Olivia de Patoul [1]
Introduction
When considering litigation funding in France, a distinction should be made between third party funding in international arbitration, focused on Paris, and the financing of domestic court litigation.
Third Party Funding
The use of third party funding in international arbitration has grown in recent years and it is now a well-established financing tool enabling companies to file claims without paying all the costs of doing so.
Arbitration
Arbitration teams in the French offices of international law firms and boutique firms (which are usually based in Paris) have found their way to litigation finance solutions offered by UK and US-based litigation funders that are internationally active (e.g., Burford Capital and Fortress) as well as funders based in the EU (Nivalion, Deminor, and Paris-based Ivo Capital and Profile Investment).
Compared to international arbitration, the market for funding French domestic court cases is still fairly small, which is probably due to the limited adverse costs risks (compared to UK courts or arbitral tribunals).
However, there is a growing interest in legal finance in certain fields such as the private enforcement of antitrust cases, and certain types of mass consumer claims of cases aimed at recovering damages on behalf of investors who have suffered a loss as a result of their investment.
For example, Deminor is funding a legal action involving a group of investors (more than 6,000 in the first group) who suffered substantial losses following investments made in certain funds managed by H2O Asset Management, part of the Natixis group.
2023 - Year in review
i Significant developments in legislation
As litigation funding has become a more commonly used tool, especially in international and investment treaty arbitration, the market has become more sophisticated and alternative funding structures have emerged such as portfolio funding, co-funding, defence funding and law firm funding. There is a constant goal of responding to the needs of new players.
Regulation
The growing interest in third party litigation funding has also led to a call for regulation. There are two types of regulation:
- self-regulation by actors in the litigation funding sphere (possibly in combination with industry-standardised documentation, as in structured finance operations in the banking sector); and
- (partial) government-imposed regulation.
In this respect, a resolution was passed on 13 September 2022 by the European Parliament, which includes recommendations to the European Commission to propose a directive to regulate litigation funding within the European Union.
These recommendations (contained in the Voss Report) may be the start of a legislative process at the European level, aimed at regulating the litigation funding sector for court proceedings, commercial arbitration and investor–state arbitration.
The Voss Report pushes for:
- transparency (e.g., an active obligation to disclose the existence and identity of the funder to the court);
- a cap on the fees (40 per cent, unless in exceptional circumstances);
- regulation of the management of the claim, with the funder having little influence on the conduct of the proceedings;
- regulation of conflicts of interest; and
- oversight (e.g., the authorities shall conduct mandatory annual assessments of each funder and the funders must have sufficient capital).
Each Member State shall be free to decide whether to allow third party funding. There is an unfortunate absence of distinction between claimants who are professional and those who are consumers (a 'one size-fits-all' approach).
It remains to be seen whether the European Commission will follow the European Parliament's recommendations, and within what time frame.
ii Notable cases
As stated above, an action is to be filed by more than 6,000 investors, private and institutional, grouped in a French association named 'Collectif Porteurs H20'. The action seeks damages on behalf of those investors, who suffered losses from their investments in the H20 Asset Management 'side-pockets' funds. The litigation is being funded on a 'no cure, no pay' basis.
A question relating to the rights of an impecunious party that agreed to an arbitration clause led to an important decision from the French Supreme Court on 20 September 2022, in the Carrefour Proximité France case.
The question was whether an allegedly impecunious party may be excused from participating in an arbitration because of its lack of money, and then claim the incompetence of the court by referring to the arbitration agreement.
The French Supreme Court said that, based on the principle of loyalty, while the impecuniosity of a party does not make the arbitration clause unenforceable, the failure of this party to pay its advance on costs precludes it from relying on the arbitration agreement if it then challenges the jurisdiction of French courts.
Legal and regulatory framework
France does not have a specific legislative or regulatory framework governing third party funding. The French civil law principles governing commercial contracts will apply, with contractual freedom as an overarching starting principle.
It is worth noting that French courts are not bound by the parties' classification of their contracts. The courts have the power to reclassify a contract when the contractual relationship is found to be governed by a specific legal regime, such as that relating to an insurance or partnership contract.
Given the implications of this reclassification (from a legal and regulatory perspective), it is of the utmost importance to verify whether the litigation funding agreement at hand includes any provisions that could lead to reclassification as a specific type of contract.
Ethics
While there is no direct regulation of third-party litigation funding, the regulations governing the legal profession (essentially the Bar rules; see hereunder) may have an impact on the trilateral relationship between funders, lawyers (members of the Bar) and clients.
The professional ethics rules and specific legislation (in particular the Law of 1971 governing the legal profession) apply to lawyers (members of the Bar) advising and assisting clients with third party litigation funding. The most relevant rules concern the duty of professional secrecy and independence, and the prohibition on charging (full) contingency fees.
Professional secrecy applies to all oral and written communications between a lawyer and a client. This is a mandatory rule of public order that cannot be waived.
Violation of professional secrecy can give rise to disciplinary or even criminal sanctions. However, the client is free to communicate documents and information received from his or her lawyer to third parties, including funders.
The duty of independence applies to any strategic decision regarding proceedings, including advice on settlement. This duty implies that a lawyer should receive instructions from the client, not the third party funder. This was confirmed in a resolution of the French National Bar Council of 20 and 21 November 2015.
This resolution makes clear that, although there is no legislative framework regulating the funding practice in France as such, its development does not contravene French law.
However, it also calls for the adoption of regulation to uphold lawyers' ethical obligations and the legal privilege surrounding the client relationship.
Therefore, a lawyer (member of the Bar) may not advise the client and the third party funder simultaneously and should refrain from meeting with the funder in the client's absence.
International Arbitration
The Paris Bar Council has explicitly recognised the use of third party litigation funding in the context of international arbitration, stating that 'it is favourable to the interest of litigants and lawyers (members of the Paris Bar), particularly in international arbitration' (Paris Bar Council Resolution dated 21 February 2017).[2]
This did not come as a surprise, as international arbitration is a relatively mature market for third party funding. As mentioned above, Paris is a key international arbitration hub, and a significant number of Paris-based law firms are active in the field.
The Resolution insists on the aforementioned ethical principles and obligations towards clients. It also recommends the disclosure of funding arrangements to arbitral tribunals and suggests managing money flows with the funder via the lawyers' trust account,[3] which is traditionally used to handle client funds.
French lawyers (members of the Bar) are prohibited from entering into full contingency agreements. However, partial contingency fee arrangements are allowed provided that they are entered into in advance. International arbitration is again a notable exception to the full contingency fee prohibition. In 1992, the Paris Court of Appeal ruled against applying this principle in international arbitration when such agreements are voluntarily entered into and not abusive since they are internationally recognised and accepted in numerous countries, regardless of the legal system.[4]
Contingency fee arrangements are, therefore, another way for a law firm to fund the case, whether partially (in domestic litigation and arbitration) or entirely (in international arbitration).
Insurance
Other funding possibilities include legal costs insurance, or a before-the-event insurance policy where parties agree with an insurer to cover the costs of legal proceedings before the need arises. After-the-event insurance, offering protection against a potential adverse costs award if the case is unsuccessful, is mostly used as specialist insurance in international arbitration where adverse costs awards can be much higher than in domestic court litigation.
Legal aid is a mechanism of state-provided financial support to (partially or fully) cover a litigant's court costs and fees. It is only open to physical persons who must evidence insufficient personal resources.
Class Actions
Class actions were introduced by Law 2014-344 dated 17 March 2014, which modified the French Consumption Code in matters of consumer protection. This has been extended to class actions in healthcare, the environment, data protection and discrimination cases (Law No. 2016-1547 of 18 November 2016).
Third party funding of such actions is not formally prohibited. However, consumer protection class action provisions provide for certain direct payouts that make the possibility of the direct payment of proceeds to a funder doubtful.
Structuring the funding agreement
Litigation funding agreements as such are not regulated by French law. However, as noted above, the principle of contractual freedom set forth in French civil law (e.g., Articles 1101–1104 Civil Code) allows the parties to tailor the funding agreement to their specific needs.
As mentioned above, parties should be aware that if a dispute arises between the funder and the client, the court will not be bound by the parties' classification of their agreement. Rather, the court can decide, depending on the specific elements of the case, that the agreement qualifies as a specifically regulated contract (e.g., insurance or partnership). That said, we are unaware of existing case law on this particular subject.
The litigation funding agreement will often be structured as a financing operation, as selling the claim may give rise to the retrait litigieux (i.e., litigious withdrawal right). According to Article 1699 of the Civil Code, 'the person against whom a litigious right has been assigned may be held harmless by the assignee, by reimbursing him the actual price of the assignment together with costs and interest from the day on which the assignee has paid the price of the assignment made to him'.[5] In other words, the Civil Code allows the debtor to terminate the debt and the lawsuit the debtor may be facing simply by reimbursing the assignee the price paid to the assignor.
This may be interesting for a debtor (a defendant in a lawsuit) where an assignment has taken place at a relatively low price (compared to the value of the litigious right). At the same time, this is potentially harmful for the assignor (who would take the place of the initial creditor) as the lawsuit will end and there is no further possibility of recovery.
Important Rulings
In two rulings handed down on 28 February 2018, the French Court of Cassation accepted that the debtor of a claim assigned during arbitration proceedings is entitled to exercise its right to withdrawal in post-award proceedings, at the stage of the dispute over the annulment[6] or the exequatur[7] of the arbitral award.
However, in two judgments of 7 December 2021,[8] the International Chamber of the Paris Court of Appeal ruled against the aforementioned position of the Court of Cassation, judging that it is not within the powers of the annulment judge to examine an application for a contentious withdrawal.
According to the Court, however, such an application may be decided by the enforcement judge, provided that the assignment of the claim is governed by French law. A petition to quash these decisions has (again) been filed with the Court of Cassation.
In a remarkable decision dated 25 January 2022,[9] the Paris Court of Appeal also decided that a third party funder was not a co-claimant in arbitral proceedings. Rather, the extension of an arbitration clause to a third party funder requires exceptional circumstances. The existence of the third party funder, the fact that the funder's interest is not simply financial, and the fact that the third party only acts as a funder occasionally, are not considered to be exceptional circumstances.
French courts have already been asked to rule on a dispute regarding the funder's remuneration and whether they have the power to reduce a contractually agreed funder's fee if it would be considered disproportionate in light of the funder's obligations.
On 23 November 2011, the French Court of Cassation ruled that the agreement to pay 30 per cent to a funder (a physical person) of all net amounts recovered in an inheritance dispute could be subject to a reduction by the court if the latter found it disproportionate.[10] While the Versailles Court of Appeal had refused to reduce the contractually agreed funder's fee of 30 per cent, the Court of Cassation quashed the decision. The Paris Court of Appeal eventually reduced the remuneration to 15 per cent, taking into account the relatively short duration of the proceedings and the limited services to be provided by the funder.[11]
Given the specific circumstances of the case, it remains to be seen whether this case law will set a lasting trend.
Client Rights
Clients have the right to retain the counsel of their choice. This does not prevent the funder from proposing counsel, provided that the client is not yet represented. Funders will often request that both they and the client must agree on any new legal team if there is a change of counsel during the litigation.
In practice, clients often turn to funders for advice on the best representation if no lawyer has been retained yet, but the final decision will always remain with the client.
The funder's attendance at hearings can also be covered in the litigation funding agreement. However, unlike domestic litigation where court hearings are open to the public (subject to certain exceptions), arbitration hearings will generally remain confidential. There is no possibility of a funder attending unless otherwise agreed between claimants and respondents, which is not common in our view.
One of the key provisions parties will address in their litigation funding agreement is the funder's rights regarding settlement.
Generally speaking, the funder will not play an active role. However, questions over the initiation of settlement discussions, settlement thresholds and the acceptance of a settlement offer will often find their way into the litigation funding agreement.
Provisions concerning settlement, especially in terms of value, are often directly linked to the financing provided by the third party funder. The latter will seek to protect itself against the client accepting unreasonably low settlement offers. Thus, it will often be a question of finding the right balance between the client's power to enter a settlement and the protection of the funder's investment. This balance could be subject to review by the French courts.
Parties to a litigation funding agreement are free to agree on the circumstances in which the litigation funding agreement can be terminated. Usually, parties agree on a predefined list of circumstances that may adversely impact the funded proceedings.
The following examples are frequently cited: full or partial dismissal of the claim, the revelation of previously unknown facts or circumstances, the loss of evidence or the appearance of previously undisclosed evidence, and events adversely affecting the enforcement position (e.g., loss of creditworthiness, a composition with creditors, restructuring or bankruptcy).
Under these circumstances, the funder may lose the financing provided up to the terminating event and will bear the costs resulting from such termination. A breach of the litigation funding agreement by the funded party may also lead to termination, either with or without notice depending on the importance of the breach, as well as the duty to reimburse costs and expenses to the funder.
There is no equivalent in France of the common law doctrines of champerty and maintenance that still apply in some jurisdictions. Therefore, parties may contractually agree on a more active role for the funder in the proceedings (e.g., offering certain administrative support, or acting as a sounding board for strategy purposes). In any event, however, this will be limited by French professional (ethics) rules applying to members of the Bar.
Those rules include a prohibition on taking instructions from the funder rather than the client or meeting the funder without the client, legal privilege in the relationship between the lawyer and the client, and, more generally, the fact that in the case of a conflict of interests between the client and the funder, the lawyer will need to follow the client's instructions.
Given the extensive contractual freedom of the parties, the funder's other rights and obligations in relation to the conduct of the proceedings will need to be agreed upon. This is especially important for information rights, access to documents (which can be complex in arbitration proceedings), confidentiality and consultation rights on certain strategic decisions.
Disclosure
In French domestic court litigation, French law does not contain a formal obligation to disclose the litigation funding agreement.
In arbitration proceedings, a distinction should be made between the professional (ethics) rules and the arbitration rules parties agree to apply to the arbitration proceedings.
The Paris Bar Council Resolution of 21 February 2017 encourages members of the Bar who represent funded parties to advise their clients to disclose the existence of third party funding to the arbitral tribunal to allow arbitrators to identify potential conflicts as a result of certain ties with a funder.
As to the applicable arbitration rules, an illustration can be found in the recently amended ICC Rules, which apply to any ICC arbitration commencing from 1 January 2021 (unless otherwise agreed between the parties) (2021 ICC Rules). One of the most significant changes in the 2021 ICC Rules is the focus on third party funding.
This confirms a trend of acknowledging the existence of third party funding and the need for transparency surrounding its use. With the 2021 ICC Rules, the ICC joins other renowned arbitration institutions such as CIETAC, HKIAC, CAM-CCBC and the Milan Chamber of Arbitration.
ICC Rules
The trend in favour of increased transparency regarding third party funding is expressed in Article 11 (7) of the 2021 ICC Rules, which now provides that parties:
'must promptly inform the Secretariat, the arbitral tribunal and the other parties, of the existence and identity of any non-party which has entered into an arrangement for the funding of claims or defences and under which it has an economic interest in the outcome of the arbitration'.
This provision aims to prevent a conflict of interests between the arbitral tribunal, the parties to the dispute and non-parties such as third-party funders. This includes situations where an arbitrator has connections to an entity providing third party funding. If he or she is a member of the funder's investment committee, advises the funder on its investments or owns shares in the funder, this should be identified and disclosed to avoid possible follow-on proceedings (i.e., the setting aside of the arbitral award or proceedings challenging the arbitrator).
This stance in the 2021 ICC Rules echoes a previous Paris Bar Council recommendation and takes a clear position in the ongoing debate regarding the extent of disclosure (i.e., disclosure of the provisions of the litigation funding agreement, as against disclosure of the existence of the funder and the identity of the funder). It appears that Article 11(7) of the 2021 ICC Rules favours a balanced approach reflecting existing practice.
ICSID Arbitration Rules
However, the new ICSID Arbitration Rules, which were approved by the Member States on 21 March 2022 and entered into force on 1 July 2022, go further. Rule 14 (1) classically requires a funded party to provide 'a written notice disclosing the name and address of any non-party from which the party, directly or indirectly, has received funds for the pursuit or defence of the proceeding through a donation or grant, or in return for remuneration dependent on the outcome of the proceeding (“third-party funding”)'.
If the funder is a juridical person, Rule 14 (1) moreover provides that the notice should also include 'the names of the persons and entities that own and control that juridical person'.
More importantly, Rule 14 (4) grants the power to an ICSID arbitral tribunal to request additional information on the content of any funding agreement once the notice of funding has been filed.
Such broad powers are questionable, as funding agreements tend to reflect the outcome of the analysis of the case by a third party funder (e.g., potential weaknesses and settlement thresholds), which – once disclosed – may influence the arbitral tribunal and negatively affect its impartiality.
Finally, client–lawyer communications are privileged and should not be disclosed to third parties (including funders). The communication between funded litigants, their lawyers and third-party litigation funders is not covered by any privilege. Again, the litigation funding agreement offers a way to organise this confidentiality contractually.
Costs
According to Article 696 of the French Code of Civil Procedure:
'the losing party shall be ordered to pay the costs, unless the court, by reasoned decision, orders another party to pay all or part of them'.
These legal costs are listed in Article 695 of the Code of Civil Procedure and include court fees, translation fees, expert fees, and lawyers' fees 'to the extent they are regulated'.[12]
Article 700 of the Code of Civil Procedure allows additional lawyers' fees and other sums not covered by Article 695 to be claimed. Costs under Article 700 are usually not awarded based on actual costs incurred, but rather they are somewhat discretionary.
If granted, they are generally only a fraction of the actual costs incurred by the winning party. It remains to be seen whether funding costs could be claimed as part of Article 700.
In both domestic and international arbitration, the parties are free to agree the terms and conditions of the allocation of costs, including by reference to arbitration rules. If they do not, under French law the arbitral tribunal has a wide discretionary power and can award adverse costs (including lawyers' fees) to the prevailing party in the proportion it deems fit.
Unless the litigation funding agreement provides otherwise, the funder has no obligation to cover adverse party costs, and the prevailing adverse party has no enforceable right against the funder to cover such costs.
From the factual background of a ruling dated 1 June 2006 rendered by the Versailles Court of Appeal, it appeared that in a matter related to payment of costs in an international arbitration, the successful respondent in that arbitration (Onyx, which later became Veolia Propreté) attempted to obtain payment of the costs of the arbitration from the third party funder (Foris AG) before the French courts.
At first instance, the Nanterre Commercial Court decided in favour of Veolia Propreté (the successful respondent in the underlying arbitration) and ordered provisional enforcement against the third party funder. However, the Court of Appeal remanded the lower court's judgment for lack of jurisdiction.
Domestic French court proceedings have no specific rules for imposing a security for costs order on a third party. However, a provision for security for costs can be requested from the opposing party by way of a request for interim measures requiring the requesting party to prove that the substantive obligation that is subject to the dispute is undeniable.
In international arbitration proceedings, parties can request the arbitral tribunal to make security for costs orders as part of a request for provisional measures. This generally requires the requesting party to demonstrate that it is urgently needed given the circumstances of the case and the requesting party's exposure to irreparable harm in the absence of the order.
Litigation Funding Market - Outlook & Conclusions
The French third party litigation funding market is characterised by a mature segment for international arbitration with Paris as a hub (not least due to the presence of the ICC) and a developing segment for international and domestic arbitration and litigation, with class actions and the private enforcement actions of antitrust actions being developments to watch.
France appears to have chosen a professional obligations-driven approach, which does not prevent funders from developing their activities but impacts the relationships and interactions funders necessarily have with litigants and lawyers (members of the Bar).
This has caused the Paris Bar (whose lawyers are involved in the bulk of international arbitration cases seated in Paris) to reconcile professional ethics rules with international arbitration practice to maintain Paris' competitive position.
Regulation is, therefore, mostly soft law or derived from professional ethics rules, which leaves much room for contractual freedom but may cause some uncertainties.
Footnotes
1 Olivia de Patoul - former general counsel France and Belgium at Deminor.
2 Free translation.
3 i.e., the Caisse Autonome des Règlements Pécuniaires des Avocats (CARPA).
4 Paris Court of Appeal (1er Ch. B), 10 July 1992. It appears that this is not the only source of tension between traditional bar rules and international arbitration where French lawyers could be disadvantaged. The same applies to the traditional prohibition on French lawyers preparing witnesses for cross-examinations, leading the Paris Bar Council to conclude unanimously that preparing witnesses fell within a French lawyer's duties as it was a common practice in international arbitration proceedings (Bulletin du Barreau 2008 No. 9, 4 March 2008, at 45–46).
5 Free translation.
6 Cass. Civ. 1, 28 February 2018, No 16-22.112.
7 Cass. Civ. 1, 28 February 2018, No16-22.126.
8 Paris Court of Appeal (Pôle 5), Ch. 16, 7 December 2021 No 18/10217 and No 18/10220.
9 Paris Court of Appeal, 25 (Pôle 5), Ch. 16, 25 January 2022, No 20/12332.
10 Cass. Civ. I, 23 November 2011, No 10-16.770.
11 Paris Court of Appeal, (Pôle 3), 1st ch. 17 October 2012, No. 11-22443.
12 Free translation.