Comparative Analysis of Litigation Funding Rules in the DIFC and the ADGM
Introduction
Litigation funding, also known as third‑party funding (TPF), allows a non‑party to finance the costs of litigation or arbitration in exchange for a return linked to the outcome. In the United Arab Emirates (UAE), two common‑law free zones – the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM) – have enacted explicit rules governing litigation funding, making them regional leaders in the regulation of TPF. This article compares the two regimes, examining legal frameworks, funder eligibility, disclosure obligations, regulatory requirements, permitted fee structures, and notable case law to assist practitioners evaluating these jurisdictions.
Legal Frameworks
DIFC
The DIFC Courts operate under a bespoke body of legislation influenced by English common law. In March 2017 the DIFC Courts issued Practice Direction No. 2 of 2017 (PD 2/2017) on Third‑Party Funding. PD 2/2017 defines a “funder,” “funded party,” and “litigation funding agreement” and applies to proceedings before the DIFC Courts and tribunals. A funded party must give written notice to every other party and the court that it has entered into a litigation funding agreement and must disclose the identity of the funder, although the agreement itself need not be disclosed. Notice must be given in the case management information sheet before the case management conference or within seven days of signing the funding agreement. PD 2/2017 states that the court may consider the presence of a funder when ordering security for costs but that the fact of funding is not determinative. The courts retain inherent jurisdiction to order costs against funders.
In 2019 the DIFC issued a Mandatory Code of Conduct for Legal Practitioners (Order No. 4/2019). The Code requires lawyers to avoid conflicts of interest when dealing with funders, prohibits them from being swayed by funders’ instructions unless authorised by the client, and mandates that lawyers explain the client’s continued liability for adverse costs even when funded. Practitioners must not receive referral fees or other benefits from funders without disclosure to the client. A funded party remains responsible for paying the lawyer’s fees unless otherwise agreed, and the funder’s role does not diminish the lawyer’s duty to act in the client’s best interests.
ADGM
The ADGM Courts were established in 2015 and apply English common law directly, including many UK statutes. Part 9 of the ADGM Courts, Civil Evidence, Judgments, Enforcement and Judicial Appointments Regulations 2015 (the ADGM Regulations) recognises litigation funding agreements and authorises the Chief Justice to prescribe rules governing them. Following public consultation, the ADGM enacted the Litigation Funding Rules 2019 (LFR 2019), which apply to ADGM Court proceedings and ADGM‑seated arbitration. The Rules specify that a litigation funding agreement must be in writing and comply with requirements prescribed by the Chief Justice. They also provide that the sum payable to the funder must consist of the funded party’s costs plus an amount calculated by reference to the funder’s anticipated expenditure, and this amount must not exceed a percentage set by the Chief Justice.
Part 2 of the LFR 2019 sets minimum standards for funders. Funders must have litigation funding as their principal business and hold qualifying assets of at least US$5 million. A funder must not be owned, directly or indirectly, by a law firm or lawyer to avoid conflicts. Part 3 prescribes content for funding agreements: they must specify the scope of the funding, the amount and timing of the funder’s investment, how and when the funder will receive its return, whether the funder covers adverse costs or insurance, the funder’s involvement in settlement decisions, termination rights, and confidentiality obligations. Funders must ensure that the funded party has received independent legal advice on the agreement and must submit to the jurisdiction of the ADGM Courts for any costs disputes. The Rules require the funded party to notify other parties of the existence of the funding agreement but, unlike the DIFC, do not mandate disclosure of the funder’s identity or the agreement’s terms unless ordered by the court.
An amendment in 2023 replaced the reference in Rule 7(d) to section 225(3)(e) with “under the Agreement,” signalling a change to the formula for payments to funders but not altering the overall framework.
Funder Eligibility and Capital Requirements
| Jurisdiction | Funder eligibility | Capital adequacy | Ownership restrictions |
|---|---|---|---|
| DIFC | PD 2/2017 does not prescribe who may act as a funder. No explicit definition of funder eligibility; any third party may finance proceedings, provided they comply with disclosure requirements. | None. PD 2/2017 does not set a minimum capital requirement for funders. The Code of Conduct requires practitioners to avoid conflicts but does not impose financial thresholds. | No express restriction on funders being related to law firms. The Code prohibits referral fees or benefits to lawyers but does not bar law‑firm ownership of funders. |
| ADGM | The LFR 2019 requires that the funder’s principal business is funding proceedings and that the funder is not a party to the proceedings. | Funders must have qualifying assets of at least US$5 million. The ADGM allows the Chief Justice to set a percentage cap on the funder’s recovery based on anticipated expenditure. | The funder must not be wholly or partly owned by a law firm or individual lawyer to avoid conflicts of interest. |
Disclosure and Notice Requirements
| Jurisdiction | Disclosure obligations | Timing | Additional requirements |
|---|---|---|---|
| DIFC | Funded parties must give written notice to all other parties and the court of the existence of a litigation funding agreement and identify the funder. The full agreement is generally not disclosed unless ordered. | Notice must be given in the case management information sheet before the case management conference or within seven days of entering into the funding agreement. | Practitioners must avoid conflicts, disclose any referral fees, and ensure the client remains liable for costs. PD 2/2017 cautions that the existence of funding may be considered when ordering security for costs but is not determinative. |
| ADGM | The funded party must notify other parties and, where required, the court of the funding agreement. The identity of the funder and the terms of the agreement are not automatically disclosed. | The funded party must give notice before proceedings are commenced or as soon as possible thereafter, or within seven days of entering into the agreement if it is signed after proceedings commence. | Funders must ensure the funded party receives independent legal advice and include detailed terms in the agreement (scope, funding amount, returns, settlement involvement, termination rights, confidentiality). They must submit to ADGM Courts’ jurisdiction for costs disputes. The ADGM Rules do not oblige the funder to disclose its identity to other parties. |
Content of Funding Agreements
Both jurisdictions seek to ensure that litigation funding agreements include sufficient detail to protect parties and preserve court oversight.
- DIFC – PD 2/2017 provides definitions but does not stipulate mandatory content for funding agreements. In practice, agreements typically address funding amount, funder’s return, control over litigation and settlement, termination, and confidentiality. The Code of Conduct requires lawyers to ensure that agreements do not allow funders to usurp control of litigation and that clients understand any impact on their liability for costs.
- ADGM – The LFR 2019 imposes comprehensive requirements: agreements must be in writing, state the scope of funding, amount and timing of funding, manner and timing of funder’s recovery, whether the funder will pay adverse costs or obtain after‑the‑event (ATE) insurance, the funder’s role in settlement decisions, termination rights, and obligations to maintain confidentiality. A funder must ensure that the funded party has received independent legal advice before signing the agreement. The Rules also prohibit agreements relating to proceedings that cannot be subject to enforceable conditional fee agreements, thereby preventing funding of excluded claims.
Regulatory Oversight and Professional Ethics
DIFC
The Mandatory Code of Conduct is the primary instrument governing lawyer‑funding relationships. It prohibits lawyers from acting under funder instructions without client authorisation, mandates that lawyers avoid conflicts of interest, and requires disclosure of any referral fees. The Code emphasises that clients remain responsible for their legal costs unless the funding agreement provides otherwise. There are no licensing or capital adequacy requirements for funders, and there is no regulatory body supervising funders, although the courts retain inherent jurisdiction to make cost orders against them. PD 2/2017 also allows the court to consider funding when determining security for costs applications.
ADGM
The ADGM regime imposes greater oversight. Funders must meet financial and business‑type criteria and are barred from being owned by law firms. Funding agreements must satisfy the Chief Justice’s prescribed requirements, and funders must submit to the jurisdiction of the ADGM Courts for costs issues. The Rules also contain conflict‑of‑interest provisions: funders must not influence lawyers’ professional duties, and lawyers may not share fees with funders or receive commissions for referrals. These requirements are designed to ensure independence of the litigation process and to protect privilege and confidentiality.
Alternative Fee Arrangements and Damages‑Based Agreements
Both free zones permit lawyers to use alternative fee structures such as conditional fee arrangements (CFAs) but restrict contingency fees.
- DIFC – Contingency fee arrangements, where lawyers receive a share of the proceeds, are prohibited. However, conditional fee arrangements that allow an uplift on the lawyer’s fee in case of success are permitted, provided the uplift is not a share of the damages and full transparency with the client is maintained. Damages‑based agreements (DBAs) are not allowed.
- ADGM – CFAs are enforceable if they meet fairness criteria and do not conflict with justice. Unlike the DIFC, the ADGM allows damages‑based agreements, so lawyers may charge a percentage of the recovered amount provided the agreement complies with ADGM rules. The ADGM prohibits fee sharing or commissions for referring clients to funders.
Security for Costs, Adverse Costs and ATE Insurance
Security for costs – In the DIFC, the court may consider the fact that a party is funded when deciding whether to order security for costs, but funding alone does not justify an order or a reduction in the amount. Recent DIFC case law emphasises that the presence of a funder does not automatically justify lowering security; the court must examine the funder’s financial capacity and commitment. For instance, in LXT Real Estate Broker LLC v SIR Real Estate LLC (Court of Appeal, January 2026), the DIFC Court of Appeal held that the existence of a funder does not warrant halving the security and that a principled assessment is required.
In the ADGM, the court may order security for costs and can take account of the funding arrangement, but the Rules do not provide specific guidance. The ADGM Court applies English common law and may follow English precedents when determining whether to impose security or costs orders on funders. The LFR 2019 does not give the court express power to order costs against funders, but funders submit to the court’s jurisdiction for cost disputes.
Adverse costs and ATE insurance – The DIFC courts have inherent jurisdiction to order funders to pay adverse costs. Although there are few reported cases, commentators anticipate that the DIFC may follow English case law in holding funders liable. After‑the‑event insurance is uncommon but can be used in both jurisdictions; its uptake is limited in the UAE and primarily associated with DIFC and ADGM litigation.
Case Law and Practical Implications
DIFC Case Law
The DIFC courts have adjudicated several cases involving third‑party funding. PD 2/2017 has been interpreted as requiring transparency while preserving confidentiality of the funding agreement. In LXT Real Estate Broker LLC v SIR Real Estate LLC, the Court of Appeal rejected an argument that the existence of a funder justified reducing security for costs; it insisted on a fact‑based analysis of the funder’s financial strength and commitment. The case underscores that funders may face security orders and cost liability and that claimants should be prepared to evidence the funder’s ability to satisfy adverse costs.
ADGM Case Law
There are fewer published ADGM decisions concerning litigation funding. The Trowers & Hamlins and Clifford Chance briefings note that, to date, there have been no reported ADGM cases where a funder has been held liable for costs, although the court’s jurisdiction allows such orders. Practitioners expect ADGM courts to look to English authorities when considering funder liability, given the direct application of English law. The 2025 ADGM decision in Arabyads Holding Limited v Gulrez Alam Marghoob Alam, which imposed wasted costs on lawyers for misuse of AI, illustrates the ADGM courts’ willingness to impose punitive cost orders for professional misconduct, suggesting that funders may also face scrutiny if they abuse the process.
Practical Considerations for Litigants and Funders
- Transparency versus Confidentiality – The DIFC requires disclosure of the funder’s identity, whereas the ADGM requires only notification of the existence of funding. Funders who wish to remain anonymous may prefer the ADGM, but the ADGM regime still demands sufficient information in the agreement and may compel disclosure if necessary. Both regimes emphasise that disclosure does not waive legal privilege.
- Funder Qualification – ADGM funders must meet capital and business‑type criteria. This provides confidence that funders can meet funding commitments but may limit the pool of eligible funders. The DIFC has no such requirements, allowing greater flexibility but potentially less assurance of funder solvency.
- Control of Litigation – Both regimes emphasise that funders should not control the conduct of the case. The DIFC Code of Conduct prohibits lawyers from following funder instructions without client consent, while the ADGM rules forbid agreements that give the funder control over decisions and require independent legal advice. Agreements should clearly state the funder’s consultation rights and preserve the client’s autonomy.
- Costs Exposure – Funders in both jurisdictions should be prepared for the possibility of adverse cost orders. The DIFC explicitly recognises the courts’ power to order costs against funders, and the ADGM requires funders to submit to the court’s jurisdiction for costs disputes. Funders should budget for security for costs applications and may need to provide assurances of financial capacity.
- Fee Structures and Profit Caps – The ADGM’s cap on funder recovery tied to anticipated expenditure and the prohibition on payments based on damages ensure that funders’ returns are linked to actual costs rather than windfall profits. The DIFC imposes no such cap, so returns are negotiated freely. The availability of damages‑based agreements for lawyers in the ADGM also offers clients additional flexibility but raises issues of fairness and potential conflicts.
- Enforceability and Court Supervision – The ADGM regime requires funding agreements to be enforceable under section 225 of the ADGM Regulations and subject to court supervision. This enhances certainty for funders and funded parties. The DIFC does not have a comparable statutory provision but relies on general contract principles and the court’s inherent jurisdiction.
Conclusion
The DIFC and ADGM have positioned themselves as hubs for international dispute resolution in the Middle East, in part by embracing litigation funding. Both jurisdictions recognise that third‑party funding increases access to justice and fosters a competitive disputes market, but their regulatory approaches differ.
- The DIFC regime emphasises transparency and professional ethics. It requires disclosure of the funder’s identity, mandates that lawyers avoid conflicts and maintain client control, and allows courts to order security for costs and adverse cost orders against funders. However, it imposes no eligibility criteria for funders and does not cap funders’ returns, leaving the content of funding agreements largely to contractual negotiation.
- The ADGM regime provides a more structured framework. It sets minimum capital requirements and business‑type criteria for funders, regulates the content of funding agreements, and requires funders to ensure independent legal advice. Disclosure obligations are more limited (notice of the agreement rather than the funder’s identity), and the court’s power to order costs against funders is implied rather than expressly conferred. The ADGM also allows damages‑based agreements for lawyers, offering alternative fee structures not available in the DIFC.
For litigants and funders, choosing between the DIFC and ADGM involves balancing transparency, flexibility and regulatory certainty. The DIFC may appeal to parties seeking anonymity or flexible returns, whereas the ADGM may be preferred by those who value a clearly defined, capital‑adequacy‑backed framework. Both jurisdictions continue to develop their jurisprudence, and stakeholders should monitor forthcoming cases and potential legislative amendments to stay abreast of evolving litigation funding landscapes.