I MARKET OVERVIEW
In 2016, the Brazilian chapter of Getting the Deal Through: Litigation Funding2 registered the status of third party funding (TPF) in Brazil as being nearly non-existent. In 2017, this situation changed as arbitration institutions reported TPF cases for the first time. In 2018 though, the number of cases being subject to funding substantially decreased, perhaps reflecting the hardships of the Brazilian economy and the fact that companies are avoiding litigation.
There are currently two major players in the market, LexFinance, a company seated in Peru, which claims to cover the Iberian Peninsula and Latin America, and Leste Investimentos, a proprietary investment fund created in 2014, which also happens to be the first provider of this type of service in Brazil.
Atelier Jurídico conducted a survey of 13 arbitration institutions from six different states.3 The research provided mixed results. Some of the largest institutions reported not only the existence of funded cases, but also provided information regarding actual queries from the parties or procedural incidents relating to the participation of the funder. Most of the other institutions chose not to make any comment on how they would deal with issues of disclosure and confidentiality. Although there were only four reported cases in 2017, this seems to be a breakthrough for the Brazilian market.
The above-mentioned four cases were reported by only two of the 13 institutions surveyed, namely CAM-CCBC and CMA CIESP-FIESP (three cases and one case respectively, with total amounts in dispute of around 1.080 million reais and 12 million reais respectively). CAM-CCBC reported instances of both claimant and respondent receiving funding, while, in the case reported by CMA CIESP-FIESP, only the respondent received funding.
At CAM-CCBC, the queries reported in the survey covered a broad range of subjects and touched upon issues whose details are not yet clear, such as the extent of the funder's participation in a given case, or the ethical boundaries underlying the funder's right to oversee the proceedings.
The funder's (or the party's) liability for adverse costs awards was also mentioned in the query, but to date there is no standard practice on adverse costs funding.
CMA CIESP-FIESP pointed out that the instance of funding it dealt with was discovered 'accidentally'. Following this occurrence, a thorough review was set in motion to identify any possible risk of conflicts of interest. AMCHAM and CAMARB also stressed their concern with potential conflicts of interest. None of them reported having dealt with any TPF cases.
|Arbitration institution||Objections or queries regarding funder participation|
|CAM-CCBC||The opposing party in one of the cases requested further information on (1) report the complete qualification of the third party funder; (2) the confidentiality and confidentiality agreement signed by the funder; (3) submitting the financing contract concluded so as to allow verification of the degree of influence of the funder in the procedure as well as of the consideration given to it and the extent of the financing granted.|
|CMA CIESP-FIESP||The TPF was not voluntarily reported by the party. A payment receipt indicated the participation of a funder and CMA CIESP-FIESP requested further clarification.|
While only one of the institutions reported having any regulatory measures in place regarding TPF (CAM-CCBC, the institution that reported having dealt with three cases, has enacted Resolution 18/2016 in this regard), the survey produced, among other things, the following responses regarding the institutions' policies on disclosure of funding.
|Arbitration institution||Funding disclosure policy|
|Arbitration and Mediation Center of Brazil-Canada Chamber of Commerce (CAM-CCBC)||Recommends parties disclose TPF as soon as possible. Full information on the identity of the funder is required.|
|Mediation and Arbitration Chamber CIESP-FIESP (CMA CIESP-FIESP)||Recommends parties disclose TPF as soon as possible and submit to the institution any information regarding potential conflicts of interest (independence and impartiality)|
|Market Arbitration Chamber (CAM)||Recommends disclosure of the existence of the funding and any and all relevant information to allow checks for conflicts of interest.|
|Business Arbitration Chamber (CAMARB)||CAMARB is constantly evaluating standards on TPF; to date, the arbitration institution has not issued an official recommendation.|
|Brazilian Chamber of Mediation and Corporate Arbitration (CBMAE)||The existence of funding should be disclosed, along with the identity of the funder and its representatives.|
On a separate but relevant note, there are – apparently – a number of funded cases that have not been reported to arbitration institutions. The lack of regulation and the inherent difficulty in monitoring the participation of funders contribute to this situation.
Overall, Brazil has a huge potential for TPF, as there is a combined total of over 99.7 million lawsuits pending in all courts and instances,4 and more than 200 new arbitration proceedings were initiated last year.5 It is a multibillion-dollar market that is now starting to become acquainted with external funding methods and players.
II LEGAL AND REGULATORY FRAMEWORK
There is no specific legislation on third party funding. Although the Brazilian Arbitration Act (BAA) has incorporated new procedural tools with the aim of promoting efficiency in commercial arbitration, this subject remains unregulated. As mentioned above, only CAM-CCBC has drafted guidelines for parties assisted by a funder through its Resolution No. 18/2016. These guidelines outline a definition of third party funding and provide recommendations on matters such as disclosure and submission of all relevant information on the funder's identity.
Other than that, the legal framework for TPF may be understood as drawing on other provisions in the Brazilian Code of Civil Procedure (BCCP) and the Statute of the Legal Profession and of the Brazilian Bar Association. The statutory rules on contingency fees and general rules governing the ethics of lawyers presumably apply as well. Either way, the courts will also have a role in defining these limits.
Types of legal fees and related fee arrangements
Legal fees have an impact on how much a funder may collect at the end of court or arbitration proceedings. For this reason, a brief summary of these modalities is in order.
Peculiar to Brazilian law is the existence of a rule concerning honorários de sucumbência (BCCP Section 85, Paragraph 11), whereby lawyers receive a separate credit arising from their work on the case, determined by the tribunal. It is incumbent upon the losing party to pay these fees.
If requested in court proceedings, the judge may order at every stage, cumulatively (BCCP Section 85, Paragraph 1), the payment of the counterparty's attorneys' fees. The same applies to arbitration. Pursuant to this provision, the successful party's attorneys must receive a percentage of the amount in dispute. In ordinary cases between private parties, the percentage ranges from 10 per cent to 20 per cent on average (the BCCP does not establish a reasonable range), whereas in cases involving public entities, the percentages decrease as the amount in dispute rises (BCCP Section 85, Paragraph 3, I, II and III). In both cases, fees increase with subsequent appeals.
To avoid disputes, especially if funders pay all costs – including legal fees – it is worth stating in the agreement whether the portion to be awarded under the heading of sucumbências is also within the limits of what the funder can collect, or whether reimbursed legal fees should be included (the latter is a highly questionable approach, as sucumbências are owed to the attorneys, not the parties).
In this context, it is important to bear in mind that while parties may request the reimbursement of costs incurred with payment of their attorneys, such costs cannot be compounded with sucumbências. Whenever parties or funders are discussing an agreement, this distinction should be clear from the outset.
As for contingency fees, the Brazilian Bar Association is not particularly supportive of conditional fee agreements or contingency arrangements, despite there being no prohibitions against this practice. This is also the position of the Federal Council of the Brazilian Bar Association.6 The Council declared that conditional fees – as is the case with quota litis, where attorneys receive a percentage of proceeds in exchange for service that is unpaid until the final decision is rendered – represent a potentially harmful practice, leading to the depreciation of the work of attorneys. To that effect, the Brazilian Bar Association stated that hourly fees – duly supported by the client throughout the litigation – are the rule, to which quota litis is the exception.
Since then, the Superior Court of Justice (STJ) has revised this position.7 According to the STJ's recent interpretation, lawyers may receive a fixed percentage of the final amount collected by their clients, but this decision has not yet been confirmed in other Supreme Court cases.
In light of the foregoing, should limits on quota litis apply, chances are that the court or arbitral tribunal would at least consider an upper limit of 30 per cent, given the existence of a relevant precedent.8 In the case in question, an ad exitum of 50 per cent of the amount in dispute was deemed excessive by the Supreme Court on the grounds that this rate was not a reasonably proportionate amount between that of the quota litis agreement and the amount in dispute. Furthermore, the Court declared that the lawyer had taken advantage of the party's desire to end the dispute, which also led to the conclusion that the percentage was unacceptable. This case is a good starting point for any funder looking into possible limitations in connection with recoverable percentages of proceeds.
III STRUCTURING THE AGREEMENT
Typically, a funding agreement will contain provisions on the expected fee or percentage to be collected by the funder in the event of success. In arbitration, because of the nature of this dispute resolution mechanism and the risks involved, funders tend to prefer a percentage of the proceeds instead of a purchase of claims.
As for litigation, BCCP Section 109 allows the purchase of claims, with the third party's participation conditional upon the counterparty's consent (BCCP Section 109, Paragraph 1). The BCCP legislator attempted to prevent fraud and undue monetisation of adjudicated claims and rights, assuming that any change in the ownership of the claim must be notified to and accepted by all parties. Needless to say, this adds to the list of disadvantages of claim transfers in Brazil.
Below is a brief summary of the main issues and topics in funding agreements. A disclaimer is in order, as these agreements are subject to customisation.
Both claimants and respondents may be eligible for funding.
Agreements may provide for full or partial coverage of costs arising from the proceedings and legal fees in exchange for a percentage of the damages and other claims awarded. In terms of costs, parties are advised to take into account the considerations mentioned in Section V.
Non-achievement of contractual goal
In the event of failure, parties are not liable for any costs or payments. Funding agreements are aleatory contracts and funders are normally aware of the risks.
As mentioned above, funders tend to treat confidentiality very seriously. For instance, one of the funding providers mentioned that not more than 10 people had access to each arbitration proceeding. Information may be disclosed either by virtue of a court request or if the client wishes to disclose the existence of the funding agreement. The terms and conditions of agreements are confidential at all times. However, some funders are more likely to prompt their clients to disclose the existence of the funding.
According to our research and practice, funders prefer arbitration as the dispute resolution mechanism.
Funder liability for adverse costs and other indemnities
It is not standard practice to insert any provisions on this issue.
Not all funders require specific termination clauses, and the general rule is that the provisions of the Brazilian Civil Code are applicable on termination as a fallback measure.
The trigger for payment is usually the issuance of the arbitral award or final decision.
Based on the above-mentioned research, the two institutions with actual reported cases requested information on the funder, with the purpose of conducting a conflict check. BAA Section 14 gives good reason for a thorough vetting of circumstances that may lead to conflicts of interest, as the BAA incorporates, by reference, BCCP Sections 144 and 145, which comprise standards of independence and impartiality applicable to judges.
BCCP Section 144 relates to the basic requirements of economic and professional independence, some of which are also found in the International Bar Association (IBA) Guidelines on Conflicts of Interest in International Arbitration (the IBA Guidelines), in particular in the Non-Waivable Red List and the Orange List. BCCP Section 145 holds both impartiality and independence to a higher standard than the IBA Guidelines.
It is not necessary to consider here each and every condition, but notably Section 145, II of the BCCP refers to three different situations that may be indicative of partiality: (1) the arbitrator receives any gifts from the parties either before or during the arbitration; (2) the arbitrator provides legal advice on the subject matter in dispute; or (3) the arbitrator provides the financial means for the parties to initiate or continue the proceedings.
In proscribing the provision of financial means, it is still not clear whether the law intended to prohibit only actual financial aid (which would constitute a rather blunt case of partiality and lack of independence), or also any recommendation arising from informal communication between parties and arbitrators on the role of an external funder. These theories are yet to be tested.
As those specific provisions of the BCCP apply to arbitration under the BAA, and because some of the situations on the Waivable Red List and the Orange List are prohibited under Brazilian law, it is highly recommended that parties and chambers perform a detailed review of past and current relationships and facts with reference to the BCCP.
In the course of our survey, even those institutions with no reported TPF cases were asked to indicate which type of information parties should disclose and why.
The arbitral institutions with reported cases, CMA CIESP-FIESP and CAM-CCBC, asserted that it is paramount that the parties provide full qualification of and all information on the funder. This information may be disclosed to all parties and arbitrators pursuant to the above-mentioned standards. The other participating chambers also ranked information on funders as a top priority while emphasising that the independence and impartiality of the arbitrators is the main issue at stake.
As for confidentiality standards, the BAA does not expressly impose confidentiality on all arbitration proceedings. BAA Section 13, Paragraph 6, mentions the duty of the arbitrators to remain independent and impartial, and to act diligently and in a discreet manner. By extending and analysing the meaning of the word 'discreet', one could possibly infer that confidentiality is an obligation of arbitral tribunals. Some of the most relevant arbitral institutions in Brazil have already incorporated confidentiality provisions in their arbitration rules. Among these, CAM-CCBC (Section 14); CMA FIESP-CIESP (Section 10.6); CAMARB (Section 13.1); CAM – BM&FBOVESPA (Section 9.1); AMCHAM (Sections 18.1 and 18.2); FGV (Sections 61 and 62); and CBMA (Sections 11.2 and 17.1) have express provisions regarding the confidentiality of proceedings, documents presented therein, and awards issued. Even ad hoc procedures are bound by confidentiality and it would not be too far-fetched to say this is a customary rule. The STJ, ruling on a competence issue at the enforcement stage, decided to remove an arbitral award from the dockets9 upon request from one of the parties.
In theory, there could be objections to the funder's participation arising from confidentiality concerns. However, none of the arbitration institutions interviewed mentioned any concerns in this regard. This could be interpreted as a sign that parties are open to the presence of the funder and – at least for the time being – the lifting of the confidentiality veil for the funder.
As regards the client–attorney relationship, the Brazilian Bar Association's Code of Ethics (EOAB) Section 7, II expressly establishes that communications between parties and their attorneys are privileged. Thus, information exchanged in the context of this professional relationship is confidential. This does not mean that the very existence of funding should be kept secret. According to one of the funding companies interviewed, their clients are encouraged to disclose the funding at the beginning of the performance of the funding agreement.
In relation to costs, the BCCP, even after the amendments implemented by Law No. 13.105 of 16 March 2015, focuses on the role of parties and attorneys. Although the BAA does not refer to the BCCP (as it does with regard to the independence and impartiality of arbitrators), it cannot be denied that some elements of the BCCP with respect to costs and legal fees may be embedded in the legal culture of some arbitrators. The BAA refers very succinctly to costs in Section 27 and this provision has been reproduced in the vast majority of the Brazilian arbitral institutions' rules, including those of CMA CIESP-FIESP (Article 10.5); CAM-CCBC (Article 10.4.1); CAMARB (Article 10.6); AMCHAM (Article 17.5); and FGV (Article 39, Paragraph 2).
As the BCCP is a subsidiary source of law in arbitration, its rules are also referenced. There are many intricacies practitioners must keep in mind (BCCP Sections 81 to 96), and only the most relevant will be mentioned here.
According to Section 82, Paragraph 2 of the BCCP, judges are entitled to order the unsuccessful party to pay the costs. If a party is only partially successful, the judge may apply what he or she deems a reasonable portion of costs as per Section 86. One may apply the same rationale of proportional allocation of costs in multiparty procedures, as stipulated in Section 87 of the BCCP. If the final award, nonetheless, does not mention the portion attributable to each party, there is a presumption that parties are jointly liable for pending costs and fees (BCCP Section 87, Paragraph 2).
However, the notion of proportion as stated in BCCP Section 86 is limited to a de minimis criterion. If a party loses only a minimum portion of its claims, then the ex adverso may be requested to pay the legal fees and costs in full.
Those costs consist of, according to BCCP Section 84, expenses arising from travel costs; procedural costs related to copies and notary or other charges; experts' fees and accommodation expenses incurred with the transportation of witnesses. In arbitral procedures, the expenses arising from administrative costs, reservation of hearing rooms, arbitrators' fees and transcripts are also covered by the award on costs.
Attorneys' fees are not considered 'costs' according to the BCCP.
In the event of withdrawal – waiver of a right by one of the parties – the party responsible for the withdrawal will be liable for all costs incurred. This stems from the provisions of the BCCP whereby the lawmakers attempted to establish a sense of proportionality in defining costs. In contrast, when parties reach a settlement in litigation, in the absence of rules governing the division of costs, there should be an equal distribution of all costs (BCCP Section 90, Paragraph 2).
As for arbitration, the tribunal enjoys some leeway in choosing the most appropriate balance and distribution of reimbursed costs among the parties. The circumstances of the case (i.e., specific claims on costs, complexity of the dispute and analysis of the conduct of the parties throughout the proceedings) may play a role in this equation. Parties, and especially funders, are advised to take into consideration the above-mentioned provisions, as most arbitrators come from a litigation background.
Funders seeking to recover the amount of their expenses should formulate specific provisions in the agreement regarding costs. To date, there have been no reported cases involving disputes over costs recovery, but it would not be unreasonable to assume that the fee (a percentage of the winnings) could, arguably, not cover those costs – if they were paid by the funder.
In addition, attorneys' fees are tackled under a different heading (Section 85) in the BCCP. The arbitration rules of the main institutions place attorneys' fees under the broad heading of costs, therefore arbitral tribunals could take different approaches to dealing with them. To be on the safe side, it is recommended that parties specifically request the reimbursement of legal fees – not to the party itself, but to the attorneys and, if applicable, to the funders themselves.
For tax purposes, the transfer of monies to the funder, upon enforcement of the arbitral award, may be subject to taxation, ranging from 15 per cent to approximately 20 per cent, on the accrued profit. Depending on how the funder and parties declare this transfer to the Brazilian Tax Authority, taxes may be fixed at a higher rate, so this is also a relevant factor when structuring the operation.
Another relevant aspect of the BCCP is the participation of public entities10 – now fully acknowledged by the BAA (Section 1, Paragraph 1). The BAA lacks details on how to rule on costs in this regard. While theoretically costs would be left to the arbitral tribunal's discretion, there is a thin line between the private nature of arbitration and public order and other legal standards applicable to public entities. The BCCP and other lex specialis in this context may offer some guidance.
Security for costs
Security for costs may be ordered by a state court or arbitral tribunal in cases where there is a significant reason for the case to be heard (fumus boni iuris) and a risk (periculum in mora) that, if the case proceeds, one of the parties may not have enough resources to meet its procedural financial commitments. Before the state courts, the BCCP (Section 83) regulates the situation where one of the litigating parties is foreign and does not have any assets in Brazil, in which case a court may order the collection of the funds corresponding approximately to the costs and attorneys' fees. The STJ has revised this position11 by virtue of the principle of pas de nullité sans grief, which means that unless there is actual damage for the opposing party, it is not mandatory to strictly observe Section 83 of the BCCP. There is another situation regarding security, but it is only applicable to the enforcement of the court decision. Before the changes implemented in 2015 (Section 525), a party seeking to challenge any of the findings of the decision at the enforcement stage had to provide security. However, this is no longer the case.
In arbitration, BAA Sections 22-A and 22-B refer to interim measures to be issued both by state courts (if arbitration proceedings have not already been initiated) and arbitral tribunals. In the first case, the arbitral tribunal can, after a duly informed review, change, modify or extinguish the interim measure. There is no official database on how arbitral tribunals have decided, but our experience shows tribunals seldom grant this type of security, as the arbitrators tend to advance the proceedings before issuing orders on costs.
Finally, the BCCP (Sections 79 to 81) deals with a type of damages that can be awarded if a party litigates without legal grounds (Section 80, I) or factual grounds (Section 80, II) – in other words, when the party is not acting in good faith, which is also a breach of Article 34 of the EOAB. Although there are statutory provisions, courts or arbitral tribunals rarely grant damages stemming from bad-faith conduct.12
VI THE YEAR IN REVIEW
A major breakthrough in Brazilian legislation occurred with the approval on 13 July 2017 of changes to the labour law in Law No. 13.467, which introduced arbitration in labour law cases. According to Article 507-A, employees receiving more than twice the limit of benefit payments available under the Brazilian social security system (approximately 11,070 reais or approximately US$5,000) may resort to arbitration. This is a remarkable achievement in a country with 3,600 judges specialised in labour law and over 5 million13 cases. The STJ has highlighted on many occasions the relevance of arbitration as a means of easing the congested judicial system in Brazil. This is definitely the case with the labour courts and, as a result, possibilities for the funding market seem promising.
VII CONCLUSIONS AND OUTLOOK
Statistically, TPF has enjoyed a major breakthrough since 2016. There have been seven officially reported cases and the funders in operation seem to have grasped the potential of the Brazilian market. In regulatory terms, the BCCP and the EOAB still remain the main source of legal guidance regarding costs, conflicts of interest and cession of claims. At present, there is no code of ethics nor the prospect of further rules on TPF on the horizon.
1 Luiz Olavo Baptista is the founding partner and Adriane Nakagawa Baptista is a lawyer at Atelier Jurídico. The authors would like to thank Lucas de Medeiros Diniz for his help in drafting the questions and organising the results of our survey, and Caique Bernardes Magalhães Queiroz for reviewing and offering valuable input.
2 Baptista, Luiz Olavo and Nakagawa, Adriane, Brazil – Litigation Funding 2017. Available at:
3 The authors chose to focus on arbitration institutions as the issue of TPF did not appear in the case law research conducted through the website of the main Brazilian state courts. The following institutions were surveyed: Arbitration and Mediation Center of the Brazil – Canada Chamber of Commerce (CAM-CCBC); Arbitration and Mediation Center CIESP-FIESP (CMA CIESP-FIESP); AMCHAM Arbitration and Mediation Center; Chamber of Mediation and Arbitration of Eurochambers; Market Arbitration Chamber (CAM); Arbitration Council of the State of São Paulo (CAESP); Chamber of Arbitration Business (CAMARB); FGV Chamber of Mediation and Arbitration; Brazilian Chamber of Mediation and Corporate Arbitration (CBMAE); Brazilian Centre of Mediation and Arbitration (CBMA); Arbitration and Mediation Chamber of the Federation of Industries of the State of Paraná (CAMFIEP); Arbitration and Mediation Center of the Commercial Association of Paraná (ARBITAC); Chamber of Conciliation, Mediation and Arbitration of the Bahia Commercial Association (ACB).
4 2016 National Council of Justice report, available at www.cnj.jus.br/programas-e-acoes/politica-nacional-de-priorizacao-do-1-grau-de-jurisdicao/dados-estatisticos-priorizacao.
5 Luiz Olavo Baptista and Mariana Cattel Alves, The International Arbitration Review (8th ed.), available at http://thelawreviews.co.uk/edition/the-international-arbitration-review-edition-8/1145653/brazil.
6 Consultation 2010.29.03728-01 of 2010: 'However, it is important to note that the quota litis clause is exceptional, to be resorted to only when effectively verified, with ballast documentation, that the party is in a situation of irremediable financial impossibility to support procedural fees'.
7 STJ, REsp No. 805919 of October 2015.
8 STJ, REsp No. 1155200 of March 2011.
9 STJ, Conflito de Competência No. 122439 – RJ (2012/0091919-8).
10 Given the dispute has connection with acta jure gestionis.
11 STJ, AgInt no REsp 1664304/SP Agravo Interno No Recurso Especial 20170070698-7.
12 See STJ, Resp No. 947.927-AgRg, Rel. Nancy Andrighi, j. 15 April 2008, CJU de 29 April 2008.
13 Report 'Justiça em Números' from the National Council of Justice, available at www.cnj.jus.br/files/conteudo/arquivo/2016/10/b8f46be3dbbff344931a933579915488.pdf.