Published 7 May 2021
(Minor revisions 10/05/2021) Third-party funding (TPF) is an investment made by funders to finance the legal costs of litigation or arbitration in return for remuneration. It is a non-recourse investment; if the funded party loses, the funder does not receive any return, and consequently loses all their investment. It is a growing trend in litigation and arbitration proceedings, as the last decade has seen a proliferation of TPF cases across the globe. Indeed, the funding mechanism has become so ubiquitous that it has spread to Muslim countries. An example is the United Arab Emirates, the Dubai International Financial Centre (DIFC) published the practice direction No. 2 on TPF in the DIFC courts in 2017. In Islamic finance, profit and loss sharing is as fundamental as it is in third-party funding, since the funder assumes the risk of legal proceedings. Thus, TPF might be expected to fit very well into the framework in Islamic Law. However, an analysis of its compatibility with Sharia Law might unravel a far more complicated picture. Using doctrinal analysis, this article answers the question of whether TPF arrangements comply with Sharia Law. It concludes that TPF as a financial tool within Islamic finance is indeed in accordance with Sharia Law.
This article comprises five sections. The first section begins with an introduction which sets out the overarching aim of the paper and the research question. The second section then proceeds to explain the working mechanism of TPF arrangements. The third section describes the Islamic financial framework and the major schools of Sharia law. The fourth section analyzes the compatibility of TPF in each of the seven major schools of Sharia Law, including four Sunni doctrines (i.e., Hanbali, Maliki, Shafi’i and Hanafi) and three Shia doctrines (i.e., Isna Ashari, or Ja-fari, Ismaili, and Zayadi). The fifth and last section concludes the article, which positions TPF as a new vision within the context of Islamic jurisdictions, particularly in Sharia. Overall, the article highlights the significance of a developing funding market that promotes access to the judicial system and to justice.
This paper will be part of the TDM Special Issue on "Islamic Finance and Dispute Resolution". More information here www.transnational-dispute-management.com/news.asp?key=1832