THE PRE-CONTRACTUAL PHASE (PART I)
Author Maître Simon DECEUNINCK is a lawyer at the Bar of Bordeaux. He is the founder of Citizen Avocats, a law firm which specialises in Private International Law, notably Franco-British relations. Key-words International arbitration; third-party funding. Summary The author presents the subjective viewpoint of a French lawyer, concerning the phase prior to the signing of a contract for third-party funding of international arbitration proceedings. Abbreviation In what follows, third-party funding or third-party funder will be referred to indiscriminately as “TPF” |
While some countries have specifically regulated third-party funding (1), others, like France, are still marked by legal vagueness on the subject. The rules of each arbitration centre may also vary on the issue. It would thus be futile to attempt to set out the perspective of lawyers in general on the subject of TPF. The viewpoint expressed below is the subjective one of a lawyer called upon to plead before arbitral tribunals whose seat of arbitration is in France. The aim is to provide pragmatic feedback; not to prescribe any practice ex cathedra.
In this article, we will examine TPF as an incentive to resort to arbitration (1); and the ethical issues negotiating a TPF agreement raises (2).
Can TPF be an incentive to choose arbitration as dispute resolution mechanism?
International contracts have specific features that make them more prone to interpretation problems than others. For example, the language of the contract and the law applicable to its substance may intersect. With all due deference to the courts, the question “will a state judge properly take this into account?” has become a daily drafting criterion. While it is reassuring to know that an international dispute will be settled by freely chosen arbitrators, it is generally undesirable to pin one's hopes on an ordinary electio fori clause.
Yet, in practice, many cross-border transactions end up being referred to national courts, even though they would benefit greatly from arbitration. Whereas a majority of “major” international contracts refer disputes to arbitration, (2) there remains a whole category of “smaller contracts” still subject to the jurisdiction of national courts. (3)
This raises the question of whether the existence of TPF may encourage parties to opt for arbitration when they are not sure they can afford it. There is no simple answer to this question.
It is impossible to know whether someone would agree to finance a dispute arising from a contract that has not yet been signed. There is no way of knowing whether a dispute will arise, on what subject, whether the client will be at the origin of it, etc. These considerations are far too speculative.
That being said, the development of TPF could have the effect of lowering the bar for financial arbitrability. This is of course subject to funders providing more funding for lower-stakes litigation. (4) For these “smaller contracts”, TPF could be combined with ingenious arbitration clauses (sole arbitrator, arbitration centre offering competitive fees, (5) etc.). The circle then becomes virtuous: arbitration is chosen because it is appropriate and potentially fundable; fundability is increased because costs have been minimized from the outset.
Seen as an incentive to choose arbitration, TPF probably deserves a few more considerations. Let us indeed remember that parties to a dispute remain free to choose arbitration, even if they have not included a clause to this effect in their contract. (6) Could TPF encourage parties to choose arbitration in such circumstances?
This is a very hypothetical question. It is quite difficult to believe that a party would agree to put its claims on hold while waiting for the other to obtain financing.(7) It is not entirely inconceivable that well advised parties, finding themselves in dispute over the performance of a contract, might agree to try the arbitration route, on condition of financing. However, this hypothesis would require the parties' counsels to engage in a very constructive dialogue, promoting temporarily their common interest to reach agreement on the forum. Obviously, there are so many reasons for failure that we will not dwell on this subject further.
While it is unthinkable to assume a priori that a dispute will be financed, one may hope that, as TPF develops, the “modest international disputes that deserve it” will be arbitrated.
2. The lawyer's ethical conduct during the negotiation phase of the financing agreement
Let us now address the pre-contractual phase with regard to the TPF agreement. What pragmatic and ethical questions does this phase raise from the lawyer's point of view?
2.1. Lawyers’ duty to advise
I believe that the duty to advise covers the possibility for a party who has been served with a request for arbitration to seek financing, when costs are an issue. (8) Indeed, TPF can resolve the issue of denial of justice for economic reasons caused to the impecunious party, (9) which is a sensitive issue in French international arbitration law, (10) given its favor arbitrandum.
The lawyers’ duty to advise is assessed extremely broadly by French courts. Lawyers are, so to speak, expected to know everything within their domain and therefore to inform, advise and/or warn about everything relevant to the scope of their intervention. (11) It is therefore reasonable to consider that lawyers should suggest this possibility to clients who are struggling to find the financial means for the forthcoming trial.
It also seems advisable to inform the client on the main foreseeable consequences of TPF, namely:
Additional delays (as the funder will conduct extensive audits, since payment needs to be organised and received…);
Additional workload for the lawyer (steps involved in seeking financing);
No guarantee of obtaining the financing sought;
Usual methods of remuneration for the third-party funder (contingency fee); and
The role of the TPF in the proceedings and the extent of its influence over the trial…
Let us assume that this preliminary advice has been given. We now need to consider the role of the lawyer in the triangular negotiation (client - funder - lawyer). To say the least, this phase is totally unusual. It is unlike anything a lawyer is used to dealing with. The introduction of a third party into the lawyer-client relationship is a source of potential ethical difficulties that need to be properly understood. (12)
2.2. Confidentiality
The decision whether or not to fund a dispute is taken on the basis of an audit carried out by the funder’s team or experts. (13) The first issue raised by TPF is thus the confidentiality of information and documents relating to the dispute.
Lawyers’ duty of confidentiality is absolute and covers consultations and correspondence with the client and, more generally, all documents in the file, whatever the legal matter. (14) In France, the rule is extremely strict. (15) Accordingly, disclosing information covered by professional secrecy is a punishable offence. (16)
How can one reconcile this obligation, which touches on the very essence of the legal profession, (17) with the TPF's legitimate requirement to understand the dispute it is being approached to fund?
First and foremost, “in all jurisdictions, a Party seeking funding and its counsel should ensure that a robust non-disclosure agreement (“NDA”) is entered into before any substantive discussions with a Funder […]”. (18) Such agreement shall be particularly broad as to the scope of the information protected from further disclosure. It must imperatively cover any written or oral information provided by either of the actors in the context of their pre-contractual, contractual or even post-contractual relationship.
Secondly, the disclosure of information as such must be made by the client only. (19) This simple rule is virtuous: firstly, it completely exonerates the lawyer in this respect, as the client's consent to disclosure is, by definition, guaranteed. It also establishes a clear division of roles from the outset.
In practice, however, this is not very convenient. Lawyers, who are increasingly aware of cybersecurity threats (20) are now implementing techniques for storing and sharing information in encrypted form. Consequently, sensitive information would probably be best shared by lawyers than litigants. What’s more, making lawyers artificially absent from disclosure makes their task of assuring the legal efficiency of the funding agreement more complicated. (21) One can hope that the rules evolve to give lawyers a bit of leeway.
2.3. Probity and selflessness
It is in the client’s interest to obtain financing. Yet, financing is granted or refused on the basis of the quality (22) of the litigation file. Since the TPF’s audit is carried out on the basis of information primarily, if not exclusively, communicated by the client and/or their counsel, the question arises as to the extent of disclosure. Some litigants might think that partial disclosure could increase their chances of obtaining funding. However, the client’s interest should not be construed in this narrow perspective. This phase is not about obtaining financing at all cost.
TPF agreements are contracts. As such, ordinary contract law applies to them and to the prior negotiations. The legal duty to provide precontractual information must be kept in mind. Without going so far as to replace the funder in its assessment of what is relevant or not, no voluntary omission should be endorsed, or, worse, advised. On the contrary, a virtuous dialogue with the TPF should be encouraged, enabling all material information to be shared. There is no question of vitiating the consent of the TPF by fraudulent omission (dol) or neglect. To do so would compromise the entire relationship and expose the arbitration procedure to the risk of discontinuity.
Obvious as it may seem, the subject is in fact very real. Given the stakes involved in arbitration disputes, having access to the tribunal is a decisive issue. Yet, TPF can only work if the triangular relationship is envisaged as a team from the outset. The players are indeed united by a common interest: the smooth running and success of the arbitration proceedings (23).
Selflessness (désintéressement) also underpins the lawyer's conduct during this peculiar phase. This principle can be defined as detachment from all self-interest, or as the attitude whereby a person neglects his/her own interests to serve those of others (24).
Usually, lawyer fees form part of the costs of the trial financed by the TPF (25). Lawyers therefore find themselves in a peculiar situation, bordering on a conflict of interests. Uniquely, whether or not they receive a large volume of fees over the long term depends not on their client’s finances and goodwill, but on the decision of a third party. This is where the principle of selflessness regains (if it ever lost) its relevance. Like probity, it advocates to act loyally, with the client’s best interests at heart (26). Hence, the lawyer’s personal interest in being financed for a lucrative case must be ignored. This abnegation can, for example, encourage the client and his/her lawyer to continue comparing financing offers.
Probity and disinterestedness juxtaposed, the standard of conduct becomes increasingly clear. To the extent that lawyers are involved in negotiating, drafting and/or concluding the agreement, they become responsible for its legal effectiveness, must inform their client of its foreseeable consequences, and must refrain from tilting anyone's decision towards signing or not signing it.
2.4. Prudence
Prudence implies acting with caution, anticipating the consequences of one’s actions. It requires not to act, or advise anyone to act, in a hasty or reckless manner. Lawyers are bound by this principle both in their dealings with clients and third parties. It implies a duty to inform and warn. It even implies a duty to advise clients against any given course of action deemed too risky or unfavourable to their interests (27).
Caution applies first and foremost in the context of audits. Meticulously analysing each case, the TPF will question the lawyer on the strengths, but also the potential weaknesses, of the case. The latter will therefore adopt a cautious approach, look for potential weaknesses in the case and anticipate opposing arguments. As recalled above, prudence applies to third parties. A lawyer who fails to exercise due care in relation to a third party could therefore be considered to have committed a fault giving rise to professional liability. This is clearly another argument in favour of the role of honest facilitator described above.
Given the singularly unusual and unregulated nature of TPF contracts(in France), clients should be carefully informed, or even warned, about inter alia:
The financial accord and all its components (who finances what, how, how much, in return for what success fee, etc.);
The clauses, features and obligations of the contract (confidentiality, competent jurisdiction, applicable law, etc.); as well as
Any financial consideration that is significant or appears excessive (28).
The idea here is to approach TPF agreements for what they are: sui generis contracts (29) with high stakes. It goes without saying that prudence dictates to ensure that the financing agreement:
Is in writing;
Holds clear and unambiguous clauses reflecting the genuine intention of the parties;
States clearly the amount granted, as well as the modalities for the TPF’s remuneration; and
Provides for an efficient dispute mechanism…
As one can see, the pre-contractual phase is highly specific and does not correspond to the situations that lawyers are usually confronted with. It is therefore particularly useful to go step by step with the help of colleagues. Deontology serves here as a remarkable compass, enabling us to emerge satisfactorily from the regulatory fog.
(1) See: Hong Kong, Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance 2017; Singapore, Civil Law Act 1909, 2020 Revised edition, Validity of certain contracts for funding of claims 5B (2); See also the Judgment given by the UK Supreme Court on 26 July 2023 (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents), [2023] UKSC 28, which confirmed that TPF agreements are “damages-based agreements” within the meaning of specific statutes and that they must therefore comply with statutory requirements in order to be enforceable/
(2) L’arbitrage commercial international, P. Fouchard, Dalloz, 1965, p. 54, par. 91
(3) This nuances in part the assertion that arbitration is the default justice of the globalised economy (see J-B. Racine, F. Siiriainen in Droit du commerce international, Dalloz, 3rd Edition, 2018, p. 374, par. 543)
(4) Which, for the time being, seems not to be the case (see J. Clavel-Thoraval, Le Fincancement du coût d’accès à l’arbitrage pour les PME/TPE, Lamy Droit Civil, n°144, 1er janvier 2017; Third Party Funding in International Arbitration, Ashurst, 15 June 2022).
(5) e.g. the competitive scale of the Chambre d’Arbitrage Internationale d’Aix-en-Provence
(6) Under French arbitration law, they can do so even after they have already referred the matter to the national courts
(7) Such leniency would be in stark contrast to the "I’ll shoot first" logic that prevails in this type of situation
(8) In the UK, solicitors have been obliged to inform their clients that their fees may be paid by a TPF for quite some time (see Solicitors Regulation Authority’s Code of Conduct 2011, 1st Section: You and your client; Chapter 1: Client Care, IB (1.16); G. Carson, The Growth of Third Party Litigation Funding)
(9) Le Financement du coût d’accès à l’arbitrage pour les PME/TPE, op. cit.
(10) See Cass. Civ. 1ère, 13 July 2016, n°15-19.389, Bull. ; M. de Fontmichel, « Le financement de l’arbitrage par une partie insolvable » in L’argent dans l’arbitrage W. Ben Hamida & Th. Clay (dir.), 2013, Lextenso ; D. Kühner, The impact of party impecuniosity on arbitration agreements: the example of France and Germany” Journ. Int. arb. 2014, vol. 31, issue 6, p. 807; Cass. Civ. 1ère, 28 September 2022, n°21-21.738, Bull. FS-D
(11) See Cass. Com., 13 October 2009, n°08-10.430; Cass. Civ. 1ère, 2 October 2013, n°12-14-457
(12) I. Michou, P. Pic, L. Degos, J-Y Garaud, C. Dupeyron, J. El Ahdab, Le financement de l’arbitrage par les tiers (« Third party funding »), Rapport présenté au Conseil de l’Ordre du Barreau de Paris, le 21 février 2017, p.3 & 5
(13) This audit can be a valuable independent assessment of the quality of the case for the lawyer
(14) Law n°71-1130 of 31 December 1971, Art. 66-5
(15) See Cass. Crim., 22 December 1966, D. 1967.122 16 Art. 226-13 and 14 of the French Code pénal
(17) S. Bourtoluzzi, D. Piau, Th. Wickers, H. Ader, A. Damien, Règles de la profession d’avocat, Dalloz Action, 2018-2019, p.536, par. 411.12
(18) Report of the ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration, op. cit., Chap. 7 “Best Practices in Third-Party Funding Arrangements”, III Principles and Best Practices, A. Principles (as set forth in Chapters 4,5 and 6) and Related Best Practices, 1. Principles Regarding Disclosure and Conflicts of Interest, p.188
(19) Le financement de l’arbtirage par les tiers (« Third party funding »), op. cit., p.10
(20) Etat de la menace informatique contre les cabinets d’avocats, Rapport spécial de l’Agence Nationale de la Sécurité des Systèmes d’Information, 27 juin 2023
(21) Lawyers who wish to monitor this phase may set up a dual confirmation mechanism (the client "sent X"; the TPF "confirms receipt of X")
(22) i.e. the chances of success (quality of evidence, apportionment of liabilities, statutes of limitation, etc.).
(23) German law seems to regard this common interest, shared by the litigant and the founder, as the essence of TPF agreements (CA Versailles, 12ème Ch., 1 June 2006, n° 05/01030)
(24) Règles de la profession d’avocat, op. cit., p.497, par. 333.11
(25) Franco Villa, Le Financement de contentieux par des tiers (« Third Party Funding »), Anwalts Revue de l’Avocat, n°5/2014, p. 208
(26) (as broadly defined supra)
(27) Cass. Civ. 1ère, 10 June 1997, n°95-17-213
(28) French law, if applicable, could allow for a judicial reduction in the agreed remuneration if it is excessive (Cass. Civ. 1ère, 23 November 2011, 10-16.770, Bull.)
(29) CA Versailles, 12ème Ch., 1 June 2006, n° 05/01030