An extract from The Third Party Litigation Funding Law Review, 3rd Edition
Market overview
Defining 'third party litigation funding' is crucial in light of the fact that the term is not defined under Polish law and is rarely seen as an economic activity category in the country.
For the purpose of this chapter we use a broader definition of the phenomenon that includes claim financing sensu stricto, claim purchasing, as well as class action funding and insurance contracts. All these features must be addressed distinctly, since market recognition and assessment vary.
The market for third party litigation funding (understood as the financing of litigation, or arbitration, in exchange for a contingency fee) does not seem particularly well developed in Poland. While there are certain (mostly foreign) companies addressing their offers of litigation financing to legal and natural persons in Poland, there are no public records or statistics available showing the scale of their operations and results. Typically, it is not the sole activity of a company; rather, litigation financing is part of a company's broader offer. Not many examples of litigation financing are thus in the public domain, although randomly surfacing records reach as far back as 1995. Accordingly, it is difficult to assess the strength of this market segment or assess its development, although it is worth mentioning that some new entities entered the market last year. It is fair to say, however, that it is not flourishing, and it is given literally no media coverage, marketing or any separate identification in official statistics. There are several reasons for this. In simple terms, the economic reasons for the existence and development of the industry are the high value and complexity of claims, which require extensive funding. Most frequently, these claims are associated with healthy, strong legal entities with large operations that can produce such funding without a struggle, whereas for individuals, state legal aid seems to be the remedy for limited funding resources. It is also worth mentioning that there are pro rata limits on the entry fee in relation to the value of the claims. The cap on the entry fee in common (state) courts has doubled following the latest amendment to the Code of Civil Procedure and currently amounts to 200,000 zlotys.
The element of third party litigation funding is more common on the insurance market. However, at the end of the first quarter of 2019, of a total of 50,806,313 policies, legal expenses insurance policies numbered only 1,246,544. More importantly, only 1,581 claims were settled between January and March 2019 (at the end of 2018, the number of claims settled had reached 6,523). The data suggests a low level of legal awareness in Polish society or a lack of interesting insurance products, which leaves a broad field for development in this branch of insurance.
The most popular and the fastest growing 'branch' of the third party litigation funding industry seems to be claims purchasing. This kind of investment takes different forms on the Polish market, ranging from securitisation funds, through debt recovery entities, to claims purchasing replacing class actions. Currently, claims alienation seems to be of utmost importance for business entities facing a growing number of overdue receivables. According to a survey of the Conference of Financial Companies in Poland, Polish businesses deal with 25.6 per cent of overdue receivables on average, whereas 18.3 per cent of companies deal with at least 50 per cent of overdue receivables in their portfolio. The above conditions make Polish companies more and more likely to use the services of professional debt recovery entities of any kind.
As regards prospects for potential growth, there are different solutions for different market segments. The segment involving claims purchases, insurance and (considering its specifics) class action funding is developing and seems fairly mature. The segment that is lagging behind is claims financing, which is less popular and difficult to identify. When discussing the potential of the latter, we feel its use largely depends on a properly identified target. In general, it should not target individuals or corporates. However, small and medium-sized business entities may find the industry's offer attractive, since they are often intimidated by the prospect of complex, challenging disputes with high-value claims and strong counterparties. They also tend to back off when faced with disputes with foreign entities in another jurisdiction. Also, the above-mentioned latest amendment to the Code of Civil Procedure and other acts of law may create new opportunities for claims financing entities, since the new legislation increased the maximum entry fee from 100,000 zlotys to 200,000 zlotys.
The attitude to carrying out disputes in Poland seems to be another inducement for the development of the market; court disputes and litigation in particular are frequent and, with the growth of the economy, higher-value claims are more and more common. In 2018, 9,442,891 cases were brought before Polish civil courts and 1,661,631 were brought before Polish commercial courts.
Legal and regulatory framework
Neither Polish statutory law nor the rules of two leading Polish arbitration courts (the Court of Arbitration at the Polish Chamber of Commerce in Warsaw and the Court of Arbitration at the Confederation of Lewiatan) provide specific rules on third party litigation funding. Since the phenomenon of third party litigation funding, in terms of its core feature (i.e., claims financing), is not yet popular in Poland as a commercial activity, there are also no court precedents regarding the field. The industry thus operates under the general framework of freedom of economic activity, currently regulated (in addition to Poland's Constitution) by the Act of 6 March 2018 – the Entrepreneurs Act. Agreements for claims financing are subject to the rules and principles of Polish private law (i.e., the Act of 23 April 1964 (the Civil Code)), which offers far-reaching flexibility for parties. In principle, no licences are required (see, however, the comments on securitisation funds below). According to the Civil Code's regulations on contractual obligations, any agreement of this kind should therefore be considered on the basis of the general rule of freedom of contract, which means that its content or purpose shall not prejudice the nature of the relation, a statute or the 'principles of community coexistence'. The aforementioned rule means that every litigation funding contract should be analysed within the scope of, at least, its possible non-compliance with the rules of community coexistence. In this context, for example, grossly excessive remuneration may constitute an infringement of these rules.
Apart from the minor limitations of a general nature mentioned above, there are certain restrictions on the conduct of litigation funding activities by Bar-admitted lawyers (i.e., legal counsellors and attorneys-at-law). These restrictions affect the opportunities available to Polish law firms in relation to offering services of this kind.
First, it is forbidden for professional lawyers to agree on remuneration consisting solely of a contingency fee. At least part of the lawyer's remuneration should be fixed; however, it is not defined or specified how big the fixed part should be. As litigation funding is frequently based entirely on a success fee, this rule hinders litigation funding being provided by law firms. It should, however, be emphasised that, in general terms, the concept of a success fee is widely applied by Polish lawyers and is now becoming more common following clients' growing demands.
Second, it is questionable whether litigation financing (or financial intermediation) is permissible in light of the codes of conduct of professional lawyers. According to the rules applicable to professional lawyers, it is forbidden to carry on any activity that can potentially give rise to doubts as to the impartiality of the lawyer. Financial services and financial intermediation, as well as intermediation in commercial transactions, are examples of activities that are considered likely to influence the impartiality of a lawyer; therefore, it is questionable whether professional lawyers are allowed to engage in cases of litigation funding. Furthermore, this may also raise doubts because a professional lawyer's core duty is to act in the best interests of the client, which may prove controversial if funding is the key driver for a client's involvement in a dispute.
Contrary to third party litigation funding, strictly speaking, claims purchasing is widely used and based on statutory regulations of a supplementary character. A claim purchase agreement itself may be concluded by anyone and no specific licence or permission is required to purchase a claim. More complex rules apply to securitisation funds, which are funds that issue investment certificates for the purpose of raising funds to acquire receivables. The fund is obliged to apply for a permit from the Polish Financial Supervisory Commission. The operation of the fund is also subject to the supervision of the Financial Supervisory Commission as well as the National Bank of Poland, the Inspector General for the Protection of Personal Data, the Inspector General of Financial Information or the Office for Competition and Consumer Protection.
Apart from the above, specific rules on insurance contracts are also worth mentioning.
Polish regulation of legal expenses insurance policies is consistent with Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking up and pursuit of the business of Insurance and Reinsurance, also known as Solvency II. The act implementing the Solvency II Directive provides general rules on legal expenses insurance, such as the obligation of an insurance company to bear the costs of court proceedings and services directly related to the pursuit of the claim before a court or by extra-judicial settlements, or the right of a policy holder to freely choose a lawyer. Limitations on insurance contracts derive from the Civil Code. Although the market offers a wide range of legal expenses insurance, in Poland, contrary to many other jurisdictions, only before-the-event insurance is available. It is highly questionable whether after-the-event (ATE) insurance is permitted by Polish law since, according to the Civil Code, an insurance agreement concluded after the event being subject to the agreement occurred shall be ineffective. Therefore, concluding an ATE insurance agreement would involve a high risk of nullity of the contract.
In conclusion, taking into account the low level of market interest in third party litigation funding and the marginal number of cases of such funding, it is quite unlikely that this market will be regulated in the near future and, from the legal and regulatory framework perspective, the foregoing should be considered an inducement to potential investors.
