An extract from The Third Party Litigation Funding Law Review, 5th Edition
Third party litigation funding is still a relatively new phenomenon in Switzerland. Triggered by the commercial success of FORIS AG in Germany in the late 1990s, first reports about litigation funding emerged in Swiss legal writing around the turn of the century.2 FORIS AG entered the Swiss market in 2000. At the time, the legality of litigation funding under Swiss law was still uncertain. In the wake of the leading case of the Swiss Federal Court, the country's highest court, which answered the question in the affirmative in 2004,3 Allianz ProzessFinanz GmbH (Allianz), a subsidiary of the German Allianz Insurance Group, also entered the Swiss market.4 In 2008, Allianz even opened a representative office in Zurich. However, in 2011, Allianz stopped writing new funding business worldwide (including in Switzerland).
Until recently, two funders were known to be actively operating out of Switzerland, (1) Profina Prozessfinanzierung GmbH in Zug, which was founded in 2006,5 and (2) JuraPlus AG in Zurich, which was founded in 2008.6 In 2017, a new participant, Nivalion AG in Zug, which was founded in late 2016, entered the market.7 Furthermore, in 2018, Vannin Capital announced the launch of an office in Germany with an aim to, inter alia, fund business in Switzerland.8 In 2019, a new participant called Swiss Legal Finance SA opened an office in Geneva.9 In 2021, blockchain-focused Liti Capital SA was founded in Geneva.10 Among larger international participants, Omni Bridgeway is the only one with a presence in Switzerland, through an office in Geneva.11 Several other non-Swiss (in particular German, English and French) funders are also said to be taking on Swiss cases. Furthermore, Swiss asset managers have recently shown increased interest in litigation funding.
Most Swiss-based participants seem to focus primarily on state court litigation, notably civil liability cases as well as intellectual property and inheritance disputes. Other fields of law with funded cases are general contract and corporate law (including liability of directors and officers).12 Furthermore, there is anecdotal evidence for third party funding in arbitration and in claims dormant in foreign bankruptcies,13 until recently mostly by non-Swiss funders.
The Swiss market is still relatively small. Swiss funders ordinarily require a minimum amount in dispute, ranging from 250,000 to 7.5 million Swiss francs.14 Representatives of funders have stated that there are no more than around 50 funded cases in Switzerland per year. According to recent indications from representatives, Swiss funders receive around 50 to 100 enquiries per year each, which result in the conclusion of between five and 15 agreements per funder.15 Also, there are no Swiss industry associations.16
Legal and regulatory framework
The legality of litigation funding is no longer an issue in Switzerland since the Swiss Federal Court rendered the already mentioned decision of 10 December 2004.17 In this case, the Court had to review the constitutionality of a provision of the 2003 Zurich Cantonal Act on the Legal Profession (the Zurich Lawyers Act)18 that made it illegal to fund a lawsuit on a commercial basis and against a participation in the success of the suit. The Court found that the provision violated freedom of commerce as guaranteed in the Swiss Federal Constitution.19 The Court therefore quashed the critical provision of the Zurich Lawyers Act.
The Federal Court issued a very detailed opinion that provides guidance on a number of critical aspects of litigation funding. The most important points addressed are the following:
- The Court addressed the question whether third party litigation funding might jeopardise the independence of the lawyer acting for the funded party. Under the Swiss Federal Act on the Freedom of Lawyers (the Federal Lawyers Act), lawyers in Switzerland must exercise their activity independently.20 The Court found that the plaintiff's contractual obligations under the typical funding arrangements to promptly and fully inform the funder on all aspects of the case and not to settle the case without the funder's prior approval do not jeopardise the lawyer's independence.21
- The Federal Court then considered the concern that the lawyer's duty of confidentiality22 was at risk. In the Court's analysis, it is perfectly permissible for the client to allow his or her lawyer to disclose confidential information to the third party funder and this does not call into question the lawyer's confidentiality obligation.23
- The Federal Court finally looked at the issue of conflicts of interest. Swiss lawyers have not only a contractual, but also a statutory duty to avoid conflicts.24 The Court found that the party's and the third party funder's interests were, as a rule, aligned since they are both interested in obtaining the best possible result in the proceedings. However, the Court accepted that conflicts of interest might arise in certain scenarios; for example, when it comes to accepting or rejecting a settlement proposal. However, in the Court's analysis, such potential conflicts can be managed by appropriate arrangements in the funding agreement. Therefore, the mere possibility of such conflicts does not suffice to preclude third party litigation funding.25
- The Federal Court also looked at the commercial realities of third party litigation funding. The Court recognised that funders will focus their acquisition efforts on lawyers and that the lawyers thus have a commercial interest in entertaining good relationships with professional funders, thereby being at risk of putting the funders' interests before those of the client. However, the Court found that this was not the only area of potential conflicts of interest for lawyers; it pointed as an example to the situation where the lawyer is paid by the client's professional liability insurer. The Federal Court came to the conclusion that the existence of the lawyer's legal obligation always to put the client's interests first, coupled with the threat of severe sanctions in the event of a breach, adequately addresses this concern.26
There are no specific statutory rules concerning third party litigation funding. Certain clauses in litigation funding agreements can be inadmissible; for example, if the funder was granted an excessive share of the proceeds of the litigation.27 Furthermore, as discussed by the Federal Court in its leading case, the most important legal limits and prohibitions arise from the lawyers' duties (1) to exercise their activity independently, (2) to keep client-related information confidential, and (3) to avoid conflicts of interest.
In this context, the Administrative Court of the canton of Aargau dealt with a case in 2008 in which the lawyer who represented the plaintiff as counsel was at the same time the president of the board of the third party funder financing the litigation. Despite this double function, the court found that the lawyer's duty to act independently had not been breached as long as the litigation funding agreement provided for the priority of the lawyers' rules of professional conduct over the interests of the funder and did not grant the funder any right to interfere with the lawyers' handling of the litigation.28
By contrast, in another decision, of 22 January 2015, the Swiss Federal Court found that a lawyer had breached the duty to avoid conflicts of interest in a situation where the lawyer had represented both his client and the litigation funder when they negotiated the funding agreement. The Court found that there was a conflict between the interests of these parties with respect to the share of the proceeds of the litigation that they would receive.29 In addition, the Court criticised the fact that the agreement provided for a share of the proceeds to be used to repay private loans that the lawyer had granted his client earlier on. As a consequence, the Court found that the lawyer had breached his professional duties.30
Furthermore, Swiss law narrowly restricts the options for lawyers to agree to success-related remuneration. The Federal Lawyers Act bans the possibility of agreeing on a full-success fee (i.e., arrangements under which remuneration is only owed in the event of success, or in which the sole remuneration consists in a share of the proceeds of the litigation (pactum de quota litis)).31 By contrast, Swiss case law has confirmed the permissibility of a pactum de palmario, an arrangement pursuant to which the client pays a reduced fee and the lawyer is in turn entitled to a share of the proceeds of the litigation as an additional (contingent) fee component.32 The courts have held that the fee component that is unrelated to the outcome of the litigation must at least cover the lawyers' costs and must allow for a reasonable profit.33 In its most recent leading case, the Federal Court has furthermore specified that the success-related component must not exceed the amount of the unconditional fee component. Furthermore, the agreement of a pactum de palmario is only permissible at the outset of the mandate or after the dispute has ended, but not in between.34 Litigation funding arrangements that circumvent the general ban on success fees are also prohibited. This can be the case if counsel in the litigation is at the same time a shareholder of the funder, in which case the lawyer's duty to act independently would also be violated.35
Currently, there is no specific regulation and supervision of third party litigation funding in Switzerland. In particular, the Swiss Federal Court clarified that third party litigation funding does not qualify as an insurance that would fall under the Insurance Supervision Act36 because there is no payment of a premium in exchange for insurance against a future risk.37 Furthermore, the core offering of litigation funders does not fall within the scope of other Swiss financial market laws.38 The Federal Court does not seem to exclude a need for future regulation,39 and representatives of litigation funders have considered whether regulation may actually be in the interest of providers to help and better establish the existing offer.40 Nevertheless, there is currently no prospect of regulation (and no self-regulation either).41
Structuring the agreement
There is no specific model agreement in use by Swiss litigation funders and each funder uses its own template. However, most of the relevant agreements are structured very similarly.42 Some funders provide a template for download from their website.43
The process of entering into a funding agreement ordinarily consists of two phases: after a preliminary assessment of the prospects of the case, the funder will require the prospective plaintiff to enter into an exclusivity arrangement for a certain period (e.g., three weeks); during the exclusivity period, the funder will conduct a more thorough assessment allowing for an informed decision on whether to take on the case.44
Funding agreements in Switzerland are typically structured as a financing (not as a purchase) of the claim.45 The funder enters into an obligation to pay all costs that are reasonably required to pursue the claim. This relates to court costs (including advances that are payable by the plaintiff) and the plaintiff's own attorney's fees. Furthermore, the potential compensation of the defendant for its legal fees if the claim is unsuccessful is also covered, which is not the case for many non-continental European funders. Depending on the nature of the case, the plaintiff may furthermore require the funding of a party-appointed expert to pursue the claim.46
In exchange for the financing, the funder receives a share of the proceeds of the litigation. Generally, Swiss funders can be expected to take a share in the region of 30 per cent of the net revenue.47 The share may vary, however, depending on the absolute value recovered and the point in time at which the dispute comes to an end (i.e., the funder's share will be lower in the case of high amounts recovered and in the case of an early settlement).48 In some cases, the funder's share is also calculated as, or limited to, a multiple of the amount invested by the funder.
Under Swiss law, the question arises as to how the funder's claim can be secured. In Swiss civil procedure, a party cannot be authorised by agreement to pursue a claim on behalf of another person.49 As a consequence, the plaintiff would no longer have standing to sue if the claim was assigned to the funder. Therefore, some agreements merely provide for a duty to assign the agreed share to the funder upon first request.50 However, a pledge of the claim as security for the funder's share seems to be the preferred option.51
The agreements usually provide for the funder's right to withdraw from the contract if events materially affect the initial assessment of the case. Such events typically include (1) the surfacing of previously unknown, detrimental facts, (2) a change in case law that affects the case, (3) a loss of important evidence, and (4) a deterioration of the defendant's financial position.52 Some funders will only commit to funding the case before the courts of first instance.53 In any event, however, the rendering of a judgment that results in a full or partial dismissal of the claim will usually also trigger a right of termination by the funder.54 In the event of withdrawal, the funder will be required to cover all costs that have been incurred so far (including costs resulting from a termination of the proceedings). However, the plaintiff will be entitled to continue the proceedings at its own cost and risk.55
Similarly, funding agreements often provide for an exit mechanism if the parties (i.e., the funder and the plaintiff) fail to reach an agreement regarding a settlement offer. The party rejecting the settlement is usually entitled to continue the proceedings but will become liable to the other party for the proceeds that would have resulted from the settlement.56
There are no known examples of disputes between funders and plaintiffs in Switzerland.
In Swiss civil procedure law, the parties can seek disclosure and the production of documents from the counterparty or third parties if the information is of relevance for the court's decision.57 However, production requests must be precisely worded and relate to documents that are clearly specified since fishing expeditions are inadmissible.58
Legal documents stemming from communications between a party or third party and counsel are exempt from disclosure obligations (attorney–client privilege).59 The scope of this exception was significantly expanded in 201360 and is today predominantly deemed to apply to all types of legal documents (including notes to file, whether prepared by the lawyer or the client, legal assessments, draft contracts, etc.) and irrespective of whether they are in the possession of the lawyer, the client or even a third party.61 As a consequence, assessments from counsel will be subject to privilege even if they are in the hands of the litigation funder.
Under Swiss civil procedure law, there is also no duty to disclose the existence of a litigation funding agreement.62 In particular, production requests relating to the funding of a claim are not permissible because they are irrelevant for the court's decision.63 As a consequence, more often than not in court litigation, the existence of a funding arrangement will not be disclosed.
By contrast, in international arbitration, some authors have argued that a claimant would be under a duty to disclose the fact that it is supported by a litigation funder, in particular to allow for the evaluation of a security-for-costs request.64 Furthermore, under the IBA Guidelines on Conflicts of Interest in International Arbitration, as revised in 2014, any legal or physical person having a direct economic interest in, or a duty to indemnify a party for, the award to be rendered in the arbitration, may be considered to bear the identity of that party.65 As a consequence, concerns regarding relationships between an arbitrator and one of the parties with respect to conflicts of interest extend to third party funders and may require the disclosure of the existence of a funding arrangement.66
There are indications for a trend towards the introduction of specific new rules addressing the disclosure of third party litigation funding in international arbitration. For example, Article 11(7) of the revised ICC Rules of Arbitration, which entered into force on 1 January 2021, stipulates that '[i]n order to assist prospective arbitrators and arbitrators in complying with their duties [to disclose any facts or circumstances with respect to their impartiality and independence], each party must promptly inform the Secretariat, the arbitral tribunal and the other parties, of the existence and identity of any non-party which has entered into an arrangement for the funding of claims or defences and under which it has an economic interest in the outcome of the arbitration'.67
In Switzerland, litigation funding agreements are typically subject to confidentiality obligations. A disclosure requires the consent of the other party.68 Nevertheless, consideration is given to whether the chances of settlement would increase if the case's own financial strength (because of the funder's support) and soundness (given that it has passed the funder's assessment) is demonstrated to the opposing party early on. As a consequence, a voluntary disclosure of the existence of a funding arrangement for tactical reasons is considered.69
Swiss law of civil procedure generally follows the loser-pays rule, according to which the losing party has to pay the court costs and also compensate the winning party for that party's attorney's fees.70 However, party costs are awarded on the basis of tariffs that depend on the amount in dispute.71 In most cases, the compensations awarded cover only part of the actual costs incurred.
Upon the filing of the statement of claim, the court will usually request an advance on costs from the plaintiff to cover the prospective court costs.72 The amount of this advance depends on the amount in dispute. Furthermore, each party must advance the costs for the taking of evidence that it has requested.73 In addition, at the defendant's request, the plaintiff must also provide security for the party costs if, inter alia: (1) the plaintiff is domiciled abroad and no treaty exemption applies; (2) the plaintiff appears to be bankrupt; or (3) there are other grounds for assuming that a claim for party costs would be at risk.74 The question of whether the funding of a plaintiff's claim (to the extent the defendant becomes aware of this fact) may give rise to a duty to secure the defendant's party costs is hardly discussed in legal writing in Switzerland. In an unpublished decision of the Commercial Court of the Canton of Zurich, however, the Court ordered a plaintiff who – had it not been for a litigation funding arrangement – clearly lacked sufficient funds for conducting major litigation to provide security for the defendant's party costs.75 Furthermore, in another case before the same court, where the conditions for having to secure party costs were met on the part of the plaintiff (who was bankrupt), the question arose whether the plaintiff could avoid the duty to furnish security by reference to the fact that its funder would be liable under the funding agreement for potential party costs payable if the claim was unsuccessful.76 The Court held that only the actual party's ability to meet its financial obligations was relevant for assessing whether party costs had to be secured under the CPC.77 As a consequence, the Court concluded that the obligation of the funder, which only exists in relation to the plaintiff, to pay compensation for the defendant's party costs, did not release the plaintiff from its duty to furnish a security.78
In international arbitration, notable authors even argue that a claimant appearing to lack assets to satisfy a final cost award but pursuing the claim with the funding of a third party makes a strong prima facie case for security for costs.79
Therefore, just as in other jurisdictions, there is a risk in Swiss-based proceedings that a funded party bringing a claim will be ordered to pay a security for party costs if the lack of sufficient own funds is apparent or once the existence of a funding arrangement has been disclosed.
The year in review
The past years have seen some movement in the Swiss market for litigation funding, with Nivalion AG, Vannin Capital, Swiss Legal Finance SA and, just recently, Liti Capital SA entering as new participants.80 Foreign participants, in particular the ones based in Germany, the United Kingdom or France, have also shown an increased interest in the Swiss market.
There has also been a slight increase in reported court cases relating to issues of litigation funding.81 It will be interesting to see whether this trend continues. Furthermore, scholarly writers have recently pointed to the fact that Swiss lawyers are under a duty to advise their clients regarding the availability of third party funding and to represent them when entering into a funding agreement.82 All these factors indicate an increased awareness of third party litigation funding and the opportunities arising from it.
Conclusions and outlook
In light of the limited number of funded cases in Switzerland so far,83 litigation funding is not yet an important phenomenon. However, litigation funding is here to stay and will very likely gain further in importance in the future.
The fact that the importance of third party funding in Switzerland has remained rather modest until now may in part have to do with the fact that class actions or other mechanisms of collective redress do not exist in Switzerland at present. In 2013, the Swiss government, the Federal Council, had published a report on collective redress, which suggested a number of measures to improve an efficient handling of mass claims in Swiss civil procedure.84 In this report, the government expressed support for the further development of the Swiss market for litigation funding and described it as an important factor to improve access to justice in mass tort and consumer cases.85 In March 2018, the Federal Council proposed a partial revision of the CPC, one of the key objectives of which was to strengthen mechanisms of collective redress. Furthermore, the preliminary draft law provided for a duty for courts to inform plaintiffs about the possibility of litigation funding.86 However, on 26 February 2020, the Federal Council published the draft bill concerning the revision of the CPC, which – if enacted – would oblige only the government (but not the courts) to provide the public with information on third party litigation funding to facilitate access.87 Beyond that, it is proposed that the advance on costs that the plaintiff has to pay at the initiation of the proceedings should be reduced to half of the expected court costs.88 This measure would lower the cost barrier for litigation in general. The debate on the proposed revision in parliament is still ongoing. The introduction of mechanisms of collective redress has, however, been excluded for the time being and will – if at all – be addressed in a separate legislative proposal in the future.89
These legislative efforts to establish mechanisms of collective redress in Swiss law would, if made law in future, further favour the development of third party funding in Switzerland.