Shariah Compliance in Litigation Finance

The use of third-party legal funding is gaining acceptance around the world. In the Middle East, both civil and Shariah jurisdictions exist. This implies various concerns in regard to ensuring that legal funding is Shariah-compliant.

Omni Bridgeway explains that transferring legal risk in a Shariah-compliant manner is something participants and the institutions that serve them will need to be aware of when investing in this region of the world. So, what are the essential principles of sharia-compliant finance?

Islamic Business Transactions must meet these conditions:

• The transaction cannot involve charging or paying interest.
• A valid contract must contain an offer, an acceptance of that offer, a record of the parties involved, and the stated purpose of the contract.
• ‘Uncertain’ transactions must be avoided—which can include allegations of fraud.
• The matter at hand must be lawful in accordance with Islamic law.

Because litigation funding is a net gain for the communities it serves, the Shariah law “Maslahah” can apply to its use. This law determines whether or not something is permissible based on whether it is beneficial to the Muslim community.

Of course, Shariah Law prohibits gambling—which it defines as the gaining of wealth by chance or financial gain without effort that comes at the cost of another. This facet of Shariah impacts how funding agreements can be worded to keep them compliant. This can involve two structure types for agreements:

1. Mudarabah, in which capital is provided, and then a strategy is developed for its recovery.
2. Musharakah is similar, but involves both parties making an investment in the outcome.

By taking these structures into account, and carefully wording a funding agreement to avoid violating any of the aforementioned conditions, litigation funding can become Shariah compliant.