DURING THE LEGAL PROCEEDINGS (PART II)
Author
Francesca MASTRAGOSTINO, candidate to the Luxembourg Bar and Junior Associate in the Dispute Resolution Department at Bonn, Steichen & Partners in Luxembourg. She previously worked as a Legal Analyst at Qanlex, a litigation finance fund operating in Europe and Latin America, and holds an LLM in European and International Business Law.
Key-words
Third-Party Funding; Disclosure; Impartiality; Confidentiality; Obligations; Costs.
Summary
The author provides insights from a funder's perspective regarding the relationship between the client and the Funder following the commencement of the legal proceedings, analysing aspects such as disclosure of the funder’s presence, the rights and obligations of all parties and the issue of security for costs.
Abbreviations
Third-Party Funding is often referred to as “TPF”, Litigation Funding Agreement as “LFA”, European Convention on Human Rights as “ECHR”.
Disclosure of Funder presence and transparency
The growing trend in international arbitration is towards disclosing the existence of litigation funding arrangements and the identity of the funders. While not required in all cases, this shift is based on principles aimed at safeguarding the integrity of the arbitral process.
In jurisdictions like Hong Kong and Singapore, as well as in the arbitral institutions such as the Hong Kong International Arbitration Centre and the ICC, disclosure of funding arrangements is compulsory. The recent 2022 Arbitration Rules of the International Centre for the Settlement of Investment Disputes (“2022 ICSID Rules”) (1) also follow this approach, requiring not only disclosure of the funder's identity but also further details about the ownership and control of the funding entity.
Differently, under Luxembourgish law, there's typically no obligation for parties involved in domestic litigation to disclose their funding agreements to the opposing party or the court. Although a court could theoretically order such disclosure if certain conditions for document production are met, this scenario is highly improbable. The defendant would essentially need to demonstrate that the funding agreement could influence the judge's decision on the case's merits, a burden that's typically challenging to satisfy. (2) Similarly, there's no explicit requirement in the New Code of Civil Procedure for arbitration to disclose funding agreements.
Even in investment treaty law, such as the Comprehensive Economic and Trade Agreement, (3) are included provisions for disclosing Third-Party Funding details. (4 )This shift towards transparency is seen as a necessary means to uphold the impartiality of arbitrators and protect arbitral awards from future challenges connected to it. (5)
Despite the recent developments, there are also instances where disclosure is more limited, such as in the case of Amorrortu v. The Republic of Peru, PCA Case No. 2020-11, (6) where the tribunal ordered disclosure of the funder's identity but denied access to the underlying funding agreement. The tribunal reasoned that this limited disclosure was sufficient to address potential conflicts of interest and clarified that the claimant was not obliged to demonstrate control over settlement negotiations. (7)
Despite the debate, there might be indeed potential benefits to such transparency: firstly, it signals to the tribunal and the opposing party that an impartial third party has found the claims meritorious, possibly encouraging settlement discussions. Additionally, the knowledge that a party is backed by a professional litigation funder may deter opponents from using delay tactics, as the financial support provides a measure of stability to the claimant's position.
Funders’ rights and possible challenges
Maintaining a strong and cooperative relationship between the claimant and the litigation Funder is critical throughout the legal proceedings. Such collaboration is characterised by continuing monitoring and dialogue, and it is frequently managed by the same investment team that guided the case through the negotiating process.
Regular updates on the case's progress, as well as notice of any crucial developments, are key components of this collaboration. These discussions can be held once a month or more seldomly depending on the degree of activity in the case. A strong long-term partnership in litigation funding is built on open and honest communication.
The degree of control that prospective funders have over the selection of legal representation for the funded party is a critical factor. While Funders do not dictate legal strategy, their experienced legal specialists build a thorough understanding of each funded case. When asked, they are willing to provide non-binding strategic insights. This collaborative approach develops a partnership based on trust and common goals, eventually improving the chances of success throughout the legal procedures. Aside from watching substantive case developments, the Funder rigorously oversees the litigation budget to ensure that adequate resources are committed to successfully support the investment.
Is it possible for funders to stipulate their preferred legal counsel? Individuals seeking assistance often retain the ability to choose their own legal representation, with Funders refraining from imposing their views. Nonetheless, acceptance or approval terms related to the claimant’s selected counsel may be included in Litigation Funding Agreements (“LFA”), having an impact on whether funding is approved or rejected.
Such control exercised by each Funder can therefore vary greatly. Some may stipulate that their financial support is contingent upon the litigating party appointing the Funder's recommended legal team or integrating certain professionals into their own. Differently, other funders opt for a more impartial role and merely fund the proceedings.
However, it is critical to emphasise that, regardless of any influence, attorneys have an unshakeable commitment to act in their client's best interests. This obligation persists even when the client's interests differ from the Funder's choices, as will be more thoroughly analysed below in the case of settlement offers.
Additionally, Funders may attend mediations and settlement conferences to provide advice on how the LFA operates in different settlement scenarios, as well as major hearings and trials as observers, as long as their presence does not compromise confidentiality regarding financial matters for the claimant and lawyers. (8)
Lastly, post-investment monitoring practices in litigation funding can vary between investments and jurisdictions, with funders generally taking a "light touch" approach to case management. The degree of interference is often laid out specified in the Litigation Funding Agreement, usually prohibiting funders from controlling lawyers' strategic decisions but grants them limited rights, such as being informed about settlement offers and major case developments. As a result, funders often engage in regular communication with lawyers and claimants, sometimes requesting written reports on significant developments. Given their familiarity with the case merits, litigation finance professionals, particularly those with legal backgrounds, are often consulted for non-binding advice on strategy and other key matters during the case progression.
Bringing a third-party into the proceedings: a tripartite relationship
The LFA provides for clauses outlining the framework this relationship between funder, client and counsel must work within, and among them a fundamental one regards confidentiality, reporting, and provision of documents outlines the obligations and rights of the parties involved.
According to such clause, the client is required to ensure that their legal representatives promptly provide the funder with copies of any significant documents related to the litigation. Additionally, Claimant must keep the funder informed of all material developments and any information that could have a significant adverse effect.
It however is emphasised the exclusive ownership of confidential information by the disclosing party, the client, while the funder, being the recipient, acknowledges that all confidential information provided remains the property of the disclosing party and agrees not to disclose or use it for any purpose other than furthering the legal interests of client or the funder, as permitted by the former or as required by law. Furthermore, the clause imposes a non-disclosure obligation on the recipient for the duration of the agreement and for a specified period after termination, except in specific circumstances provided for in the agreement, such as furthering legal interests or as required by law.
Importantly, the funder is allowed to disclose confidential information to a co-funder (9) if necessary, provided that the participant agrees to be bound by the confidentiality provisions outlined in the agreement. This layout ensures that the confidentiality of the information is maintained even in collaborative scenarios involving multiple parties.
When it comes to additional obligations and responsibilities of both claimant and leal counsel, it is important for the LFA to provide for a clause on irrevocable instruction to lawyers and the cooperation of the claimant.
Under such provision, the claimant shall be required to execute an irrevocable instruction, directing the lawyers to comply with the terms of the agreement and cooperate with the funder. This instruction ensures that the funder has control over the legal representation and can enforce its rights under the agreement. Additionally, if the claimant engages any additional or substitute lawyers, they must also execute an irrevocable instruction satisfactory to the funder.
While this provision may appear to be in conflict with the client's right to select its own legal representation, it is essential to underscore that this is not the case. In fact, this provision becomes relevant only after to the signing of the Litigation Funding Agreement, and its primary purpose is to safeguard the interests of the funder, who may have opted not to enter into the agreement with the client had the client disclosed its intention to choose a different legal counsel.
Furthermore, the claimant is obligated to cooperate fully with the lawyers and the funder throughout the litigation process. This includes devoting sufficient time and attention to the case, remaining a party to the litigation until final resolution, and using best efforts to maximize the value of the litigation proceeds. The claimant must also promptly enter and enforce any judgment obtained and pursue prosecution in all appropriate jurisdictions.
Lastly, it is paramount that the claimant client that they have provided the funder with all relevant information related to the litigation, (10) ensuring transparency and accuracy in the exchange of information, as the information provided by the claimant has been decisive for the funder to enter into the agreement and it is important for the funder to ensure that there is no additional information that may adversely affect the outcome of the claim in ways that had not been envisaged before.
Security for costs
Moving onto a different side of the relationship, arbitral tribunals, especially in investment arbitration, have often dismissed applications for security for costs solely based on the presence of Third-Party Funding. The prevailing rationale is that merely having financing does not automatically indicate a risk of non-payment, and requiring security in every TPF case could hinder potentially valid claims. (11)
For instance, in the Libananco v. Turkey case, (12) Turkey sought security for costs, citing that Libananco's claim was funded and the funder was unreliable. The tribunal, noting the absence of established ICSID practice, denied the request, reserving such orders for extreme cases where a party's interests face irreparable harm. Similarly, in Hamester v. Ghana, (13) the tribunal declined security, finding no evidence of necessity or urgency and fearing stifling the claimant's case. (14)
The high standard to grant security of costs – at least in the sphere of investment treaty arbitration – has only exceptionally been met. This stance was exemplified in RSM v. Saint Lucia, (15) where a history of non-compliance, limited finances, and an undisclosed funder led to the exceptional decision for security. Yet, even here, not all arbitrators agreed on the necessity of such security. The decision was not unanimous, however.( 16)
This reluctance to grant security for costs solely due to TPF aligns, for example, with practices in English courts. In Progas Energy v. Pakistan, (17) the Commercial Court rejected the argument that the involvement of commercial funders should affect decisions on security for costs. The judge emphasized that the mere fact of a challenge being funded should not automatically lead to a security order. (18)
Lastly, the recent ruling by the England and Wales Court of Appeal in Rowe v Ingenious Media Holdings (19) represents a notable shift in the approach to requiring cross-undertakings in security for costs. This decision marks a departure from previous practice, where such undertakings were commonly mandated, and instead restricts their imposition to "rare and exceptional circumstances." What's particularly significant is the impact this has on commercial litigation funders, whose costs are now treated on par with other litigation expenses.
Central to the court's reasoning is the delicate balance between the rights of claimants and defendants, as enshrined in Article 6 (20) of the European Convention on Human Rights (“ECHR”). While acknowledging the importance of ensuring access to justice for claimants, the court also recognizes the legitimate interest of defendants in recovering their costs, especially in cases where a claim's failure could lead to significant financial repercussions.
In this context, the court's decision underscores the expectation that litigation funders should be sufficiently capitalized to cover any potential liabilities arising from the cases they fund. This includes not only the costs of litigation itself but also any adverse costs orders that may be incurred if the claim is unsuccessful.
The Rowe case serves as a poignant reminder of the intricate dynamics at play in the realm of litigation funding and insurance. By reframing the criteria for requiring cross-undertakings, the court has introduced a new layer of complexity that legal practitioners must navigate. This highlights the importance of engaging solicitors who possess a deep understanding of the nuances of this evolving landscape.
Looking ahead, the lack of clarity surrounding the circumstances in which cross-undertakings will be deemed appropriate leaves room for further interpretation and development in future cases. As such, practitioners must remain vigilant and adaptable to ensure they can effectively navigate these complexities on behalf of their clients. (21)
CONCLUSION
It can be concluded that during the phase of legal proceedings, the pattern of cooperation, communication, and mutual trust among funders, clients, and lawyers remains paramount, underscoring the evolving landscape of litigation funding and the need for practitioners to navigate its complexities effectively.
Transparency remains as a central theme, with a growing trend towards disclosure of funding arrangements to safeguard the integrity of legal proceedings. Within this framework, collaboration, and communication are emphasized as essential components of the tripartite relationship. While funders may not dictate legal strategy, they still play a significant role in overseeing the litigation budget and may stipulate conditions in litigation funding agreements to protect their interests. Nevertheless, the autonomy of the client in selecting legal representation is preserved, with lawyers bound by an unwavering commitment to act in their client's best interests.
Furthermore, complexities surrounding security for costs have emerged, further highlighting a reluctance among arbitral tribunals and courts to grant security solely based on the presence of thirdparty funding. Recent rulings underscored the delicate balance between the rights of claimants and defendants, emphasizing the expectation that litigation funders should be adequately capitalized to cover potential liabilities.
(1) The 2022 ICSID Rules can be read at
(2) I. BERGER, L.H. GAICIO-FIEVEZ, A. NICKELS, “Litigation Funding: Luxembourg”, Lexology GTDT, 28th
September 2022.
(3) The Comprehensive Economic and Trade Agreement (CETA) is a free-trade agreement between Canada and
the European Union and its member states. Article 8.26 of the CETA establishes that “where there is third party
funding, the disputing party benefiting from it shall disclose to the other disputing party and to the Tribunal the
name and address of the third party funder.”.
(4 ) A. DE LOTBINIERE MC DOUGALL KC, D. NYER, K. ODYNSKI, “Charting a new course: proposed
expedited dispute resolution procedures for CETA”, White&Case, 2nd May 2024.
The article can be found at https://www.whitecase.com/insight-alert/charting-new-course-proposed-expediteddispute-resolution-procedures-ceta
(5) W. PANLILIO, “Discoverability of Litigation Funding in International Arbitration”, LCM Finance, 15th
December 2022. The article can be read at https://lcmfinance.com/publications/discoverability-of-litigationfunding-in-international-arbitration/ .
(6) Information regarding the case can be found at https://pca-cpa.org/en/cases/296/ .
(7) In particular, the tribunal held that such disclosure is “sufficient to deal with potential conflicts of interest.”
(8) A. LEMPINER, “A Practical Guide to Litigation Funding - Woodsford Litigation Funding Insight”, Woodsford Litigation Funding, consultable at https://woodsford.com/wp-content/uploads/2021/01/WoodfordWhite-Paper-A-Practical-Guide-Lit-Fund-NLogo.pdf
(9) It is not uncommon for funders to opt for joint funding of a case, typically with the goal of sharing the risks inherent in the investment or diminishing the individual capital commitment. In such arrangements, funding is typically deployed pari passum, with all parties adhering to the same rules and timeframe.
(10) On this, it is interest to read the judgement Hall v Saunders Law Ltd & Ors [2020] EWHC 404 (Comm). See also R. WHEAL, E. ILLINGWORTH “What duties does a lawyer owe a litigation funder - put simply, what do the words say?”, White&Case, 31st March 2020. The article can be found at https://www.whitecase.com/insight-alert/what-duties-does-lawyer-owe-litigation-funder-put-simply-what-dowords-say .
(12) Libananco Holdings Co. Limited v. Republic of Turkey, ICSID Case No. ARB/06/8, Decision on Preliminary Issues, 23rd June 2008 (Libananco v. Turkey).
(13) Gustav F W Hamester GmbH & Co KG v. Republic of Ghana, ICSID Case No. ARB/07/24, consultable at https://jusmundi.com/en/document/pdf/decision/en-gustav-f-w-hamester-gmbh-co-kg-v-republic-of-ghanaaward-friday-18th-june-2010 .
(14) See also Commerce Group Corp. and San Sebastian Gold Mines, Inc. v. The Republic of El Salvador, ICSID Case No. ARB/09/17, Decision on El Salvador’s Application for Security for Costs, 20th September 2012, [25], [31], [35], [42]– [52].
(15) RSM Production Corporation v. Saint Lucia, ICSID Case No. ARB/12/10. See more at https://jusmundi.com/en/document/decision/en-rsm-production-corporation-v-saint-lucia-rectificationproceeding-monday-6th-may-2019
(16) RSM Production Corporation v. Saint Lucia, ICSID Case No. ARB/12/10, Decision on Saint Lucia’s Request for Security for Costs, 13 August 2014, [86].
(17) Progas Energy Limited, Progas Holding Limited, Sheffield Engineering Company Limited v. The Islamic Republic of Pakistan [2018] EWHC 209 (Comm), [78].
(18) Reference taken from https://globalarbitrationreview.com/guide/the-guide-ma-arbitration/4thedition/article/third-party-funding-in-international-arbitration#footnote-157-backlink .
(19) Rowe & Ors v Ingenious Media Holdings & Ors [2021] EWCA Civ 29.
(20) Article 6 of the ECHR:
“Right to a fair trial
1. In the determination of his civil rights and obligations or of any criminal charge against him, everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law. Judgment shall be pronounced publicly but the press and public may be excluded from all or part of the trial in the interests of morals, public order or national security in a democratic society, where the interests of juveniles or the protection of the private life of the parties so require, or to the extent strictly necessary in the opinion of the court in special circumstances where publicity would prejudice the interests of justice. 2. Everyone charged with a criminal offence shall be presumed innocent until proved guilty according to law. 3. Everyone charged with a criminal offence has the following minimum rights: (a) to be informed promptly, in a language which he understands and in detail, of the nature and cause of the accusation against him; (b) to have adequate time and facilities for the preparation of his defence; (c) to defend himself in person or through legal assistance of his own choosing or, if he has not sufficient means to pay for legal assistance, to be given it free when the interests of justice so require; (d) to examine or have examined witnesses against him and to obtain the attendance and examination of witnesses on his behalf under the same conditions as witnesses against him; (e) to have the free assistance of an interpreter if he cannot understand or speak the language used in court.
(21) EdwinCoe LLP Blog, “Class Action Litigation - Recent decision of the Court of Appeal may make litigation funding more expensive”, 16th March 2021. The article can be found at https://www.edwincoe.com/blogs/main/recent-decision-of-the-court-of-appeal-maymake-litigation-funding-more-expensive/https://www.edwincoe.com/blogs/main/recent-decision-of-the-courtof-appeal-may-make-litigation-funding-more-expensive/ .