LCIA, in
SIAC and in regional centers such as ADCCAC and DIAC.
Andrew Miller, Associate Director, Driver Trett, London
the book as a whole, not just the strongest case(s), which
allows the funding of claims which may not be funded on an
individual basis.
The construction industry is well suited to third party funding.
At its simplest, third party funding in the construction
industry sees a funder, a party with no direct interest in a
piece of litigation, who deploys capital to a contractor who
is typically the claimant in a dispute. In return, the funder
receives a return on its investment. In the most common
form of litigation finance, the return received is conditional
on the success of the case and is paid to the funder from
the proceeds of it. It is usual for the return on the funder’s
investment to be a multiple of the amount advanced, or a
percentage of the proceeds, or a combination of both.
FUNDING MANAGES THE COST OF A
CONTRACTOR’S LEGAL CLAIMS AND TURNS THE
LEGAL DEPARTMENT INTO A PROFIT CENTRE.
There is also a growing understanding by CEOs and CFOs
of Middle East construction and energy companies, about
how dispute finance can be used as an effective and
profitable financial solution.
There has been a shift in the mindset of leading contractors
about how third party funding can help a company manage
the cost of its legal claims, turn the legal department into
a profit centre and even offer the potential for monetisation
straight into the P&L.
Most contractors will have numerous disputes, which can be
viewed as a portfolio by grouping together some, or all cases.
By funding a portfolio of cases, financing is secured against
Move the financial risk of disputes;
Remove the costs associated with disputes from the
company’s balance sheet; and
Release the financial upside of multiple claims where
returns are generated at zero cost.
WHAT TO KNOW ABOUT THE DRIVING FACTORS IN
THE MIDDLE EAST AND FURTHER AFIELD
Several key factors have emerged in recent years. Regulators
have addressed lingering uncertainty in many jurisdictions
concerning the acceptance of funding.
Sydney, London and New York have permitted third party
funding for years. In recent times Singapore and Hong Kong
have adopted regulations to permit third party funding in
international arbitrations. The DIFC and ADGM soon followed
by separately recognising and regulating the use of third
party funding for litigation in their courts.
This has coincided with the expansion of the arbitration
infrastructure across the region and further afield. The
DIFC-LCIA is strategically located in the Dubai International
Financial Centre.
Recent legislative improvements are also a factor. The
introduction of the UAE Federal Arbitration Law was
introduced in the UAE in 2018. We now have over two years of
implementation of the law which highlights how increasingly
arbitration-friendly the jurisdiction has become. A set of
new laws and the introduction of an international arbitration
centre in Saudi Arabia in recent years also indicates
improvements in the Kingdom.
The ICC announced just in December 2020 the opening of its
case management office for the ICC Court Secretariat in the
Abu Dhabi Global Markets. The regional arbitration centres of
DIAC and ADCCAC are also very active and their rules appear
in a significant number of construction and energy contracts.
Indian contractors operating in the Gulf are well used to
the appearance of SIAC as the arbitral institution in their
contracts, where SIAC has representative offices in Mumbai
and Gujarat, which has seen a considerable increase in
disputes involving contractors from the sub-continent. We
are finding that awareness of litigation funding among Middle
Eastern clients is high. CEOs and CFOs see funding as a tool
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