21 January 2016

Alexander Konkov, Partner at «Khrenov and Partners»
Marianne Rybynok, Advisor at «Khrenov and Partners»

Legal fees in connection with the resolution of international disputes can be very high. This factor is one of the key when deciding whether to start a formal arbitral or judicial proceedings, whether to hire legal counsel to the parties or to try to resolve the conflict through negotiations. Advance is usually difficult or even impossible to estimate how much it would cost the entire process, because it is difficult to predict what the arguments will be given the opposite side, will file a counterclaim and, consequently, what will be the volume of documents and evidence, etc.

There are various ways and mechanisms of financing costs related to the conduct of international disputes, since various types of insurance, and to the provision of funding from third parties (Eng. — Third Party Funding — hereinafter «TPF»). As the foreign practice, the involvement of third parties to cover court costs can be quite beneficial for both the parties to the dispute, and to attract investors. Unlike Western countries, in Russia, similar mechanisms incurring legal costs is not yet developed. Nevertheless, the study of foreign experience in this field can be very useful and not without interest.
The court may oblige the investor to bear the costs of both parties to the dispute
TPF has been around for a long time in western Europe and the United States. Its essence lies in the fact that a third person cover all legal expenses side of things, in exchange for part of the sum awarded by the arbitrator or judge (if you win). In other words, a third-party financier arbitral or judicial proceedings, is a kind of a financial investor.

Drinking TPF is ambiguous. In some countries, this type of financing is still banned at the legislative level. There are a number of ethical arguments against the TPF, which will be discussed in detail below. In jurisdictions where this type of financing is legal, it is often subject to certain restrictions on the TPF.

Historically within the Anglo-Saxon system of law the use of the Institute TPF has long been illegal and contrary to the doctrine of «champerty». This concept originated in England in the Middle Ages. While some members of the British aristocratic families kept aside dispute the significance of his title and ancestral ties, and in return receive a portion of the amount of support awarded to this side of the dispute. In addition, the English barons often threatened by English judges weapons. Even if a word of English aristocrat has ceased to play such a role, as in the days of the Crusaders and knights' campaigns, the practice of «champerty» has long been illegal. It existed in England until 1967, after which it was put into the category of crimes against the law.

Today TPF is very popular in England, the USA, Australia and other countries with Anglo-Saxon legal system. Nevertheless, there are some limitations. In different jurisdictions, these restrictions are implemented differently.

For example, in England TPF regulated so-called «soft law» (soft law), that is, the rules are not enshrined in law, but generally accepted in professional legal practice. In 2007, Britain established a working group at the government for the development of common rules for TPF. Today, there are code for the TPF, which defines some of the key provisions of the agreement on a typical TPF. For example, the Code provides that a third-party financier dispute should not have any effect on the lawyers involved in the conduct of the dispute. In addition, it must have immediate access to sufficient funds to cover not only direct costs, but also the possible disposition of the court or tribunal on the opposite side of the costs (adverse costs), etc.

In addition to the mentioned Code, in England as there are quite a number of precedents that permit the use of certain issues TPF. Thus, according to the decision in one case, the investor may be liable not only for the cost of the financed party, but also for the cost of the other side, if the court ruled in favor of the latter (Merchantbridge & Co Ltd & Safron Advisors Ltd vs Safron General Partner). As a general rule, the losing party in England reimburse legal costs of the successful. However, in the case of an investor pays the TFP is not always, but only if this is specified in the contract for the TPF, or if it turns out that the investor was actively involved in the dispute.

The Anglo-Saxon legal system is somehow «immigrated» to the countries that were once colonies of the British Empire. Along with him, and immigrated to the doctrine of «champerty», therefore, if the TPF and the permitted in these countries, it is always with certain restrictions.

For example, TPF is completely prohibited in Cyprus. Reforms in respect of TPF, similar to English, there have not been conducted, so TFP remains illegal in that jurisdiction. However, the example of Cyprus is the exception rather than the rule. For example, TPF is widely used in the United States and Australia. Australia agreement on the TPF can be declared illegal only if it leads to abuse of the judicial process (abuse of process), it is very difficult to prove. In the US, American Bar Association for several years exploring the question of whether to prohibit the TPF, and if not, then what exactly must be regulated by the norms of TPF.
For countries with a Romano-Germanic legal system (civil law countries), the unified approach to the TPF here. For example, in Belgium, the Professional Code, which regulates the legal profession, TPF makes use of quite complex. Belgian Code prohibits a lawyer to recover their costs in connection with the conduct of a dispute with a third party, not a party to the dispute. Although there are exceptions to this rule, TPF market in Belgium is missing. Somewhat different is the situation with TPF in France, the Netherlands and Germany.

Interestingly, German lawyers are forbidden to receive interest on the amount awarded to the client. Accordingly, any agreement, according to which the legal fees depends on the outcome of the case, is prohibited. It is believed that legal advice should be as independent, including from the final payment. However, agreement on the TPF may be concluded between the customer and the investor directly. Thus, the lawyer does not have a relationship to the contract and its professional obligations are not violated.

In France, there is no consensus on how to determine whether the TPF. TPF market here, as there is no such as too large a role legal aid — free legal aid. A similar situation exists in the Netherlands.
The chances of attracting an investor depends on the prospects of the dispute
Typically, the contract concluded between the TPF and the investor party to the dispute. The law firm, as a rule, not a party to such a contract. The law firm signed a contract for services by the party of the dispute, which transmits lawyers exposed the account for payment of the investor. Drinking TPF and the methods of regulation vary from country to country. Despite this, we can define a set of common positions which are usually included in each TPF contract.

The first of them — a period of exclusivity (Exclusivity Period). Under this period is the period during which the investor conducts due diligence (due diligence) and decides whether it will fund the dispute. The duration of the period of exclusivity depends on what stage of the dispute was to attract investors: the closer to the date of the direct examination of the dispute on the merits, the less time it will take to the investor in order to determine the prospects of the dispute.

The prospect of a specific dispute in the eyes of an investor depends on many factors. You can highlight the most significant ones.
The first — is the question of the jurisdiction of the dispute. If the probability of occurrence of the dispute between the parties of competent jurisdiction, it means that the cost of the arbitration or judicial proceedings significantly. On average, the hearing on jurisdiction increases the arbitration to 6 — 12 months.

An important factor is the evidence base. It is clear that the legal arguments must be supported by factual evidence. In the Anglo-Saxon legal systems, a huge and sometimes decisive role played by the testimony. Key statements contained in these indications should also be supported by evidence. The more facts that are used in the argument of the parties and is not supported by appropriate evidence, the harder it will be to win a case such party.

The third factor — is the assessment of damages. Any assessment of the amount of losses is very subjective. The more there may be ways to assess potential losses than the uncertainty of the size of the possible compensation awarded by the tribunal, the less beneficial it may seem business investor. For example, England and there is a basis for a claim such as «loss of chance» (loss of chance). This lawsuit is always difficult to determine how the court will calculate the damages, as there are very high levels of subjectivity. So, in Chaplin vs Hicks defendant prevented the participation of the plaintiff in a beauty contest and, although there was no guarantee of victory, the court decided that the plaintiff has suffered losses and appreciated the opportunity to win a beauty contest the plaintiff’s 25%.
In addition, the investor will be required to assess how difficult it will then execute the decision of the tribunal or court. In particular, matters in which jurisdictions are the assets of the defendant. For example, countries not members of the Organization for Economic Cooperation and Development are considered by investors as sophisticated to bring the judgment.
An important role is played by the duration of the process and its likely cost. The longer the process is going to be, the less interest to investors. Of course, it is impossible to say in advance, how long the proceedings, especially if it is in the very early stages. If the process is delayed for a long time and the party supported the investor refuses to enter into a settlement agreement, the investor, under certain circumstances, may even terminate the contract on the TPF.

Just as in the case with the duration when the spores are in the early stages, to predict its likely value extremely difficult. Here, there are various options on how the investor can hedge against risks. For example, an investor can set a limit, which will be limited to its investment in the dispute.
TPF improve access to justice, but carries the risk of abuse
The agreement contains provisions TPF sure about the mechanism and structure of payments to investors. The parties may agree that the investor receives a percentage of the amount awarded by the court or tribunal (usually 20 to 50%). The party may also convey the right to sue investors. It is important to agree in advance what would be the payment of an investor at the stage of bringing the judgment.
As a rule, TPF treaty stipulates that the party to the dispute is obliged to behave rationally from a commercial point of view, to provide «all the necessary information," his lawyer, etc. An investor might try to cut off funding, referring to this type of commitment (especially if a judicial or arbitration process does not develop as expected). In this regard, it is important as it is possible to prescribe in detail the obligations parties to the dispute, not forgetting that the investor is not entitled to interfere in the process of direct reference to the dispute. The latter circumstance is somehow reflected in the regulations governing the TPF in many jurisdictions.

Quite often it happens that the losing party has to cover not only their legal costs, but other costs (adverse costs), partially or completely. It is important to agree in advance as to whether such payments are borne by the investor or not. If not, you may want to purchase insurance that will cover this kind of loss. If you have insurance, you will need to register the contract TPF order in which the parties to the dispute will be receiving their payments: investors, insurers, lawyers. We should prescribe provisions that would occur if the party supported the investor goes bankrupt.
An important aspect is also the disclosure of conflicts of interest. The independence of arbitrators — one of the key conditions in terms of enforceability of the award. Therefore, if there is a connection between someone of the arbitrators and the investor, the investor must be sure to report it.

The above provisions, of course, are not exhaustive. The agreement on the TPF is usually covered by a much wider range of issues requiring settlement between the parties. Given the ambiguity of the approaches to the TPF, which exist in different jurisdictions, it is important that the contract drawn up by a qualified lawyer. In some jurisdictions, such as England, there is a requirement that the party to the dispute, relying on an agreement on TPF, should get a written confirmation (affidavit) that an independent lawyer explained to her the essence of the contract and it is understandable that side.
Use of TPF associated with certain ethical issues.

Perhaps the most thoroughly studied these issues were American Bar Association, and which produced a report on this subject. One of the main problems has been named a possible bias in the legal profession, if they work in tandem with investors, together developing the customer base. Ideally, the lawyers do not have to be connected like any investor. In addition, TPF opponents argue that this type of funding will lead to the fact that the number of claims will increase. At the same time some of them will make claims that are in fact constitute an abuse of the judicial process. Those who support the TPF, argue that a significant increase in the number of claims should not occur, as investors want to invest only in the «good» actions with a high probability of winning. It can be said that TPF to some degree improves access to justice, giving the potential parties to the dispute, which do not have sufficient financial resources, the ability to defend its interests. On the other hand, we must understand that the investor is not interested in those claims that result can not lead to the award of the plaintiff sufficiently large amount. Every investor has its own criteria of profitability, but the current trend is that the investor is unlikely to take up the funding if it could potentially get less than at least twice the amount of its investment.

In other words, TPF in some cases, can actually serve as a tool for ensuring access to justice, but its use must be legally limited in these reasons.
It should be noted that in Russia there is no direct legal prohibition against TPF. Theoretically, for this type of contract can be used, for example, the simple partnership agreement. However, the market is not developed TPF in Russia. Perhaps for this type of financing will be a lot of interest now in connection with the crisis situation.