Spotlight: structuring litigation funding agreements in France

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Structuring the agreement

Litigation funding agreements as such are not regulated by French law. However, as noted above, the principle of contractual freedom set forth in French civil law (e.g., Articles 1101–1104 Civil Code) allows the parties to tailor the funding agreement to their specific needs.

As mentioned above, parties should be aware that if a dispute arises between the funder and the client, the court will not be bound by the parties’ classification of their agreement. Rather, the court can decide, depending on the specific elements of the case, that the agreement qualifies as a specifically regulated contract (e.g., insurance or partnership). That said, we are unaware of existing case law on this particular subject.

The litigation funding agreement will often be structured as a financing operation, as selling the claim may give rise to the retrait litigieux (i.e., litigious withdrawal right). According to Article 1699 of the Civil Code, ‘the person against whom a litigious right has been assigned may be held harmless by the assignee, by reimbursing him the actual price of the assignment together with costs and interest from the day on which the assignee has paid the price of the assignment made to him’.5 In other words, the Civil Code allows the debtor to terminate the debt and the lawsuit the debtor may be facing simply by reimbursing the assignee the price paid to the assignor.

This may be interesting for a debtor (a defendant in a lawsuit) where an assignment has taken place at a relatively low price (compared to the value of the litigious right). At the same time, this is potentially harmful for the assignor (who would take the place of the initial creditor) as the lawsuit will end and there is no further possibility of recovery.

In two rulings handed down on 28 February 2018, the French Court of Cassation accepted that the debtor of a claim assigned during arbitration proceedings is entitled to exercise its right to withdrawal in post-award proceedings, at the stage of the dispute over the annulment6 or the exequatur7 of the arbitral award. However, in two judgments of 7 December 2021,8 the International Chamber of the Paris Court of Appeal ruled against the aforementioned position of the Court of Cassation, judging that it is not within the powers of the annulment judge to examine an application for a contentious withdrawal. According to the Court, however, such an application may be decided by the enforcement judge, provided that the assignment of the claim is governed by French law. A petition to quash these decisions has (again) been filed with the Court of Cassation.

In a remarkable decision dated 25 January 2022,9 the Paris Court of Appeal also decided that a third party funder was not a co-claimant in arbitral proceedings. Rather, the extension of an arbitration clause to a third party funder requires exceptional circumstances. The existence of the third party funder, the fact that the funder’s interest is not simply financial, and the fact that the third party only acts as a funder occasionally, are not considered to be exceptional circumstances.

French courts have already been asked to rule on a dispute regarding the funder’s remuneration and whether they have the power to reduce a contractually agreed funder’s fee if it would be considered disproportionate in light of the funder’s obligations. On 23 November 2011, the French Court of Cassation ruled that the agreement to pay 30 per cent to a funder (a physical person) of all net amounts recovered in an inheritance dispute could be subject to a reduction by the court if the latter found it disproportionate.10 While the Versailles Court of Appeal had refused to reduce the contractually agreed funder’s fee of 30 per cent, the Court of Cassation quashed the decision. The Paris Court of Appeal eventually reduced the remuneration to 15 per cent, taking into account the relatively short duration of the proceedings and the limited services to be provided by the funder.11 Given the specific circumstances of the case, it remains to be seen whether this case law will set a lasting trend.

Clients have the right to retain the counsel of their choice. This does not prevent the funder from proposing counsel, provided that the client is not yet represented. Funders will often request that both they and the client must agree on any new legal team if there is a change of counsel during the litigation. In practice, clients often turn to funders for advice on the best representation if no lawyer has been retained yet, but the final decision will always remain with the client.

The funder’s attendance at hearings can also be covered in the litigation funding agreement. However, unlike domestic litigation where court hearings are open to the public (subject to certain exceptions), arbitration hearings will generally remain confidential. There is no possibility of a funder attending unless otherwise agreed between claimants and respondents, which is not common in our view.

One of the key provisions parties will address in their litigation funding agreement is the funder’s rights regarding settlement. Generally speaking, the funder will not play an active role. However, questions over the initiation of settlement discussions, settlement thresholds and the acceptance of a settlement offer will often find their way into the litigation funding agreement. Provisions concerning settlement, especially in terms of value, are often directly linked to the financing provided by the third party funder. The latter will seek to protect itself against the client accepting unreasonably low settlement offers. Thus, it will often be a question of finding the right balance between the client’s power to enter a settlement and the protection of the funder’s investment. This balance could be subject to review by the French courts.

Parties to a litigation funding agreement are free to agree on the circumstances in which the litigation funding agreement can be terminated. Usually, parties agree on a predefined list of circumstances that may adversely impact the funded proceedings. The following examples are frequently cited: full or partial dismissal of the claim, the revelation of previously unknown facts or circumstances, the loss of evidence or the appearance of previously undisclosed evidence, and events adversely affecting the enforcement position (e.g., loss of creditworthiness, a composition with creditors, restructuring or bankruptcy). Under these circumstances, the funder may lose the financing provided up to the terminating event and will bear the costs resulting from such termination. A breach of the litigation funding agreement by the funded party may also lead to termination, either with or without notice depending on the importance of the breach, as well as the duty to reimburse costs and expenses to the funder.

There is no equivalent in France of the common law doctrines of champerty and maintenance that still apply in some jurisdictions. Therefore, parties may contractually agree on a more active role for the funder in the proceedings (e.g., offering certain administrative support, or acting as a sounding board for strategy purposes). In any event, however, this will be limited by French professional (ethics) rules applying to members of the Bar. Those rules include a prohibition on taking instructions from the funder rather than the client or meeting the funder without the client, legal privilege in the relationship between the lawyer and the client, and, more generally, the fact that in the case of a conflict of interests between the client and the funder, the lawyer will need to follow the client’s instructions.

Given the extensive contractual freedom of the parties, the funder’s other rights and obligations in relation to the conduct of the proceedings will need to be agreed upon. This is especially important for information rights, access to documents (which can be complex in arbitration proceedings), confidentiality and consultation rights on certain strategic decisions.