Portugal continues to be a peripheral market for third party funding, especially when compared to other countries in Europe and across the globe. However, there is potential and Portugal is starting to feature on the agenda of international funders, who are regular visitors to the country's main law firms to showcase their portfolios and look for new opportunities.
The rise in recent years both in foreign investment in the country and of cross-border disputes submitted to arbitration creates the right atmosphere for the third party funding market to develop.
It is therefore not surprising that third party funding has caught the attention of the local arbitration community and has become a hot topic of debate, not only at arbitration conferences and webinars, but also in several recently published articles on the subject.
Portugal is also a greenfield market when it comes to the specific regulation of third party funding (as described in more detail below), although it remains to be seen whether this is something that favours or hinders its development in the country.
The current economic conditions, shaped the covid-19 pandemic, could also be a catalyst for the growth of the third party funding market in Portugal. The increasing number of both businesses in distress and those that are compelled (or simply prefer) to allocate funds to their businesses rather than to fund litigation, opens the door to third party funding as a suitable alternative means for these companies to pursue cases while reducing their financial exposure.
However, not everything favours third party funding in Portugal. The relatively small size of claims together with the local business mentality may be considered negative factors.
Legal and regulatory framework
Like many other European countries, Portugal has not enacted a specific national statutory or regulatory framework for third party funding.
There are also no known judgments from the Portuguese courts regarding third party funding, self-regulation for operators in this market or soft law that is specific to third party funding.
However, the lack of specific regulation does not mean an absence of rules applicable to third party funding. It simply means less certainty and clarity for parties who want to avail of third party funding, because they will need to seek guidance from and take into account a number of general rules and principles.
The main points of concern are not exclusive to the Portuguese market and include matters such as (1) licensing of the activity itself, (2) the independence and impartiality of arbitrators, (3) conflicts of interest, (4) the national courts' perception of third party funding; (5) the legal and ethical issues that third party funding poses for lawyers in Portugal; and (6) possible interference with control and strategy in the proceedings.i Authorisation to fund a third party dispute
To operate legally in Portugal, banking and financial institutions are subject to specific authorisation and regulation pursuant to Portuguese Decree-Law No. 298/92 of 31 December (as amended). However, it is difficult to categorise the activity of a third party funder among the activities of banks and financial institutions permitted under this legislation.
A third party funder not only lends an amount of money, but also expects to receive a portion (usually a percentage) of the proceeds arising from a favourable ruling (whether from a judicial court or an arbitral tribunal). This type of risk factor and the division of the profits from a potential win are not envisaged as a type of activity in which banks or financial institutions can engage. A bank financing a plaintiff to initiate litigation (or a defendant to enable it to present its defence) would be a different matter, but that can be achieved through a standard commercial loan from a bank, which is granted regardless of the outcome of the litigation; the bank would be financing the borrower itself, rather than the borrower's litigation.
Similarly, it is not possible to classify third party funding as an insurance activity, even though there is a risk factor involved. Insurance and reinsurance activities are regulated in Portugal pursuant to Law No. 147/2015 of 9 September. However, once again, in our view third party funders' activity cannot be qualified as an insurance activity, as it lacks one of its fundamental elements: the payment of a premium as consideration for the insurance policy, for which there is no equivalent in third party funding.
In summary, the current Portuguese legal framework does not require any specific authorisation or licence to act as a third party funder of legal disputes in Portugal, as this area is completely unregulated.ii Third party funding and arbitration
As mentioned above, there is an ongoing debate in Portugal among arbitration practitioners and scholars on the topic of third party funding, with a general consensus that one of the main concerns it raises is the independence and impartiality of arbitrators and the resulting potential for conflicts of interest. It is important to point out that in Portugal, as in many other jurisdictions, it is common for arbitrators to be experienced lawyers, many of whom are partners in large law firms that may have dealt not only with the third party funders themselves, but also with the funded party or the counterparty in the dispute.
In other words, arbitration's already fertile terrain for conflicts of interest becomes even more prone to problems of this kind when you add a third party funder to the equation.
Arbitrators' independence and impartiality is regulated in Portugal. Firstly, arbitral tribunals are acknowledged by the Portuguese Constitution, which means that arbitrators are comparable to judges and must comply with similar duties of independence and impartiality. Secondly, Article 9, Paragraph 4 of the Portuguese Law on Voluntary Arbitration imposes duties on arbitrators, who must remain neutral (i.e., not be biased in any way) towards the parties, their lawyers, the dispute itself and, where the dispute is decided by more than one arbitrator, the arbitrator's co-arbitrators. Thirdly, as the concepts of independence and impartiality are not legally defined, guidance should be sought from general soft law and the International Bar Association (IBA) Guidelines on Conflicts of Interest, which play a significant role together with internal rules and guidelines published by arbitral associations and institutions.
Intrinsically related to arbitrators' duties of independence and impartiality is their disclosure duty, meaning that an arbitrator must be transparent, neutral, independent and impartial in the sense that he or she should disclose any relations or potential conflicts of interest between the parties involved (the parties to the dispute, their legal counsel and any co-arbitrators). However, disclosure of any relationship that an arbitrator might have with a third party funder is only possible if the arbitrator becomes aware of the involvement of the third party funder in the dispute – and this is an area that, in the absence of specific regulation, remains unclear.
The recent annulment of the award delivered in the Eiser v. Spain ICSID arbitration is a stark reminder of the need both for clarity and to take into account all parties, including experts and third party funders, when complying with the duty of disclosure.
The duty of disclosure incumbent on all parties is also relevant in relation to a party's ability to pay adverse costs, and may lead the arbitral tribunal to order the party concerned to pay security for costs.iii Third party funding and national judicial courts
It is important to highlight that the foregoing considerations regarding arbitration are not applicable in the case of third party funding of disputes heard in the national judicial courts.
For one thing, the risk of a conflict of interest is much lower. Apart from the fact that judges cannot under any circumstances work as lawyers, they are paid by the state and not by the parties to the dispute, which practically eliminates any potential conflicts of interest. Additionally, Portugal applies the constitutional principle of the 'natural judge', which means that everyone is entitled to have their case decided by a legal judge. This right means that a judge who adjudicates on a specific case must be elected to do so on the basis of objective legal and predetermined criteria and obviously not on the basis of individual and discretionary choices. In Portugal, civil litigation disputes are assigned to judges randomly, therefore the risk of a potential conflict of interest is very low. Furthermore, judges must follow the general civil procedural rules, which prohibit a judge from hearing a case where he or she might have a particular relationship with one of the parties or an interest in the dispute, which is particularly unlikely when cases are assigned randomly (and typically there are more judges than arbitrators).
In addition, as there is no rule imposing a duty to disclose whether the parties are being funded by a third party, this is not, in principle, a relevant factor for the court. Further, the court does not have to make any assessment of the financial capability of a party to pay the court fees, unless the counterparty expresses its concern and requests the court to order it to pay some sort of security (typically, a bond). Similarly, there is no concern regarding payment of adverse costs (which in Portugal are limited to payment of the court fees and a portion of the lawyers' fees), because if the losing party does not pay those costs, the counterparty can initiate enforcement proceedings to obtain payment.
Given the current circumstances, we believe that the impact of third party funding on the national judicial courts, and particularly on judges, is in fact non-existent. This is essentially because the parties are under no obligation to disclose funding by a third party, and even if such a duty were to exist, it would be most unlikely to have any impact on the judge.iv Lawyers' legal and ethical duties
Portuguese lawyers are bound by the Rules of the Portuguese Bar Association, established in Law No. 145/2015 of 9 September (as amended), Article 106 of which prohibits the pactum quota litis. The purpose of this provision is to protect the integrity of the legal profession, by considering null and void any agreement whereby a lawyer is paid only according to the outcome of the case or for a successful performance.
As long as lawyers or law firms are not themselves the funders (and are only legal counsel paid by the funder to provide legal assistance to the funded party), third party funding does not seem to breach this provision.
Notably, in the event of a favourable ruling, the fact that a third party funder benefits from a percentage of the proceeds obtained is not considered a form of quota litis because third party funders are not subject to the Rules of the Portuguese Bar Association. The Rules of the Portuguese Bar Association also prohibit sharing lawyers' fees; however, once again, if the lawyers are not the funders (and only paid by the funder to advise on the dispute), this rule is not breached, because lawyers are not sharing their fees – and third party funders are not subject to these rules.
It is another matter whether a lawyer or a law firm can be considered a third party funder when they agree to a success fee (typically a percentage of the amount at stake in the dispute) on top of the fees that they are paid regardless of the outcome of the case. Success fees are allowed under Article 106, Paragraph 3 of the Rules of the Portuguese Bar Association, so this cannot really be considered a type of funding. In addition, the fact that lawyers represent their clients before the court means that they are not considered to be a third party in relation to the client, as the lawyers do not intervene on their own behalf but, rather, exclusively on behalf of their clients.
It is also pertinent that lawyers are prohibited from (directly or indirectly) soliciting clients, which means that they should be careful when exploring opportunities in the market, as they should not attract or direct a third party funder to finance a specific issue with the sole purpose of becoming the legal counsel assisting in that case – as the funder would end up paying the fees of those lawyers for advising the funded party, which could be considered to be soliciting clients.
Finally, it is important to have very clear and precise contractual provisions in place between the third party funder and the party regarding the conduct of the proceedings, to safeguard the lawyer–client relationship, which is also subject to specific provisions.v Third party funding – advantages and opportunities in the legal market in Portugal
One of the main advantages of third party funding for the Portuguese market is that it provides companies with the opportunity to take disputes to litigation that it would not otherwise be possible to, be it because they are in financial distress, they do not have the financial muscle to get professional legal advice for larger disputes or, from a management perspective, it simply would not make sense.
In fact, pursing litigation is first and foremost a management decision as it may mean allocating significant financial resources, which might not be viable economically for a given company even if its chances of winning the case are high. Allowing a third party to fund a company's litigation means transferring the risk, as well as the 'investment', to that third party. The third party will take a percentage of the proceeds of a favourable award, but choosing this course of action might still be the smartest decision when managing a limited budget.
In our experience, companies are sometimes put off by the legal costs of high-value complex litigation, particularly in arbitration, where, in contrast to the judicial court system, costs are paid up front. Third party funding can therefore play a significant role in filling that gap and allowing companies to pursue their rights regardless of the costs involved.
The legal market in Portugal currently has many international participants and multinational companies, which makes for highly complex and sophisticated litigation. This can also be seen as an opportunity for legal counsel to assess cases in greater depth before commencing a dispute, as third party funders require a due diligence process to be undertaken to assess the risks of the case and decide whether it merits funding. This means more work for law firms but also represents a different approach to litigation, which can be beneficial, in the sense that it allows for better and more thorough preparation, mitigation of risks and fewer surprises when the case is actually taken to court.