The European Parliament adopted in September this year under the initiative legislative procedure nº 2020/2130(INL), a resolution on third-party funding in commercial litigation, recommending the proposition of a directive next year, which aims to establish minimum standards for this practice within the European Union (“EU”).
Directives are legislative acts that set out common goals for EU Member-States, coordinating the countries during their term. If approved, the directive on third-party litigation funding (“TPLF”) – as it is known – will provide a guideline for each country to regulate the subject according to its domestic law.
TPLF is a mechanism by which a private investor, unrelated to the dispute, pays costs and other legal fees to obtain a portion of the damages that will be awarded if the arbitrator finds in favor of the claimant. The size of the TPLF industry is estimated from forty to eighty billion euros per year, at a global level.
The experience reveals that the absence of rules regulating the relationship between the financier, funded party, and other actors involved in the dispute, can be problematic. Hence, by structuring objective rules legal certainty is increased, which stimulates the practice of the TPLF and, consequently, enables access to justice.
Among the advances of TPLF is the obligation to disclose the existence of the third-party funding agreement, which is of utmost importance to properly verify certain issues, such as the arbitrator’s conflict of interest.
Another feature that must be highlighted is the possibility to bind the financier to the dispute. Once he is not a party in the procedure, collecting the expenses incurred by the opposing party might be difficult if the claimant rests defeated. Therefore, binding the financier to adverse procedural costs and preventing unilateral termination of the third-party funding agreement before the end of proceedings improves TPLF.
To protect the funded party, the Resolution provides that contractual clauses which transfer to the financier the funded party’s autonomy over the strategy adopted in the dispute are void. In addition, it limits the funder’s profit to a maximum of 40% of the amount awarded to the founded party.
Financing disputes by third parties is an activity that is growing on a day-by-day basis and therefore needs regulation to be safer and predictable. However, it should be done carefully to avoid the creation of rules that, in practice, will decrease the range and effectiveness of this tool.
In Brazil, Arbitration Law does not regulate the financing of disputes by third parties, so to fill the vacuum some arbitration chambers deal with the issue in their regulations and administrative resolutions.
For instance, the Arbitration Center of the Brazil-Canada Chamber of Commerce (CAM-CCBC), in the 2022 Regulation, which entered into force on November 1st of this year, provides that parties shall inform the existence of third-party financing agreement at the first opportunity (Art. 9.6).
The European experience is relevant to Brazilians so far it demonstrates TPLF as a safe practice, even though it needs understanding and specialized advice to avoid misuse.
L.O. Baptista Advogados has professionals specialized in arbitration who have had experience in the matter and, therefore, can advise those seeking financing and those who want to finance as well.
Co-authored by: Silvia Rodrigues Pachikoski, Tonico Monteiro da Silva, Thiago Andere Martins e Julia Guimarães Rossetto
