From risk to reward: As Saudi Arabia booms, so does legal finance

International law firms have recently surged in the Kingdom of Saudi Arabia following changes to its Code of Law Practice, which now requires foreign firms to establish their own offices or set up formal partnerships with local lawyers. Saudi Arabia's thriving economy, extensive gigaprojects and ambitious infrastructure development plans also fuel this trend and make the country an appealing market to law firms. In line with this trend, legal finance is growing as a practical solution to effectively handle dispute costs and mitigate risks.

The legal services boom: A surge of law firms entering the Saudi Arabian market

Law firms are flocking to open up shop in the Kingdom following changes to the country’s Code of Law Practice. Previously, being affiliated with a local firm was sufficient, but changes effective in December require foreign law firms to obtain their own license to operate as a branch office or as a joint venture with local lawyers. Any work related to Saudi law must be conducted solely in the local branch and cannot be passed to foreign offices.

At the time of writing, around 15 international law firms have already been awarded licenses in Saudi Arabia and many more are already registered and awaiting approval. The country's status as the fastest growing economy in the G20 and its government's financial resources make it an attractive market for these firms.

Gigaprojects in Saudi Arabia and resulting disputes

In 2021, the Saudi government launched the National Investment Strategy (NIS), a comprehensive plan aimed at transforming the country's economy through various initiatives and targeted investments. As part of the NIS, analysts estimate that around $1 trillion will be spent on preliminary investments in key sectors including clean technology, metals and mining and transport and logistics by the end of the decade. 

Saudi Arabia has ambitious plans for infrastructure development, with $870 billion allocated for "mega projects" by 2030. Arguably the highest profile of these is NEOM, a futuristic city located on the Saudi side of the Gulf of Aqaba. The country aims to become a leading travel and shipping hub, and to support this vision, it has launched an updated National Transport and Logistics Strategy, a Saudi Aviation Strategy and plans to expand the King Salman International Airport. The total investment estimate for these projects is $150 billion.

Recognizing the potential of its vast mineral resources, the Kingdom also introduced a new mining investment law in 2021 that aims to facilitate the issuance of exploration licenses and leverage the estimated $1.3 trillion worth of "vastly unexplored" metals and minerals in the country. This presents significant investment opportunities, with an estimated total investment of $170 billion.

Construction-related disputes are an inevitable by-product of the rapid pace of construction projects in the region given the complexity and uncertainty inherent in these long-term transactions. Construction projects often involve multiple jurisdictions and legal regimes, including civil and Sharia law. Factors such as cost inflation, supply chain bottlenecks, labor shortages and the ongoing threat of viral outbreaks and extreme weather events can further complicate these projects.

Alongside this likely increase in construction-related dispute activity, disputes in the energy sector are also inevitable given the importance of the region to global energy production. Saudi Arabia is known for its significant reserves of oil, ranking second globally. As a result, the region has become an important forum for energy arbitrations.

The role of legal finance

To manage the costs and risks associated with disputes, legal finance, also known as third-party funding or litigation funding, has emerged as a pragmatic tool in Saudi Arabia.

Legal finance can help alleviate some of the financial strain associated with construction and energy disputes. Businesses use legal finance in a variety of ways. First and foremost, businesses engaged in disputes can work with a funder to cover the cost and risk of pursuing meritorious claims; in essence, a third-party financier pays lawyers’ fees and expenses.

Businesses also use legal finance to access some of the working capital tied up in pending disputes. Funders can advance a portion of the expected entitlement for pending claims, enabling companies to access funds immediately instead of waiting for a resolution through settlement or trial. This allows companies to put the money to work right away.

Legal finance is typically provided on a non-recourse basis, meaning that the financier only recovers its costs and a return if the claim is successful. This arrangement reduces the risk for companies, as they are not obligated to repay the financing if the claim is unsuccessful. And companies maintain control of their financed claims, except in instances in which selling a claim is permissible and makes more strategic sense for the client.

Around the world, businesses from startups to the Fortune 500 use legal finance as an effective financial and risk management tool. Businesses in Saudi Arabia, and the law firms that serve them, are also increasingly turning to legal finance. It allows them to reduce their legal costs and allocate their valuable resources to their core business needs while ensuring that high-value claims are properly pursued.