Olivia de Patoul [1]
Introduction
Litigation funding is not regulated by law in Luxembourg and the validity of litigation funding agreements has never been discussed by local courts.
This, however, does not mean that litigation funding is not used in this jurisdiction but that it remains submitted to the contractual freedom of the parties provided they comply with public policy and general civil provisions applying to contracts submitted to Luxembourg law.
Even if valid and enforceable, litigation funding agreements are less common than in other jurisdictions,[2]probably because of the relatively low costs of litigation. Litigants therefore have less need to seek external funding to finance their claims.
There have been past examples of funded litigation.
Most notably, victims of the late Bernie Madoff's Ponzi schemes instituted legal proceedings in Luxembourg against, inter alia, the investment managers and custodian banks of the Luxembourg funds that, unknown to the investors, invested in Madoff.
Some of these proceedings remain ongoing today, pending the outcome of criminal investigations. Also, investors who have invested in Luxembourg funds set up by Credit Suisse with exposure to Greensill are currently exploring their options under Luxembourg law.
Also, with the entry into force in 2023 of the new Arbitration Act, Luxembourg is trying to attract more arbitration disputes, and that could lead to more cases being funded, especially at the enforcement stage. In the arbitration sector, funders are currently most interested in the enforcement of arbitral awards against states.
As Luxembourg is known for its financial services industry, it is expected that the Luxembourg litigation funding market will develop mainly around investment losses and litigation related to financial products (e.g., mis-selling claims).
Litigation funding is also increasingly gaining traction in the Luxembourg financial sector, as investment companies regularly join funded collective actions in foreign jurisdictions to recover losses suffered on their investments.
Finally, Luxembourg is an interesting venue for cross-border asset recovery and enforcement matters in general.
Luxembourg law contains various provisions to facilitate the enforcement of a final enforcement decision, such as garnishment. Also, Luxembourg courts can issue interim attachment orders to freeze the assets of a debtor while proceedings on the merits are still ongoing.
The procedure for obtaining such an interim attachment is quite efficient (either ex parte proceedings before the president of the district court or, if the creditor already has a title, notification of the attachment directly by a bailiff without intervention of the court) and the substantive requirements for obtaining an attachment are relatively low. This allows a creditor to rapidly freeze the bank accounts held by a debtor in Luxembourg.
The major litigation funders with operations in Luxembourg or that focus on the Luxembourg market, or both, are Deminor and Nivalion.
The year in review
i Legislative developments
Despite the deadline of December 2022, EU Directive 2020/1828 on consumer collective redress has not been implemented yet. The draft bill introducing consumer class actions was submitted to parliament in August 2020 and considerably amended in January 2022 to comply, inter alia, with the Representative Action Directive of 4 December 2020.
Consumer actions against financial institutions and insurance companies are excluded from its scope following the bill latest amendments.
Luxembourg, however, adopted its new arbitration law, aiming to modernise arbitration by offering more speed and flexibility.
The most important changes relate to confirmation of the 'competence-competence' principle, creation of the supporting judge, simplification of the appeal procedure to an arbitral award and affirmation that both a request to set aside an arbitral award and an appeal of a decision upholding enforcement do not have suspensive effect, unless the enforcement 'is susceptible to severely prejudice the rights of a party'.
ii Notable cases
It is understood that investors who have invested in the Credit Suisse (Lux) Supply Chain Finance Fund, a sub-fund of a Luxembourg SICAV that was put into liquidation in March 2021 following the bankruptcy of Greensill, have initiated or are in the process of initiating legal action funded by litigation funders.
It is alleged that Credit Suisse arranged and promoted Greensill-related insured investment funds as safe instruments and as an alternative to money market funds because of their insured character.
Investors claim to have been misled about the key characteristics of the fund, notably about the non-renewal of the underlying insurance policies eight months before the collapse of Greensill.
Legal and regulatory framework
i No regulatory framework
There is no prohibition on litigation funding in Luxembourg. Moreover, as a civil law jurisdiction, the concepts of champerty and maintenance are not part of Luxembourg's legal culture.
Third party funding of litigation is, therefore, considered allowed and has been used in the past without any issues arising.
There is no legal framework in place for litigation funding in Luxembourg. The general rules of contract law as established in the Luxembourg Civil Code will apply, including the principle of freedom of contract.
The parties to the funding agreement are free to determine their respective rights and obligations within the framework of general contract law.
As set out above, litigation funding is not yet commonly used in Luxembourg.
Consequently, and to the best of our knowledge, Luxembourg courts have not yet been asked to resolve questions regarding the admissibility of third-party funding or disputes between a funder and its client.
Nevertheless, the legality of litigation funding in Luxembourg is commonly accepted.
Regarding arbitration proceedings, on 23 March 2023, the Luxembourg Parliament adopted the new Arbitration Act 2023 to reform, modernise and simplify the arbitration system. It does not, however, include any provisions on third party funding.
Finally, the Arbitration Centre of the Chamber of Commerce of Luxembourg has its own set of rules, which are contained in the Rules of Arbitration of the Luxembourg Chamber of Commerce, in force since 1 January 2020. The Rules do not contain any reference to third party funding either.
ii Contingency fees
Fee arrangements between lawyers and their clients providing that the lawyers' remuneration is exclusively based on the outcome of the dispute are prohibited. However, lawyers are permitted to work for a partial success fee on top of their fixed or hourly-based remuneration.
iii Class actions
Class actions are currently not available in Luxembourg. Given the entry into force of the new EU Directive on consumer collective redress,[3]pursuant to which all EU Member States must ensure that representative actions can be brought by qualified entities, a consumer class action mechanism will need to be adopted in Luxembourg.
The deadline to transpose the Directive was 25 December 2022, with measures to apply as from 25 June 2023. A draft bill to that effect was submitted to the Luxembourg Parliament in August 2020 but has not yet been enacted.[4]
The bill was amended in January 2022, excluding, for instance, collective recourse by consumers against professionals overseen by the Luxembourg financial and insurance regulatory authorities.
The draft bill does not include a defined framework for third party funding. However, Article L512-2 of the draft bill provides that, for the qualified entity to demonstrate it does not have a conflict of interest, the writ of summons must mention, inter alia, the sources of funding of the action, such as a funding contract. The possibility for third party funding of a consumer class action is, therefore, at least implicitly, taken into account in the draft bill.
Structuring the agreement
Litigation funding agreements are considered as agreements sui generis under Luxembourg law, governed only by the rules of general contract law. Also, some specific provisions governing the lawyer–client relationship might indirectly affect the funding contract (such as the obligation for a lawyer to remain independent or conflict-of-interest provisions).
A litigation funding agreement does not qualify as a loan, given that there is no obligation on the funded client to reimburse the funding, which is an essential obligation of the borrower under a loan agreement. The client will only have an obligation to share the proceeds in the event of a successful outcome.
The parties' respective rights and obligations can be freely defined in the funding agreement, the sole limitation being violations of public policy.
Given the lack of a statutory framework or specific legislation, the funding agreement should be comprehensive and should stipulate all aspects of the parties' relationship. Generally, a funding agreement will include provisions governing the following issues:
- The amount of the investment: the funding agreement will generally define the maximum commitment of the funder, the specific items that are included in the budget (legal fees for first instance and appeal, expert fees, adverse party costs, etc.) and the conditions to drawdown the budget. To avoid budget overruns, and depending on the type of case, funders may work with capped amounts per item or stage of the proceedings.
- Exposure to counterclaims: the funding agreement will specify whether the funding will cover the costs of defending a counterclaim and whether the funder will cover the financial exposure of a counterclaim.
- The funder's remuneration: this can be either a percentage of the recovered amounts, a multiple on the invested capital, or a combination of both. The agreement will also set out the 'payment waterfall', which defines the priority of payments to the funder, the law firm (contingency fees) and the client. Practical arrangements for the distribution of the proceeds will also be provided for.
- The exchange of information: correspondence between the client and their lawyer, and any written material drafted for the client, are protected by attorney–client privilege. The lawyer, therefore, cannot disclose any of this to the funder without the client's express consent. Consequently, the funding agreement will regulate the exchange of information between the client, the lawyer and the funder. This enables the latter to be kept abreast of the progress of the case and to monitor its investment.
- Control or consent rights: to protect its investment, the funder will generally seek to have some degree of control over important decisions in a case, such as filing appeals, terminating proceedings or accepting settlements. Under Luxembourg law, a funder is not prohibited from having a veto right on certain decisions.
- Termination rights: in addition to termination for material breach, the funder and the client may also agree on a right for the funder to terminate the agreement if an event occurs that negatively impacts the prospects of the case or an event that makes the case commercially unviable, or the agreement may even allow for termination for convenience.
Disclosure
i Disclosure of funding – judicial proceedings
Given that there is no legal framework on litigation funding, there is equally no legal obligation for a funded party to disclose the existence of a funding agreement, let alone disclose the agreement itself.
That said, for the sake of transparency, it is recommended that a litigant discloses that it is benefiting from litigation funding.
ii Disclosure – arbitration
Since 2023, arbitration in Luxembourg has been governed by the Arbitration Act 2023, which does not contain any provisions referring to third party funding or the obligation for parties to disclose their use of third party funding to the arbitrators or the adverse party.
That said, arbitrators must act impartially and independently.
This general principle is confirmed in the Rules of Arbitration[5] enacted by the Luxembourg Chamber of Commerce. Pursuant to Article 10.10 of these Rules, a prospective arbitrator must disclose
'any facts or circumstances which might be of such a nature as to call into question the arbitrator's independence in the eyes of the parties, as well as any circumstances that could give rise to reasonable doubts as to the arbitrator's impartiality'.
An arbitrator's prior relationships or dealings with the funder may qualify as such circumstance. The funded party's disclosing of the existence of the funding arrangement, including the funder's identity, enables the arbitrators to comply with their own disclosure obligations.[6]
Furthermore, there is a general tendency in arbitration worldwide towards disclosure of funding agreements in arbitration proceedings, evidenced by recent amendments to institutional rules of arbitration providing for such disclosure.
For example, the International Chamber of Commerce issued new rules in 2021, including under Article 11(7) that 'each party 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.'
In conclusion, although it is not mandatory to disclose the existence of a funding agreement in an arbitration submitted to Luxembourg law, it would be recommended to do so.
iii No discovery
Luxembourg does not have discovery proceedings akin to discovery in the United States. Parties to civil proceedings in Luxembourg must produce their own evidence to support their claims.
However, at the request of a party to the proceedings, the court can order its opponent or a third party to disclose a specifically identified piece of evidence that the opponent or third party has in its possession.[7]
Costs
i Judiciary proceedings
When it comes to recovery of costs in court proceedings, a distinction should be made between the costs related to the proceedings and lawyer fees.
The losing party will generally be ordered to pay an indemnity for costs to the prevailing party.[8]These costs mainly include bailiff fees, the fees of the expert appointed by the court and witness expenses. Lawyer fees are not included in these costs.
In addition to the indemnity for costs, the court may decide to grant an indemnity for legal fees to one of the parties.[9] The amount of this indemnity is left to the discretion of the court and generally covers only a small portion of the total legal fees incurred by that party.
The judge may only grant the indemnity if a request to that order has been made by the parties having won the case and if
'it seems unfair to leave the other party to pay part of the sums it has incurred and not included in the expenses'.
At the request of the defendant, security for costs may be imposed by the court on a foreign claimant, that is, a claimant with domicile or habitual residence in the territory of another state.[10]
The court has discretion to determine the amount of the security. However, there are several exceptions to this general rule. Claimants who have their domicile in a Member State of the European Union, a member state of the Council of Europe or any other state with which Luxembourg has entered into an international agreement providing for an exemption to request a security for costs, are excluded from the scope of application of these provisions. As a result, security for costs is rarely imposed in practice.
ii Arbitration
The Luxembourg Arbitration Act does not include any specific provisions regarding the costs of the arbitration. However, it is not debated that arbitrators can issue cost orders establishing which party must carry what part of the costs.
The Luxembourg Chamber of Commerce Rules of Arbitration provide that the final award shall fix the costs of the arbitration and decide which of the parties shall bear them, or in what proportion they shall be borne by the parties. In making decisions as to costs, the arbitrator may consider any such circumstances it considers relevant, including the extent to which each party has conducted the arbitration in an expeditious and cost-effective manner.[11]
Moreover, the costs of the arbitration shall be submitted for prior approval to the Council of Arbitration (i.e., the council managing the Arbitration Centre of the Chamber of Commerce) to ensure that the costs remain within reasonable limits, taking into account the nature of the dispute and the degree of difficulty of the issues to be resolved.[12]
iii Liability of funders for adverse costs
Third-party funders usually do not become a party to the proceedings, whether judicial or arbitration proceedings, initiated by their clients. The court or arbitral tribunal, therefore, cannot order the funder to pay costs, and the adverse party will not have a direct claim against the funder.
Outlook and conclusions
Although third party litigation funding has been used successfully in the past, the Luxembourg market remains relatively underdeveloped.
As the market for litigation funding in other EU jurisdictions grows, Luxembourg may ride this wave, albeit maybe to a lesser extent than surrounding countries. Litigation regarding investment losses and financial services, as well as commercial arbitration and enforcement procedures, seem to be the most fertile practice areas for the use of third party funding in the near future.
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Footnotes
1 Olivia de Patoul - former general counsel at Deminor for France and Belgium and author of this article.
2 There is no publicly available data on the use of litigation funding in Luxembourg; therefore, this section is based on the author's monitoring of the funding market.
3 Directive (EU) 2020/1828 of the European Parliament and of the Council of 25 November 2020 on representative actions for the protection of the collective interests of consumers and repealing Directive 2009/22/EC.
4 Bill No. 7650 introducing class actions in consumer law.
5 https://www.cc.lu/fileadmin/user_upload/cc.lu/Rules_of_arbitration.pdf.
6 Although arbitration proceedings in Luxembourg will not necessarily be conducted in accordance with the Luxembourg Chamber of Commerce's Rules of Arbitration, the principles of independence and impartiality apply generally to all arbitration proceedings.
7 See Articles 284–288 NCPC.
8 Article 238 NCPC.
9 Article 240 NCCP.
10 Article 257(1) NCPC.
11 Chamber of Commerce Rules of Arbitration, Article 33.2.
12 Chamber of Commerce Rules of Arbitration, Article 33.3.