The litigation finance legal landscape is changing in Europe and France
The wind of litigation finance has been blowing strong in the United States.
While in its early days the legality of litigation finance faced some challenges related to the common law doctrines of maintenance and champerty, it has since enjoyed a wave of liberalism and matured into a sophisticated sector with different profiles of investors operating at the crossroad of many disciplines.
From a mechanism initially aimed at giving access to justice to impecunious claimants, litigation finance has evolved into a more complex industry appealing both for investors who can obtain returns that are uncorrelated to the state of the financial markets as well as parties who are more and more keen on sharing the risks associated with long-lasting disputes or with enforcing a winning judgment or award.
This has led to a complexification of the underpinning investment models and funding agreements, which often draw from many financial and contractual mechanisms and which must comply with any limitations imposed by the applicable laws, including the law chosen by the parties, the law of the jurisdiction/forum of the dispute, and the law of the likely enforcement jurisdictions.
Europe has recently taken up this issue. The European Parliament passed a resolution on 13 September 2022, to which is attached a proposal for a directive to regulate the private financing of litigation by investment funds. It provides for the establishment of an approval and monitoring system for this activity under the supervision of the member states. The funders will have to have their registered office in a member state. They will also have to meet capital adequacy requirements, in particular the ability to finance all stages of the procedure including the trial and any subsequent appeal, if necessary, by providing a guarantee for costs. The content of the funding agreement will be regulated with a list of prohibited clauses. Funders will be prohibited from making decisions in relation to the procedure. The funder will not be able unilaterally to terminate the funding agreement in the absence of informed consent from the applicant, except by court order. Court awards will be paid primarily to the applicant, who may then pay the funder. The funder must limit its earnings to a maximum of 40% of the total amount awarded. Finally, full transparency on the content of the agreement is required, especially toward the court.
This activity should thus be able to develop within an established framework.
In France, this activity, although little developed to date outside of arbitration, was not prohibited despite the reticence linked to regulated activities and the monopoly of banks (but we believe the contract for financing the lawsuit is not a loan because there is no obligation to repay in the event of an unsuccessful outcome in the lawsuit) or to the monopoly of insurers (but we believe if there is a risk, then there are no conditions for financing). Moreover, a decision of the Court of Appeal of Versailles of 1 June 2006 (05/01038) had indirectly validated the device, the Court of Cassation controlling the fees of the funder (Court of Cassation, Civil Division 1, November 23, 2011, 10-16.770).
A new market is therefore certainly opening up. Moreover, on 23 January 2023, the French management company IVO Capital indicated that it had created in the summer of 2022 an FIA (alternative investment fund) in the SLP (société de libre partenariat) format to finance litigation; this company stated that it had invested in four cases since the beginning of this activity.
So, on the one hand it is clearly possible to finance lawyers’ fees, experts, bailiffs, etc. On the other hand, it is not possible in France to finance the payment of fines, costs, and damages pronounced by judicial convictions under penalty of six months of imprisonment and a €45,000 fine (article 40 of the law of 29 July 1881 on the freedom of the press).
The difficulties will be rather ethical because French lawyers should not normally be paid by someone other than their clients; however, an exception is provided for in the case of a mandate from the client, and that is what will be done here. In addition, the lawyer is subject to strict professional secrecy and may never disclose information to the funder; however, the financing contract should provide for an obligation of information and transparency on the part of the client toward the funder, which the client, unlike the lawyer, is entitled to accept.
Additionally, there will be a procedural obstacle in France related to the limited scope of application of “French-style class actions,” even if a bill was tabled on 8 March 2023 to facilitate them. In the meantime, it is not easy in France to launch a single class action since as many lawsuits as there are plaintiffs must be launched, which will complicate the work of the third-party funder who will have to conclude as many contracts as there are plaintiffs.
We may see very soon an illustration in France. Indeed, a lawsuit could be brought in mid-2023 by a fiducie (the French-style trust) in a class action that would conclude a financing contract; however, the admissibility of its action is highly questionable because the Court of Cassation ruled on 31 May 2005 (02-18.547) that a legal action cannot be the object of a contribution in enjoyment remunerated by the attribution of corporate rights and that it is not certain the transfer in this case can be indisputably qualified as a transfer in ownership because it would be a management trust and not a security trust. Moreover, the trust does not have legal personality, which prevents it from taking legal action (Fiducie Sylvie Vallée v. Canada, 2004 GTC 318 (T.C.C.)).
Finally, there is another uncertainty in France related to the droit de retrait litigieux (withdrawal of a litigious right) provided under articles 1699 and 1700 of the French Civil Code, which gives to the person against whom a litigious right has been assigned the right to reimburse the assignee of the actual price of the assignment plus interests and costs. In the context of assignment of rights subject to arbitral proceedings, the French Court of Cassation in 2018 annulled two decisions of the Paris Court of Appeal rendered in the context of annulment and enforcement proceedings of two awards, in which the Paris Court of Appeal had held that the argument based on the exercise of the droit de retrait litigieux was inadmissible as it did not fall within the limited scope of review of the awards under articles 1520 and 1525 of the French Code of Civil Procedure (French Court of Cassation, February 28, 2018, Civ. 1, No. 16-22.112 – annulment proceedings – , and No. 16-22.126 – enforcement proceedings). The Court of Cassation considered that the exercise of this right affected the enforcement of the awards and therefore should have been analyzed by the Court of Appeal seized under articles 1520 and 1525 of the French Code of Civil Procedure. In December 2021, seized on remand, the Paris Court of Appeal maintained its position that the exercise of this right did not fall within the limited grounds for annulment of awards. (December 7, 2021, CCIP - CA - RG No. 18/10220 – annulment proceedings, and No. 18/10217 – enforcement proceedings).
The American wind is blowing in Europe and particularly in France, but unfortunately not yet strong enough.