I MARKET OVERVIEW
Defining 'third party litigation' 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 in Poland (when understood as the financing of a litigation (arbitration) in exchange for a contingency fee) does not seem particularly well developed. 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 their 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. 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, they are affiliated with healthy, strong legal entities with large operations that can produce such funding without a struggle, whereas in respect of individuals, state legal aid seems to be the remedy for limited resources of funding. It is also worth mentioning that there are pro rata limits on the entry fee in relation to the value of the claims: for instance, in common courts 100,000 zlotys is the limit of the court entry fee.
The element of third party litigation is more common on the insurance market. However, at the end of the first quarter of 2017, legal expense insurance policies numbered 1,096,695 out of a total of 47,631,586 policies.2 More importantly, only 1,530 claims were settled between January and March 2017 (at the end of 2016, the number of claims settled reached 5,324).3 The data suggest society's low legal awareness or a lack of interesting insurance products, which leaves a broad field for development of 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,4 Polish businesses deal with 21.8 per cent of overdue receivables on average,5 whereas 14.6 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 claim 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 facing disputes with foreign entities in another jurisdiction.
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 2016, 9,042,666 cases were brought before Polish civil courts and 1,737,323 were brought before Polish commercial courts.6
II 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 its core feature (i.e., claim financing) is not yet popular in Poland as a commercial activity, there is also no court precedent regarding the field. The industry thus operates under general frames of freedom of economic activity, currently regulated (in addition to Poland's Constitution) by the Act of 2 July 2004 on freedom of economic activity. Agreements for claims financing are subject to the rules and principles of Polish private law (i.e., the Act of 23 April 1964 (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 Act'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. As such, and as an 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 such activities by bar-admitted lawyers (i.e., legal counsellors and attorneys at law). This affects the opportunities of Polish law firms in relation to offering such services.
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 such fixed part should be). Whereas litigation funding is frequently based entirely on the 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.
Secondly, 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 or 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 raise controversies if funding is the key driver for a client's involvement in a dispute.
Contrary to third party litigation funding, strictly speaking, claim 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 expense insurance policies is coherent 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 expense 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 expense 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 Polish 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 financing, it is quite unlikely that the market for litigation funding will be regulated in the near future. The foregoing should be considered – from the legal and regulatory framework perspective – as an inducement to potential investors.
III STRUCTURING THE AGREEMENT
Since cases of third party funding – when talking about claim funding only – are rarely accessible in the public domain on the Polish market, it is difficult to outline the typical structure and provisions of such agreements. Nevertheless, there are certain guidelines on critical stipulations.
First and most importantly, the parties generally indicate that the funding is to be reimbursed, and to what extent, only if the case is won. This may be a fairly straightforward agreement, or fairly sophisticated, for instance, by making it conditional on whether the case is won in full or in part. Accordingly, specific rules on the distribution of the award should be provided for. The parties can specify whether the funder gets a percentage of the award, costs incurred increased by a percentage of the award or a multiple of costs incurred. It seems indispensable to provide for the rules of settlement if the costs incurred exceed the award.
Since court proceedings, especially in complex cases involving significant capital, can take many years (sometimes more than 10), the parties should set forth the maximum level of funding provided throughout the litigation. The parties to a contract should also bear in mind that Polish civil procedure consists of two instances and extraordinary review procedures. During the main proceedings some additional, interlocutory proceedings may also arise, along with proceedings resulting from the counterclaim of the other party to a process. All the aforementioned proceedings can considerably extend the duration of the main court proceedings, increase the costs incurred by the funder and therefore decrease the profitability of the funding; thus, these should be settled in the contract. The remuneration may also be structured as a lump sum without making the fee contingent upon the percentage of the value of the claim.
Secondly, the contract should stipulate the rules on exchanging information between the parties to a contract as well as the rules on disclosing information to third parties. The arrangements of the parties should cover the admissibility of disclosure of funding by any of the parties, specifying the information that shall remain confidential. Furthermore, the parties should be aware that the funder may come to possess information classified as a company secret, and thus it is highly recommended to provide for rules of confidentiality.
Thirdly, it is recommended that the funder protect against any fraudulent misrepresentation or non-disclosure of any information or document important from the point of view of a risk assessment or a profit–loss analysis. In such a case, the funder should be allowed to withdraw from the contract and claim damages or contractual penalties, or both.
Finally, the parties should consider other minor issues such as who chooses the lawyer or whether (and, if so, under what conditions) the claimant is allowed to settle the dispute. In general, defining the scope of the funder's interference in the proceedings needs to be determined, otherwise it opens the way to a potential dispute between the party and the funder over the trial's handling and pursuing liability in the case of an unfavourable verdict.
In the case of claims purchasing, the agreement concluded by the parties usually constitutes a purchase agreement and an assignment. Hence, it should include elements typical for a purchase agreement, such as price and the timing of the passing of the claim as well as related profits and burdens to the buyer, and provisions on the assignment.
In structuring the provisions on the assignment, the parties (particularly the purchaser) should focus on the responsibility of the seller for his or her entitlement to the claim and the possible insolvency of the debtor. Even though the responsibility of the seller for the entitlement to the claim is based on statutory provisions, it is in the purchaser's best interest to verify whether the disposability of the claim was limited by the parties; hence, an agreement concluded contrary to such a provision shall be ineffective. Contrary to the seller's responsibility for his or her entitlement, the responsibility for the insolvency of the debtor does not arise from statutory provisions, and it should therefore be subject to the parties' arrangements.
In addition, in respect of claims purchases, the parties to a claim purchase agreement should be aware that according to the statutory provisions, the performance of an obligation to the former creditor shall be effective towards the acquiring party until the alienating party notifies the debtor of the assignment. Therefore, the parties should consider whether to notify the debtor of the assignment, which party is responsible for notification and how to settle any payments made by the debtor between the conclusion of the contract and the notification of the debtor (if applicable).
It is important to note that as a result of a claim purchase agreement, the seller disposes of all of his or her rights towards the claim; thus, the seller will usually not have any interest in providing for rules on the choice of lawyer or the costs of proceedings arising in relation to the claim. Nevertheless, in every case the parties should consider concluding a non-disclosure agreement.
In general terms, the obligation to pay the costs of litigation (arbitration) is imposed on the party to the process. There are, however, no regulations preventing a third party from paying the costs on behalf of the party, as long as it is clear that the court cost was paid in the case in question. It is allowed under the Civil Code to pay someone's else dues. There are also no regulations imposing on the party the obligation to disclose the source of financing, any agreement in this regard or, for example, a contract with a lawyer (apart from in class action claims). The party to a process is free to organise its relationship with the funder in the most convenient way. It is also important to note that even if disclosed, the third party litigation funder is not a party to a process and cannot be held liable for adverse costs.
Furthermore, bar-admitted lawyers are not only allowed, but are also under a duty, to keep confidential all information obtained in connection with their professional activities. A confidentiality obligation applies to all the information concerning his or her client disclosed to the lawyer by the client or obtained in any other way, regardless of the source or the form of the information. Legal privilege also applies to the documents created by the lawyer and any correspondence between the lawyer and the client. Legal privilege or a confidentiality obligation has no time limits. It is even disputable whether the client can release a lawyer from the obligation of preserving secrecy. On the basis of the confidentiality obligation, the lawyer is allowed to refuse to answer any questions concerning the information covered by the obligation.
The party to the process and the third party litigation funder are, therefore, quiteable to keep the financing, and any circumstances related to the financing, secret.
The situation is entirely different when the funding consists of claim purchasing. In such a case, the rules on legal privilege and confidentiality remain unaltered, whereas the seller and the purchaser of the claim, as well as the claim purchase agreement itself, shall be disclosed (at least before the court). The disclosure of the legal relationship between the purchaser and the seller is necessary to prove that the transaction took place and was valid. It is important to note that hearings are public in most cases. The court can order the hearing to be held in camera upon the request of a party being a business entity if facts constituting a company secret may be revealed; however, there is no actual possibility to limit the access of another party to such information revealed during the hearing or included in the case file. Nevertheless, company secrets shall be protected on the basis of the Act on Fair Trading providing that the disclosure or the making use of someone else's company secret constitutes an unfair trading practice and shall be subject to punitive measures.
The main rule of cost distribution in Polish domestic litigation is 'loser pays'. The losing party shall, upon the request of the winner, reimburse reasonable costs of the legal proceedings, which include court costs, the attorney's or legal counsellor's fee, and the cost of the appearance of the party before the court.
As to court costs, in most disputes involving property rights the court fee amounts to 5 per cent of the value of the object in dispute: not less than 30 zlotys and not more than 100,000 zlotys. The court costs are entirely reimbursed to the winning party. However, where only a part of the claims is awarded, costs shall be reciprocally exclusive or proportionally shared. The court may also require that one of the parties reimburse all costs if the other party lost only a minor part of his or her claims.
The rules of reimbursement of the fee of a professional lawyer constitute a more complex issue. According to general rules, a party may request reimbursement of the fee of a lawyer within the limits set forth in the regulation on the fees for legal counsel's activities, which amount to, for example, 10,800 zlotys for cases where the value of the object in dispute is between 200,000 zlotys and 2 million zlotys, or 25,000 zlotys where the value of the object in dispute is above 5 million zlotys. A party may request multiples of the fee provided for in the regulation when it is justifiable in light of the required workload of the lawyer, the value in dispute or the complexity of the case. Nevertheless, the fee reimbursed by the losing party cannot exceed six times the fee provided for in the regulation. The costs reimbursed are therefore detached from the costs actually incurred by the party, especially given the fact that the courts rarely order the losing party to pay more than the minimal fee provided for in the regulation.
When it comes to the reimbursement of the cost of a party's appearance before the court, it should be noted that in general terms, a party represented by a professional lawyer is not obliged to be present throughout the hearings, unless the court orders the party to appear in person. Therefore, a party represented by a professional lawyer is entitled to reimbursement of the costs of personal appearance only if such appearance is summoned by the court. A party not represented by a lawyer can request a reimbursement of the costs of the personal appearance irrespective of a court summons, within the limits of the fee of the lawyer performing his or her professional activities in the court.
Vi CONCLUSIONS AND OUTLOOK
Third party litigation funding (considering the financing of a claim of a party to a court or tribunal dispute) has no strong presence in Poland, and data regarding this practice are difficult to access. The segment of the claim funding industry that is recognised is claims purchasing, performed under various schemes. Most frequently it involves entities dealing with difficult-to-collect or non-collectible receivables that wish to use debt recovery services or that will sell their claims to securitisation funds in order to recover at least a part of their funds, making the claims purchasing market buoyant. Some entities would rather insure against legal expenses to mitigate any future risk of their inability to bear the costs of litigation; however, legal expense insurance constitutes only a marginal share of the insurance market.
Part of the growing industry segment is class action claims (however, with the rather unusual 'funder' being the state).
The absence of third party litigation funding (in its core feature) is reflected by the lack of specific regulations in this regard. It can be expected that as soon as this branch of business starts to grow, relevant regulations shall be introduced. For now, litigation funding is considered a commercial activity allowed under the general rules of freedom of economic activity, whereas the specific legal framework is driven by the regulations of the Civil Code. Since third party litigation funding is not a regulated activity, investors can take up and pursue this kind of economic activity without any limitations. Obviously, certain specific regulations apply to some segments of the industry related to the claim purchase scheme, such as securitisation funds or insurance; third party litigation funding is not subject to any of these.
1 Zbigniew Kruczkowski is counsel at Linklaters C Wiśniewski i Wspólnicy Spółka Komandytowa.
2 The number of legal expense policies in the first quarter of 2017 grew insignificantly as compared to 2016 (1,050,392 at the end of 2016), after a decrease by almost half in comparison to the 1,906,642 at the end of 2015 – statistics of KNF – the Polish Financial Supervision Authority (https://www.knf.gov.pl/publikacje_i_opracowania).
5 The Conference of Financial Companies in Poland, 'Portfolio of receivables of Polish enterprises', July 2017.
6 Statistical Guidebook of Justice, https://isws.ms.gov.pl/pl/baza-statystyczna/opracowania-jednoroczne/rok-2017.