Litigation as an investment
The mechanism of third party funding is already well known across the Atlantic and in some EU States and consists in an arrangement where a third party provides the necessary funding to bring and pursue a claim. In return, the third party receives a fee based on the amount of any award obtained.
A litigation funding agreement is, by nature, a contingency for the third party and therefore a risky “investment” because its outcome depends on the content of the decision that will be rendered by the judge or arbitrator; if the funded party’s claim is unsuccessful, then the third party will lose its investment.
The arrival of investment funds
This is why the third party funder will perform extensive analytical work and due diligence upstream in order to assess the claim’s potential in view of the amounts at stake, on the one hand, and the risk, on the other hand. Thus, in practice, the likelihood of losing the case will be less than 40 per cent (L. BENCH NIEUWVELD, Third Party Funding – investment of the Future?, 01/11/11, Kluwer Arbitration Blog) and the amounts at stake will represent some tens of millions of Euros (P. PINSOLLE, “Le Financement de l’arbitrage par les tiers”, Revue de l’arbitrage 2011, p. 392).
In common law countries, this technique has become increasingly prevalent since the mid-2000s. Third party funding was previously banned in the USA and UK on the basis of the “tort of champerty”, which prohibited a third party to a lawsuit from encouraging a claim by supporting it financially. However, this legal doctrine was eventually abolished and so many investment funds are now taking an interest in this market.
French courts look at the situation
In France, the technique is relatively unknown but not entirely non-existent. In this respect, the ruling handed down by the First Civil Chamber of the Cour de Cassation on November 23, 2011 may offer some precious guidance as to the future of third party funding in France. The facts – although quite unusual – met all of the characteristics of third party funding: a third party (a close friend of a deceased person) had agreed with the first legatee of the deceased’s entire estate (a second legatee then came forward with a later-dated will) to fund a lawsuit aimed at restoring the rights of the first legatee. In exchange, the third party would receive 30% of the estate. The claim was successful (the second will was found to be a forgery) but the legatee refused to pay the agreed sum to the funder and, in the context of the proceedings which then ensued, the legatee had requested a reduction of the third party funder’s fee. The Versailles Court of Appeal finally ordered the heir to pay the entire amount due.
Ruling provides guidance
The Cour de cassation then quashed the Court of Appeal’s decision, ruling that the contingency borne by the third party did not allow it to avoid a judicial reduction of the contractually-agreed fee, if such fee is deemed disproportionate. In this case, the issue of the litigation funding agreement’s validity had not been raised and was not therefore analysed by the Cour de cassation. In fact, the French courts have rendered few decisions on the subject and so an analysis of French case law does not establish any clear guidelines as to the rules which may apply to this technique in France. The ruling does however provide some guidance as, on the basis of Article 1134 of the French Civil Code, the Cour de cassation includes such agreement in the very limited scope of exceptions to the principle whereby contracts have a binding and mandatory effect. In doing so, and by admitting the possibility of revising the fee, the Cour de cassation adds another contingency which radically modifies the balance of the operation.
Not an investment like any other - yet
The technique of third party funding is often intended for major disputes and especially litigation with an international dimension, in which case it will be possible -- particularly if the funding is international -- to choose a jurisdiction which recognises this mechanism and may therefore offer the third party funder the legal security it is looking for. To conclude, the technique of third party funding is gradually starting to emerge in France (the subject will in fact be addressed at a study day on April 2, 2012 organised by the European College of Paris and the Panthéon Assas Paris II University’s Laboratoire d’économie du droit). However, for the time being, and from the Cour de cassation’s point of view, it is not yet an investment like any other. To be continued…
Marie Danis is a partner and Francois Chomard is an assocate at French law firm August & Debouzy.