In review: third party litigation funding in Luxembourg

An extract from The Third Party Litigation Funding Law Review, 5th Edition

Market overview

Third party litigation funding is not a prominent feature of litigation practice in Luxembourg.² This is partly due to the relatively low costs of litigation compared to other jurisdictions. However, the adverse party costs mechanism in judicial proceedings is also significantly less onerous than other jurisdictions in Europe. Litigants are, therefore, less inclined to seek external funding to finance their claims.

No specific legislation or regulation on litigation funding has been adopted so far. That said, there is no prohibition on third party litigation funding either. As a result, the use of litigation funding by a claimant is allowed and accepted.

Although litigation funding is not common in Luxembourg, there have been examples of funded litigation in the past. Most notably, victims of the late Bernie Madoff's Ponzi-schemes instituted legal proceedings in Luxembourg against, inter alia, the investment managers and custodian banks of the Luxembourg funds that were defrauded by Madoff. Some of these proceedings remain ongoing today, pending the outcome of criminal investigations.

As Luxembourg is known for its financial services industry, it is expected that the Luxembourg litigation funding market will develop mainly around investment losses and litigation related to financial products (e.g., mis-selling claims). Litigation funding is also increasingly gaining traction in the Luxembourg financial sector, as investment companies regularly join funded collective actions in foreign jurisdictions to recover losses suffered on their investments.

Luxembourg can also be an interesting venue for cross-border asset recovery and enforcement matters. Luxembourg courts can issue interim attachment orders to freeze the assets of a debtor while proceedings on the merits are still ongoing. The procedure for obtaining such an interim attachment is quite efficient (either ex parte proceedings before the president of the District Court or, if the creditor already has a title, notification of the attachment directly by a bailiff without intervention of the court) and the substantive requirements for obtaining an attachment are relatively low. This allows a creditor to rapidly freeze the bank accounts held by a debtor in Luxembourg.

The major litigation funders with operations in Luxembourg and/or focus on the Luxembourg market are Deminor and Nivalion.

Legal and regulatory framework

i No regulatory framework

There is no prohibition on litigation funding in Luxembourg. Moreover, as a civil law jurisdiction, the concepts of champerty and maintenance are not part of Luxembourg's legal landscape. Third party funding of litigation is, therefore, considered allowed and has been used in the past without any issues arising.

However, there is no legal framework in place for litigation funding in Luxembourg. The general rules of contract law as established in the Luxembourg Civil Code will apply, including the principle of 'freedom of contract'. The parties to the funding agreement are free to determine their respective rights and obligations within the framework of general contract law.

As set out above, litigation funding is not yet commonly used in Luxembourg. Consequently, and to the best of our knowledge, Luxembourg courts have not yet been asked to resolve questions regarding the admissibility of third party funding or disputes between a funder and its client. Nevertheless, the legality of litigation funding in Luxembourg is commonly accepted.

ii Contingency fees

Fee arrangements between lawyers and their clients providing that the lawyers' remuneration is exclusively based on the outcome of the dispute are prohibited. However, lawyers are permitted to work for a partial success fee on top of their fixed or hourly-based remuneration.

iii Class actions

Class actions are currently not available in Luxembourg. However, given the entry into force of the new EU Directive on consumer collective redress,³ pursuant to which all EU Member States must ensure that representative actions can be brought by qualified entities, a consumer class action mechanism will need to be adopted in Luxembourg soon.⁴ A draft bill to that effect was submitted to the Luxembourg Parliament in August 2020.⁵

The draft bill does not include a defined framework for third party funding. However, Article L.512-2 of the draft bill provides that, for the qualified entity to demonstrate it does not have a conflict of interest, the writ of summons must mention, inter alia, the 'sources of funding' of the action, such as a funding contract. The possibility for third party funding of a consumer class action is, therefore, at least implicitly, taken into account in the draft bill.

Structuring the agreement

As is the case in Belgium, litigation funding agreements are considered as agreements 'sui generis' under Luxembourg law, governed only by the rules of general contract law.

A litigation funding agreement does not qualify as a loan, given that there is no obligation on the funded client to reimburse the funding, which is an essential obligation of the borrower under a loan agreement. The client will only have an obligation to share the proceeds in the event of a successful outcome.

The parties' respective rights and obligations can be freely defined in the funding agreement, the sole limitation being violations of public policy. Given the lack of a statutory framework or specific legislation, the funding agreement should be comprehensive and should stipulate all aspects of the parties' relationship. Generally, a funding agreement will include provisions governing the following issues:

1. The amount of the investment: the funding agreement will generally define the maximum commitment of the funder, the specific items which are included in the budget (legal fees for first instance and appeal, expert fees, adverse party costs, etc.), and the conditions for drawdown of the budget. To avoid budget overruns, and depending on the type of case, funders may work with capped amounts per item or stage of the proceedings.
2. Exposure to counterclaims: the funding agreement will specify whether the funding will cover the costs of defending a counterclaim and whether the funder will cover the financial exposure of a counterclaim.
3. The funder's remuneration: this can be either a percentage of the recovered amounts, a multiple on the invested capital, or a combination of both. The agreement will also set out the so-called 'payment waterfall', which defines the priority of payments to the funder, the law firm (contingency fees) and the client. Practical arrangements for the distribution of the proceeds will also be provided for.
4. The exchange of information: correspondence between the client and their lawyer, and any written material drafted for the client are protected by attorney–client privilege. The lawyer, therefore, cannot disclose any of this to the funder without the client's express consent. Consequently, the funding agreement will regulate the exchange of information between the client, the lawyer, and the funder. This enables the latter to be kept abreast of the progress of the case and to monitor its investment.
5. Control or consent rights: to protect its investment, the funder will generally seek to have some degree of control over important decisions in a case, such as filing appeals, terminating proceedings, or accepting settlements. Under Luxembourg law, a funder is not prohibited from having a veto right on certain decisions.
6. Termination rights: in addition to termination for material breach, the funder and the client may also agree on a right for the funder to terminate the agreement if an event occurs which negatively impacts the prospects of the case or an event that makes the case commercially unviable, or the agreement may even allow for termination for convenience.

Disclosure

i Disclosure of funding – judicial proceedings

Given that there is no legal framework on litigation funding, there is equally no legal obligation for a funded party to disclose the existence of a funding agreement – let alone disclose the agreement itself. That said, for the sake of transparency, it is recommended that a litigant discloses that it is benefiting from litigation funding.

ii Disclosure – arbitration

Under Luxembourg law, arbitration is governed by Articles 1224 to 1251 of the New Code of Civil Procedure (NCPC). These provisions do not include any obligation for parties to disclose their use of third party funding to the arbitrators and/or the adverse party. That said, arbitrators must act impartially and independently. This general principle is confirmed in the Rules of Arbitration⁶ enacted by the Luxembourg Chamber of Commerce. Pursuant to Article 10.10 of these Rules, a prospective arbitrator must disclose 'any facts or circumstances which might be of such a nature as to call into question the arbitrator's independence in the eyes of the parties, as well as any circumstances that could give rise to reasonable doubts as to the arbitrator's impartiality'. An arbitrator's prior relationships or dealings with the funder may qualify as such circumstance. The funded party's disclosing of the existence of the funding arrangement, including the funder's identity, enables the arbitrators to comply with their own disclosure obligations.⁷

iii No discovery

Luxembourg does not have discovery proceedings akin to discovery in the United States. Parties to civil proceedings in Luxembourg must produce their own evidence to support their claims. However, at the request of a party to the proceedings, the court can order their opponent or a third party to disclose a specifically identified piece of evidence that the opponent or third party has in its possession.⁸

Costs

i Judiciary proceedings

When it comes to recovery of costs in court proceedings, a distinction should be made between the costs related to the proceedings and lawyer fees.

The losing party will generally be ordered to pay an indemnity for costs to the prevailing party.⁹ These costs mainly include bailiff fees, the fees of the expert appointed by the court and witness expenses. Lawyer fees are not included in these costs.

In addition to the indemnity for costs, the court may decide to grant an indemnity for legal fees to one of the parties.¹⁰ The amount of this indemnity is left to the discretion of the court and generally covers only a small portion of the total legal fees incurred by that party.

At the request of the defendant, security for costs may be imposed by the court on a foreign claimant, that is, a claimant with domicile or habitual residence in the territory of another state.¹¹ The court has discretion to determine the amount of the security. However, there are several exceptions to this general rule. Claimants who have their domicile in a Member State of the European Union, a member state of the Council of Europe or any other state with which Luxembourg has entered into an international agreement providing for an exemption to request a security for costs, are excluded from the scope of application of these provisions. As a result, security for costs is rarely imposed in practice.

ii Arbitration

The Luxembourg Code of Civil Procedure chapter on arbitration¹² does not include any specific provisions regarding the costs of the arbitration. However, it is not debated that arbitrators can issue cost orders establishing which party must carry what part of the costs.

The Luxembourg Chamber of Commerce Rules of Arbitration provide that the final award shall fix the costs of the arbitration and decide which of the parties shall bear them, or in what proportion they shall be borne by the parties. In making decisions as to costs, the arbitrator may consider any such circumstances it considers relevant, including the extent to which each party has conducted the arbitration in an expeditious and cost-effective manner.¹³ Moreover, the costs of the arbitration shall be submitted for prior approval to the Council of Arbitration (i.e., the council managing the Arbitration Centre of the Chamber of Commerce) to ensure that the costs remain within reasonable limits, taking into account the nature of the dispute and the degree of difficulty of the issues to be resolved.¹⁴

iii Liability of funders for adverse costs

Third-party funders usually do not become a party to the proceedings, whether judicial or arbitration proceedings, initiated by their clients. The court or arbitral tribunal, therefore, cannot order the funder to pay costs, and the adverse party will not have a direct claim against the funder.

The year in review

i Legislative developments

On 15 July 2021, a new law reforming aspects of civil and commercial procedure was adopted. Most of its provisions entered into force on 16 September 2021. The law aims, inter alia, to facilitate access to justice and shorten the duration of proceedings by increasing procedural efficiency. For example:

1. under the new law parties will be obliged to raise arguments of inadmissibility (e.g., lack of jurisdiction, nullity of the complaint) in their first written pleadings. This avoids parties raising these arguments at the eleventh hour to stall or delay proceedings;
2. the parties will also be required to submit final written pleadings summarising all their claims and arguments made in prior written pleadings (conclusions de synthèse). Failure to do so will lead the court to rule only on the content of the most recently filed written pleadings, considering all other arguments to be forfeited; and
3. if an expert is appointed to conduct a judicial expertise, the court will be required to set a deadline for the expert to submit the report. Failure by the expert to comply with this deadline will be ground for replacement of the expert.

As previously mentioned, a draft bill introducing consumer class actions has been submitted to the Luxembourg parliament. The legislative process remains ongoing, but it is expected that the bill will be approved in the course of 2022, considering the deadline imposed by the EU Directive 2020/1828 on consumer collective redress.

ii Notable cases

In 2021, two decisions were rendered by Luxembourg courts in the long-standing cross-border dispute between the Republic of Kazakhstan and two Moldovan investors regarding the enforcement of an arbitral award for more than US$500 million obtained by the investors.

In January 2021, the District Court of Luxembourg decided to stay the enforcement proceedings pending the outcome of a criminal investigation into the alleged forgery of documents by the investors. This followed a criminal complaint filed by Kazakhstan in Luxembourg. In February 2021, the Luxembourg Supreme Court overturned the Court of Appeal decision regarding the exequatur of the arbitral award and sent the case back to the Court of Appeal.

Both decisions are setbacks for the investors' recovery actions, which have been dragging on for years in several jurisdictions within and outside Europe.

In April 2021, a judgment was handed down in a remarkable dispute between the Central Bank of the Islamic Republic of Iran and a Luxembourg financial institution.¹⁵ This dispute arose against the backdrop of recent legislative changes in the United States,¹⁶ allowing US courts to order assets belonging directly or indirectly to Iranian entities to be transferred to the US, regardless of where in the world these assets are located and despite the principle of international comity. The financial institution intended to transfer financial assets held by the Iranian Central Bank in accounts in Luxembourg to comply with such a US court order, without previously applying for exequatur of that US order. The Luxembourg District Court however ruled that, as for any foreign decision, obtaining exequatur is required, regardless of what is provided in the US legislation. It is up to the local court of the jurisdiction where the foreign decision is to be enforced to verify that this foreign decision meets the requirements to be recognised as enforceable before enforcement can take place in that jurisdiction.

Conclusions and outlook

Although third party litigation funding has been used successfully in the past, the Luxembourg market remains relatively underdeveloped. As the market for litigation funding in other EU jurisdictions grows, Luxembourg may ride this wave, albeit maybe to a lesser extent than surrounding countries. Litigation regarding investment losses and financial services, as well as commercial arbitration, seem to be the most fertile practice areas for the use of third party funding in the near future.