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 were avoiding litigation. In 2019, the situation reversed once again, with an increase in the number of funded cases.
There are currently two major participants 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 the main arbitration institutions in Brazil for this edition of the Law Review.3 The research provided better results compared to those from previous years. Except for one of the surveyed institutions, all had dealt with at least one case that was funded by third parties, with a total of 15 funded cases this year so far. Some of the largest institutions not only reported 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.
The above-mentioned 15 cases were reported by five of the six institutions surveyed this year, namely the Center for Arbitration and Mediation of the Chamber of Commerce Brazil–Canada (CAM-CCBC), the Market Arbitration Chamber (CAM) of the B3 – Brasil Bolsa Balcão SA (formerly BM&FBOVESPA), the Business Arbitration Chamber (CAMARB), the Chamber of Conciliation, Mediation and Arbitration CIESP/FIESP (CMA CIESP/FIESP), and the Brazilian office of the Secretariat of the Court of Arbitration of the International Chamber of Commerce (ICC-Brazil). The FGV Mediation and Arbitration Chamber (FGV) reported no cases. Details of the reported cases are provided in the table below.
|Arbitration institution||Number of
|Funded cases added value (reais)||Cases funded
As well as the number of funded cases, their added value and the party funded, the arbitration institutions were asked how they were made aware of the funding and whether any objection was made regarding the provision of funder information.
To the first of these two additional questions, most institutions answered that the funded party voluntarily disclosed the information, in some cases to allow assessment of the arbitral tribunal's impartiality and independence in relation to the funder; in others, the information was disclosed voluntarily following administrative recommendations on third party funding issued by the arbitration institution. In one case, however, the arbitration institution was made aware of the funder by informal means: the matter was broached by the party's attorney during a meeting in the arbitral proceedings. Later, the institution received payment for the arbitration costs from a third party, thus confirming the funder's existence.
As to the second enquiry, most arbitration institutions reported that there were no objections or queries in relation to the funder and its role; the only two reported queries are contained in the table below.
|Arbitration institution||Objections or queries regarding funder participation|
|CAM-CCBC||By way of further information, the opposing party in one of the cases requested a report detailing
(1) the qualifications of the third party funder; (2) the terms of the confidentiality agreement signed by the funder; (3) the terms of the financing contract concluded, to allow verification of the degree of influence of the funder in the procedure, the extent of the funder's consideration 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.|
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 78.7 million lawsuits pending in all courts and instances,4 and approximately 200 new arbitration proceedings are initiated each year.5 This is a multibillion-dollar market and it is now starting to become acquainted with external funding methods and market participants.
II LEGAL AND REGULATORY FRAMEWORK
There is no specific legislation on third party funding in Brazil; in effect, the TPF regime is based on international guidelines that determine good practices in the use of this mechanism. Although the Brazilian Arbitration Act (BAA) has incorporated new procedural tools with the aim of promoting efficiency in commercial arbitration, this area remains unregulated. CAM-CCBC, however, through its Administrative Resolution No. 18/2016, has drafted guidelines for parties assisted by a funder. These guidelines outline a definition of TPF and provide recommendations on matters such as disclosure and submission of all relevant information regarding 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 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 limits in these areas.
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 the legal fees of the prevailing party,6 whereby lawyers receive a separate honorarium, or 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,7 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.8 In both cases, fees increase with subsequent appeals.
To avoid disputes, and 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 'honorariums' 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 honorariums 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 through payment of their attorneys, such costs cannot be compounded with these honorariums. Whenever parties or funders are discussing an agreement, this distinction should be made 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.9 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.10 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.11 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.12 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.
iii Non-achievement of contractual goals
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.
v Dispute resolution
According to our research and practice, arbitration is funders' preferred dispute resolution mechanism.
vi 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.
viii Payment events
The trigger for payment is usually the issuance of the arbitral award or final decision.
BAA Section 14 provides good reasons 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) where the arbitrator receives any gifts from the parties either before or during the arbitration; (2) where the arbitrator provides legal advice on the subject matter in dispute; or (3) where 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.
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.
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,13 CMA CIESP/FIESP,14 CAMARB,15 CAM,16 AMCHAM,17 FGV18 and CBMA19 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 dockets20 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) expressly establishes that communications between parties and their attorneys are privileged.21 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,22 CAM-CCBC,23 CAMARB,24 AMCHAM25 and FGV.26
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,27 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 pursuant to 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.28
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.29
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 heading30 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 entities31 – now fully acknowledged by the BAA.32 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, Section 83 of the BCCP 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 position33 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 Section 525 of the BCCP in 2015, 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, Sections 79 to 81 of the BCCP deal with a type of damages that can be awarded if a party litigates without legal grounds34 or factual grounds35 – 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.36
VI THE YEAR IN REVIEW
Events in Brazil's recent past have brought up discussions over the use of arbitration as a dispute settlement mechanism in cases of large-scale disasters. On 5 November 2015, a dam in Mariana in the state of Minas Gerais collapsed, causing catastrophic damage. Four years have passed and the environmental damage from the disaster remains, with an aftermath of 19 deaths, and lawsuits filed at the state and federal levels. An astonishing amount of dozens of public civil actions and more than 50,000 individual lawsuits remain before the judiciary pending trial. On 25 January 2019, another dam collapsed near Brumadinho, also in the state of Minas Gerais.
Learning from past mistakes (i.e., where all lawsuits arising from an incident were taken to state courts, consequently jamming the judicial system and possibly taking decades to settle all the cases), scholars began discussing the possibility of filing class arbitration proceedings37 to provide individuals with a faster, more efficient dispute settlement mechanism. At the end of 2018, the Court of Justice of São Paulo accepted a collective arbitration action. Shareholders of Petrobras (one of Brazil's main state-owned companies) decided to sue the company as a class after corruption scandals were revealed following the Federal Police's Operation Car Wash. As a defence before the first instance court, Petrobras argued that the shareholders had signed contracts with arbitration clauses, thus removing the state courts' jurisdiction over their claims. The shareholders replied that they had signed the clauses as individuals, not as a group. At the Court of Justice of São Paulo, the deciding judge ruled that as all members of the class had signed the arbitration clauses the arbitral tribunal had jurisdiction to adjudicate the claim, and therefore it would not be necessary for each individual to file an independent action. In this way, collective arbitration could proceed through class representation, reducing costs for the claimants. The Court of Justice thus upheld the decision of the first instance judge.
Although a cost-reducing solution for claimants, a class arbitration action should also be considered an attractive business proposition for funders, as the higher amount in dispute compared to that in most arbitration proceedings should lead to better funding deals, and to a higher success rate, since knowledge of the damage-causing act will already be widespread.
VII CONCLUSIONS AND OUTLOOK
Statistically, TPF has enjoyed a major breakthrough since 2016. Despite initial volatility, the increase in officially reported cases indicates that 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 sources of legal guidance regarding costs, conflicts of interest and cession of claims. At present, there is no applicable code of ethics nor the prospect of further rules on TPF on the horizon.
1 Luiz Olavo Baptista was the founding partner and Adriane Nakagawa Baptista is the director at Atelier Jurídico. The authors would like to thank Lucas de Medeiros Diniz for his help in drafting the questions for the firm's survey, and Caique Bernardes Magalhães Queiroz for organising the results, reviewing, updating and offering valuable input.
2 Baptista, Luiz Olavo and Nakagawa, Adriane, Lexology Getting The Deal Through: Litigation Funding – Brazil, 2017. Available at https://gettingthedealthrough.com/area/94/jurisdiction/6/litigation-funding-
3 The authors chose to focus on arbitral 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 for this edition: the Center for Arbitration and Mediation of the Chamber of Commerce Brazil–Canada; the Chamber of Conciliation, Mediation and Arbitration CIESP/FIESP; the Market Arbitration Chamber; the Business Arbitration Chamber; the FGV Mediation and Arbitration Chamber; and the Brazilian office of the Secretariat of the Court of Arbitration of the International Chamber of Commerce – Team 10.
4 2019 National Council of Justice report. Available at https://www.cnj.jus.br/images/SCS/justica_em_numeros20190919.pdf.
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. See also a survey by Selma Lemes with statistics concerning arbitration in Brazil (Portuguese only): Lemes, Selma, Arbitragem em Números e Valores. Seis Câmaras. 8 anos. Available at http://selmalemes.adv.br/artigos/An%C3%A1lise-%20Pesquisa-%20Arbitragens%20Ns.%20e%20Valores-%202010%20a%202017%20-
6 Honorários de sucumbência; BCCP Section 85, Paragraph 11.
7 BCCP Section 85, Paragraph 1.
8 BCCP Section 85, Paragraph 3, I, II and III.
9 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 it is effectively verified with supporting documentation that the party is in a situation of irremediable financial impossibility to support procedural fees'.
10 STJ, REsp No. 805919 of October 2015.
11 STJ, REsp No. 1155200 of March 2011.
12 BCCP Section 109, Paragraph 1.
13 Section 14.
14 Section 10.6.
15 Section 13.1.
16 Section 9.1.
17 Section 20.
18 Section 46.
19 Sections 11.2 and 17.1.
20 STJ, Conflito de Competência No. 122439 – RJ (2012/0091919-8).
21 Chapter VII, Article 36, Section No. 1.
22 Article 15.6.
23 Article 10.4.1.
24 Article 10.6.
25 Article 17.5.
26 Article 39, Paragraph 2.
27 BCCP Sections 81 to 96.
28 BCCP Section 87, Paragraph 2.
29 BCCP Section 90, Paragraph 2.
30 Section 85.
31 Given the dispute has connection with acta jure gestionis.
32 Section 1, Paragraph 1.
33 STJ, AgInt no REsp 1664304/SP Agravo Interno No Recurso Especial 20170070698-7.
34 Section 80, I.
35 Section 80, II.
36 See STJ, Resp No. 947.927-AgRg, Rel. Nancy Andrighi, j. 15 April 2008, CJU de 29 April 2008.
37 Baptista, Luiz Olavo. What Compensates Tears? A Case Study in How To Determine Damages In Large Proportion Disasters in Brazil through Class Arbitration. Available at http://arbitrationblog.kluwerarbitration.com/2019/05/13/what-compensates-tears-a-case-study-in-how-to-determine-damages-
in-large-proportion-disasters-in-brazil-through-class-arbitration (last accessed 25 September 2019).