The difference between Sharia-compliant litigation funding and conventional litigation funding can be captured in the following:
The funder and claimant do not have a creditor and debtor relationship. Instead, it’s structured conceptually as a partnership. The Sharia-compliant funding arrangement is not a debt financing product. Rather, it’s based on an award-sharing arrangement.
2. Waterfall and award distribution
Unlike conventional litigation funding, the expenses of the award are shared here, and the funder receives the award net of expenses. Unlike conventional litigation, the funder is not given priority and seniority in repayments.
3. Risk and loss
The funder has to bear the risk of losing their funding and investment.
4. No guarantees on capital
Unlike conventional litigation, there is no before-the-event (BTE) insurance, nor any after-the-event (ATE) insurance protection for the funder. Sharia compliance requires the genuine sharing of risk, and the Sharia funders are aware of this and enter into the arrangement with this requirement in place.
5. Cases supported
Only Sharia-compliant cases are funded. This is based on advice from the Sharia board and is continuously overseen by the Sharia board.
6. Award-sharing mechanism
Unlike conventional litigation funding, the award in the Sharia funding is not fixed to the capital contribution. Rather, it operates as a percentage of the award.
Insaaf Litigation Fund has spent almost a year developing this product with Amanah Advisors. Sharia-compliant litigation funding is different from conventional litigation funding on seven different levels:
1. Several contractual amendments in the underlying agreements to comply with Sharia principles
2. The change in the underlying structure and relationships between the various parties involved
3. The development of profit and loss sharing
4. The removal of guarantees of return and insurance provisions
5. The support of only Sharia-compliant litigation cases
6. Ongoing Sharia governance and a Sharia governance framework to mitigate Sharia non-compliance risks
7. The Sharia fund is managed according to Sharia principles
The Competition Appeal Tribunal (CAT) recently described third-party litigation funding as “a well-recognised feature of modern litigation” that “facilitates access to justice for those who otherwise may be unable to afford it”. Justice is one of the core commands and objectives of Sharia. The Qur’an and Prophetic sayings state:
“O you who believe, be persistently standing firm in justice as witnesses for Allah, even if it be against yourselves or parents and relatives. Whether one is rich or poor, Allah is more worthy of both. Follow not your desires, lest you not be just. If you distort your testimony or refuse to give it, then Allah is aware of what you do.” [Qur’an 4:135]
Verily, Allah orders justice and good conduct and giving to relatives and He forbids immorality and bad conduct and oppression. He admonishes you that perhaps you will be reminded. [Qur’an 16:90]
The Prophet Muhammad (peace be upon him) said: “Allah the Exalted said: O my servants, I have forbidden oppression for myself and have made it forbidden among you, so do not oppress one another.” [Sahih Muslim]
Ibn al-Qayyim said: “Allah the Exalted has made clear in his law (sharia) that the objective is the establishment of justice between His servants and fairness among the people, so whichever path leads to justice and fairness is part of the religion and can never oppose it.” [al-Turuq al-Hikmiyya]
Returns are not guaranteed. Instead, the award is based on the success of the case. Of course, cases with likely chances of success are selected, and together with the track record of the fund managers, success is more than likely. However, capital is always at risk.
The Sharia structure works on an award-sharing model. While some scholars are inclined to consider this as a form of Mudaraba, other scholars can consider this to be a new partnership concept based on award-and-loss sharing. Our Sharia board is of the view that both concepts are acceptable.
The funder provides the capital, while the claimant brings the case forward. The funds are then managed to fund the work of the legal team, with a view to gain the award. If the award is granted, the award will be distributed after expenses between the claimant and funder.
Amanah Advisors are the Sharia board and are overseeing the compliance of this product. Amanah Advisors will continue to guide and audit our product to ensure we are Sharia compliant.