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Would the liability of Brazilian litigation funders be at risk?

Boletim, Dispute Resolution

Would the liability of Brazilian litigation funders be at risk?

9/30/2021

A recent decision from the English Court of Appeal, rendered in the ChapelGate[1] case, upheld the High Court of Justice determination regarding the litigation funder’s liability, which was, in terms of costs to the prevailing party, not limited to the financed amount.

The judgment shed light on the application of another local precedent, known as the “Arkin cap”, in which the liability of the litigation funder was limited to the amount it provided. The matter is of interest both in the UK and around the world, given the growth of the alternative dispute resolution market globally and the increasing need for external resources to ensure access to justice by this means.

The ChapelGate case, judged by the Court of Appeal, stems from the fact that Angel House Developments’ (“AHDL”) Directors, a company owned and controlled by Ms. Julie Davey, in the exercise of their functions, sold the company’s main asset, the AngelHouse property, given to Dunbar Assets PLD as security.

Following the filling of Dunbar’s actions against Ms. Davey, the AHDL’s owner filed further proceedings on behalf of her company against the Directors regarding the disposal of AngelHouse, on the grounds of breach of fiduciary duty and failure to exercise stewardship. These claims were funded by ChapelGate, the investor, with whom she had entered into a specific agreement. However, the claims filed by Ms. Davey were dismissed by the first instance judge, and ChapelGate was included in the passive pole of these actions to deliberate on costs, due to the determination that Ms. Davey would pay the costs incurred by the Directors and by Dunbar throughout the process on an indemnity basis.

Despite requests by the Trustees and Dunbar, who pleaded that the costs owed by Ms. Davey were ought to be paid by ChapelGate, the litigation’s funder was ordered to pay the costs incurred by the Trustees and Dunbar after the execution of the financing agreement with Ms. Davey, however, without any cap.

The grounds adopted for this were that: (a) what is known as the Arkin cap should not be interpreted as a “rigid” rule to be automatically applied in all cases involving litigation funders, but rather a parameter to be considered by judges exercising their discretion; (b) ChapelGate’s participation in the case in question was as an investment, therefore, in spite of the fact that it did not conduct the case directly, the company had every opportunity to evaluate the claims before choosing to finance them. Moreover, in examining the Financing Agreement between the Parties, the Court of Appeal concluded that ChapelGate considered its own interests in financing the case as a commercial transaction and found no correlation between the amount the company chose to invest in the litigation and the costs to which the Directors were exposed.

It is also important to note that in England, the power of the Court to determine the payment of costs by third parties is specified in the English law, the Senior Courts Act 1981[2].

After the analysis of the case listed above, the question main question that arises is: should litigation investors in Brazil, especially in arbitration, be concerned with the hypothesis that their liability exceeds the amount financed?

Initially, it is necessary to establish the absence of an equivalent of the English Senior Courts Act in Brazilian law, which is a broad rule that gives select local courts full powers to decide by whom – and to what extent – the procedural costs should be paid, which includes third parties to the process, such as litigation funders.

Since arbitration has a contractual origin, the panel established to decide a certain dispute is limited to the arbitration clause (or arbitration commitment). Therefore, arbitrators have no jurisdiction to decide on the relationship between the parties and third parties, unless such discussion is within the scope of the dispute.

In the event the dispute involves the liability of a third party regarding the payment of procedural costs, this request must be expressed and presented before the stabilization of the claim. Later, the issue must be advocated and instructed like any other, and it is not possible for the Arbitral Court to decide it ex officio.

It is well-known that, given its private nature, arbitration in Brazil, generally, demands greater resources if compared to state justice. The arbitrators’ fees, the administrative fees due to the arbitration chambers, the production of evidence that often involves legal or technical opinions, make arbitration more costly when compared to the Brazilian judiciary, which opens space for third-party funding, to ensure access to justice.

In such cases, it is important that the financing agreement reached between the investor and the interested party be carefully drafted to establish specific criteria and limits of liability for each case in order to avoid surprises in case of unsuccessful claims as in ChapelGate v. Money and others.