“Jornal de Negócios” / “Lex”
Duarte G. Henriques
Duarte Gorjão Henriques – partner of BCH Lawyers, specialising in litigation and arbitration
What if the costs of disputes in Justice were financed?
Duarte Gorjão Henriques believes that “sooner than later” the small and medium Portuguese companies will resort to institutions that provide financing for disputes brought in court and arbitration.
There is a business that it is now very common in most of the Anglo-Saxon jurisdictions, and Duarte Gorjão Henriques believes that it will arrive in Portugal “sooner than later”. We speak of so-called “Third-Party Funding”, that the lawyer and partner of BCH believes that may help mainly small and medium companies in our country that otherwise couldn’t afford to resort to Justice. A specialist in this field—he is a member of the ICCA and Queen Mary University Task Force on “third-party funding”—Gorjão Henriques explains to “Negócios” what “third-party funding” is and how it works.
What does the funder receive when funding one of the parties on the basis “third-party funding” business model?
According to the ordinary “third-party funding” model, there typically exists a financing structure consisting either of the “1 to 3 rule” or of a share of the proceeds. For each financed euro, the funder expects to receive three. Otherwise—and regardless of the amount of money channelled—the funder may be entitled to receive between 30% and 50% of the amount in dispute. There is a recent case brought in Washington against Colombia, before an ICSID tribunal, where the funder will pay all the costs and is expecting to receive half of the proceeds in return.
What is so attractive in this model for the funded party?
The upside lies in the fact that the funded party is not bound to reimburse the funder, should the claim fail.
Will the funders lose their invested money?
They will. For them, it is a risk. But not for the funded party, that will have all of its costs paid by the funder. In the vast majority of cases, the funding is sought by companies that simply cannot afford to pursue their claim.
Will the funder undertake a risk without warranties?
Before funding a case, the funder performs a due diligence, which may be even more rigorous than those performed in M&A transactions. The funder will assess the claim and will run numerous checks, including the chances of success, the financial status of the funded party, and also the financial status of the debtor.
What kind of companies provide funding?
There are several companies specializing in litigation financing.
Do you think that those companies are open to make investments in Portugal?
The international players whom I have been working with have already shown interest in Portugal and Spain. Although this financing model in principle aims at big claims, there is room for international funders to invest in cases in Portugal. We are thinking of arbitrations which are typically initiated by small and medium companies.
What does it mean for these companies to resort to arbitration?
It means avoiding courts, because for small and medium companies going to court may be critical.
Firstly, and foremost, a case may take long time in court before it is decided, and there is a certain degree of unpredictability in the outcome. That is, if the debtor files an opposition to enforcement or to a summary judgement, the case will be utterly swamped, and it will stay in court for years. In my practice, I’ve witnessed companies questioning whether they should spend their financial resources to collect 30 or 40 thousand euros and whether they should run the risk that the debtor may have no asset to attach when the final decision is made.
Is it worth paying the costs of an arbitration case?
Even for arbitrations of small and medium face value, arbitration is expensive. In a € 500,000 claim, the initial fee in a State court is around € 1,600. In arbitration, we face a figure of € 30,000 or € 40,000 from the outset. If the other party does not make its advance on costs and if the claimant wishes to proceed with the case, the latter must pay the costs that were supposed to be paid by the defaulting party.
A company with no money to pursue a claim might receive zero without external financial support!
Nevertheless, this business model requires new “players” in Portugal, right?
Absolutely. Alternatively, international funding companies may surface, but they must use a mind-set adapted to the Portuguese context. Taking the example of a € 500,000 claim, if the funder puts € 30,000 or € 40,000 into the pipeline, the funder´s expectation might be to recover half of the proceeds. For companies with no financial resources to pay 30 or 40 thousand euros, having no external funding will mean that they will receive zero.
The Portuguese companies do not know the “third-party funding”. What about the Portuguese legal community?
I think that the Portuguese companies are not completely aware of this business model. As the Portuguese lawyers are concerned, either are they aware, but afraid of it, or unaware, but not willing to get acquainted with it.
What is the explanation for this lack of openness to get acquainted with this business model?
On the one hand, they fear that there are some ethical issues associated, and on the other, they think that this will bring a decrease in their work.
And doesn’t such a model represent a decrease?
To the contrary, it may bring more work for them. If one builds a good relationship with a funder, lawyers and law firms can only but benefit from it because this model can be suggested to clients, and the clients that once were unable to pursue a claim, now may act otherwise. One is already hearing about “portfolio financing” where, for example, a funder provides financial resources to law firms based upon the assessment of their portfolio of claims, taking the risk that some claims might fail.
Does the “portfolio financing” raise any ethical issue for lawyers?
I have been working with financing structures at the international level. The last one was a financing solution sought in the U.K. by a Chinese corporation in an arbitration against a Russian party. Before any detail was disclosed, a “non-disclosure” agreement was concluded. This is the way one tackles those issues. However, this is not the only issue here.
What are the other issues there?
We might think that this is a sort of “quota litis” or a bargain with lawyers over their legal fees. However, this is not the case here. In “third-party funding”, although the lawyer may intervene in the arrangement, the agreement is entered into between the funder and the attorney’s client. The attorney may intervene but merely as a “fiduciary” agent.
Companies enjoy the right of access to Justice!
And doesn’t this model increase the number of disputes?
It is possible that this model may produce such effect, but the other side of the coin is that of the access to justice. In Portugal, companies do not enjoy legal aid in State court, let alone in arbitration.