i MARKET OVERVIEW
Although third party litigation funding2 is still an uncommon concept in Norway, recent years have seen increased momentum in the market. Several pending claims are publicly known to be backed by third parties and, in June 2018, a Norwegian court of first instance handed down Norway's first-ever court judgment in a funded matter.
As at September 2019, there is only one professional provider of third party funding services based in Norway: Therium Nordic. The company, which is partly owned and funded by UK-based Therium Capital Management, was established in 2016. Since the Norwegian third party funding market is largely unregulated, Therium Nordic instead proclaims its commitment to the Code of Conduct developed by the Association of Litigation Funders of England and Wales. In addition to Therium Nordic, a number of foreign-based funders are said to be assessing Norwegian cases.
While an increasing number of Norwegian legal practitioners are advertising the benefits of third party funding to their clients, many still appear sceptical to the concept. Moreover, a study published in 2018 reported that Norwegian buyers of legal services are less likely to resort to third party litigation funding in the near future than their Danish, Finnish and Swedish colleagues.3 These perceptions may change as third party funding arrangements become more common in Norway and elsewhere in the Nordic countries.
Claims purchase arrangements are less rare than third party financing arrangements and are widely accepted throughout the Norwegian legal industry.
ii LEGAL AND REGULATORY FRAMEWORK
There is no legislation or other mandatory rules in Norway explicitly regulating third party funding. The issue of third party funding is neither addressed in the procedural law governing civil litigation, nor in the most common procedural rules of arbitration. In addition, there is no case law discussing regulatory issues or the legality of third party funding arrangements.
Because of the lack of regulation, claim owners and funders are generally free to negotiate the particulars of their contractual relationship. The same applies for transfer agreements between claim owners and claims purchasers. Parties need to be mindful, however, of general principles set out in statutory law and case law that would apply to all types of commercial agreements governed by Norwegian law. For instance, as further explained in Section III, courts and tribunals may revise or even set aside unreasonable terms of an agreement.
Regulators have not yet subjected professional third party funders to licensing or other types of scrutiny, but that may change as the market for third party funding increases in size.
Lawyers acting in funded matters, however, have to take extra care to comply with the Norwegian Bar Association's Code of Conduct for Lawyers (the Code of Conduct). In the following – as all the legal and ethical dilemmas that may arise in relation to third party funding cannot be addressed within the scope of this chapter – we will discuss the most practical issues.
First, one of the main principles of the Code of Conduct is that a lawyer cannot undertake assignments in which he or she would risk breaching the duties of loyalty, confidentiality and independence towards his or her client.4 Consequently, a lawyer cannot act on behalf of both the funded party and the funder as there is a clear risk of these clients having conflicting interests in certain aspects of the case. Similarly, a lawyer representing a funded party must never allow the interests and influence of the third party funder to affect his or her advice to the client. As explained in Section III, the litigation funding agreement should be drafted with these principles in mind.
Second, the Code of Conduct prohibits lawyers from entering into contingency fee arrangements and, to a certain extent, conditional fee arrangements.5 Agreements where lawyers receive a percentage of the recovered amount are prohibited, as are any agreements where the lawyer's personal economic interest in the outcome might conflict with his or her independence or the client's best interests, or both. 'No cure no pay', 'good cure good pay' and similar arrangements are permitted as long as the fee structure is reasonable and does not render the lawyer conflicted or financially dependent on the outcome.
In summary, third party funding is a largely unregulated practice but requires extra prudence on the part of the lawyers involved. We believe that if the third party funding market sees increased activity, the likelihood of regulatory developments is high.
iii STRUCTURING THE AGREEMENT
There is currently no standard market practice for how to structure a litigation funding agreement. As a starting point, claimants and funders are free to tailor the structure and the terms of their litigation funding agreement as they prefer. Still, parties need to observe several principles of Norwegian contract law when drafting their funding or transfer agreement. For instance, Section 36 of the Norwegian Contracts Act grants courts and tribunals the power to set aside or revise unreasonable contractual terms upon the motion of a party. The threshold for revising or setting aside an agreement is high, in particular between professional parties, and courts and tribunals require evidence of considerable contractual imbalance before doing so.
Moreover, there exist no standard fee or fee uplift ranges in third party financing agreements governed by Norwegian law. We have seen fee structures ranging from multiples of three times the funder's commitment, to percentages at around one-third of the recovered amount.
Owing to the legal ethics challenges outlined in Section II, parties involved in third party funding arrangements should be mindful of how the counsels' role is set out in the agreement between the funded party and the funder. Drafters should place great emphasis on explaining and defining the lawyers' involvement and obligations so that they do not interfere with the lawyers' duties as set out in the Code of Conduct. To mitigate the risk of facing ethical dilemmas, lawyers should not be party to a litigation funding agreement and parties should place contractual responsibilities such as reporting on the funded party rather than on the funded party's counsel.
Norwegian law imposes no explicit obligation on a funded party to disclose the involvement or identity of a third party funder in a dispute – neither in arbitration proceedings nor in civil litigation proceedings.
Although there are no such explicit obligations, failing to disclose the existence and identify of a third party funder could pose serious legal and ethical challenges for the parties and lawyers involved. Failing to disclose can, among other things, lead to delays or to the judgment or award becoming void or unenforceable. Parties should therefore consider carefully whether choosing not to disclose the existence of a third party funder is worth the risk. The main argument in favour of disclosure is that it ensures that the identity of the funder poses no challenge to the independence and impartiality of the arbitral tribunal or ordinary court.
When acting in arbitration and litigation proceedings, judges and arbitrators have a duty to inform the parties or to recuse themselves when there are circumstances that might raise doubts as to their impartiality or independence.
In most arbitration proceedings, issues concerning impartiality and independence are governed by the Norwegian Arbitration Act.6 This is because the bulk of arbitration proceedings seated in Norway are ad hoc proceedings, meaning that they are not administered by an arbitral institution. Parties rarely adopt procedural rules that derogate from the Arbitration Act's rules on impartiality and independence. Section 14 of the Arbitration Act7 provides that arbitrators have a duty to disclose 'any circumstances likely to give rise to justifiable doubts about his [or her] impartiality or independence'. Thus, arbitrators should not assess whether they are in fact conflicted, but whether it might appear as if they are.
When assessing their impartiality and independence, Norwegian arbitrators frequently refer to the International Bar Association's Guidelines on Conflicts of Interest in International Arbitration (the IBA Guidelines).8 Since 2014, the IBA Guidelines has contained the following provision:
If one of the parties is a legal entity, any legal or physical person having . . . a direct economic interest in, or a duty to indemnify the party for, the award to be rendered in arbitration, may be considered to bear the identity of such a party.9
Therefore, when assessing their impartiality, arbitrators can deem third party funders to be comparable to the funded party to the arbitration proceedings. Arbitrators could very well consider themselves conflicted and thus incapable of acting if they have a relationship with the third party funder that could undermine the parties' and others' confidence in their impartiality.
The same general rule applies in civil litigation. Pursuant to Section 108 of the Courts of Justice Act, a person may not serve as a judge when circumstances exist that 'are capable of undermining confidence' in the judge's impartiality. This assessment should not only take into account the judges' relationships with the parties, but their relationships with anyone who would have an economic interest in the outcome of the particular dispute. While we have not seen Norwegian courts referencing the IBA Guidelines, the same general principles are relevant in the assessment of a judge's impartiality under the Courts of Justice Act. On this background, if a judge has a relationship with the third party funder that could undermine one's confidence in his or her impartiality, the judge should be disqualified.
Given the above-mentioned principles, judges and arbitrators would expect parties and counsels to let them know if any 'unknown' third parties have a direct economic interest in the outcome of the dispute that they preside over.10 If, for instance, an arbitrator is a partner at the law firm that advises the third party funder, or the presiding judge is a close relative of one of the funder's key employees, they would likely recuse themselves.
Failing to disclose the existence and identity of a third party funder does not just entails the risk of delays owing to untimely recusals and reputational damage. In arbitration, if an award has been handed down and it is later discovered that an arbitrator was conflicted owing to the third party funder's involvement, the award may be nullified by the ordinary courts11 or enforcement of the award may be refused.12 Similar rules apply in civil litigation proceedings, where decisions may be appealed or reopened on the basis that they were rendered by a legally incompetent judge. When a judgment rendered by a judge that should have been disqualified is appealed in good time, the appeals court shall annul the judgment and the case must be retried.13 If the deadline for appeal has passed, the judgment may still be re-opened and subsequently retried.14
In summary, parties are under no explicit obligation to disclose the existence of funding and the identity of the funder, but parties that do not disclose this information risk being faced with several types of delays and objections, such as the removal of arbitrators or judges, the challenge or annulment of the judgment or award and the impossibility of enforcement.
On this basis, we believe that funded parties are best off disclosing the existence of their funding arrangement and the identity of the funder. In addition to mitigating the risk of facing obstacles during and after the proceedings, disclosing the fact of funding might also benefit the funded party's claim directly, as it would demonstrate for the opposite party that an independent third party has faith in the merits of the claim. Furthermore, we believe that if even more funded parties disclosed the existence of their financial backing, it would serve the integrity of the market for third party funding.
Parties to Norwegian litigation and arbitration proceedings are obliged to share relevant documents, including those unhelpful to their case. The ordinary courts can compel anyone to make available evidence containing information that may be relevant to the factual basis for the ruling. An arbitral tribunal can only recommend that parties or third parties disclose such evidence, but does not have the power to enforce disclosure. However, if a party or third party fails to comply with a recommendation made by an arbitral tribunal, the requesting party might instead petition the ordinary courts to order disclosure.
Therefore, anyone – including funded parties and third party funders – can be compelled to disclose a litigation funding agreement provided that it contains information that may shed light on disputed matters.
However, the general duty to disclose evidence only comprises the parts of the evidence (such as sections of an agreement) that are relevant for the dispute in question.15 If, for instance, a funded party claims compensation for its funding costs, the fee provisions of the funding agreement would be relevant while other provisions might not be. Similarly, if a claim purchaser needs to prove ownership of the claim that it pursues, the requested party would only need to disclose the parts of the requested documents that are sufficient to prove that the claims transfer was valid and binding. In other situations, where the funding agreement has no relevance for the disputed matters, requested parties may refuse to disclose it. It is important to note, however, that relevance assessments shall be based on the parties' assertions without regard to their merits – meaning that a requesting party may 'tailor' its assertions in a manner that would be more likely to result in a duty to disclose.
There are several exemptions to the duty to disclose evidence. For instance, parties cannot be compelled to submit evidence protected by legal privilege, that is, confidential communications between lawyers and their clients made for the purpose of seeking or giving legal advice. Courts and tribunals may also exempt a party from its duty to disclose if the evidence cannot be made available without revealing trade or business secrets.
In civil litigation, a party that is successful in an action is entitled to full compensation for its 'legal costs' from the opposing party.16 Full compensation for these costs shall cover 'all necessary costs incurred by the party in relation to the action'.17 Arbitrators generally apply the same principles in arbitration proceedings, although the Arbitration Act merely provides the arbitrators' with the power to order the losing party to pay all or part of the legal costs of the prevailing party 'as it sees fit'.18
Under the main rules outlined above, courts and tribunals classify lawyers' fees, arbitrators' and experts' fees, and administrative fees and costs, as recoverable legal costs. In addition, a prevailing party can claim compensation for 'its own work on the case if the work has been particularly extensive or would otherwise have had to be undertaken by counsel or other qualified assistant'.19 Any other type of losses and expenses, such as loss of revenue, lost goodwill, or increased interest expenses are, as a main rule, not recoverable.20
As of September 2018, the only Norwegian case law discussing whether funding costs qualify as recoverable legal costs is a first-instance court judgment, Atlant v. Oslo municipality.21 The claimant, Atlant, which had its case funded by Therium Nordic, claimed compensation for its funding costs. Atlant's funding costs constituted approximately 50 per cent of the damages it was awarded in the main claim. The district court concluded, summarily, that funding costs did not constitute legal costs pursuant to the Dispute Act and rejected Atlant's claim for compensation.
To our knowledge, no cost items similar to third party funding (for instance, claims for compensation of the added costs of borrowing money to cover legal fees) have been successfully recovered as legal costs under the Dispute Act or the Arbitration Act. This serves to support the district court's conclusion in Atlant v. Oslo municipality.
In addition, classifying funding costs as recoverable legal costs might conflict with the universal right of access to justice, as set out the Norwegian Constitution and the European Human Rights Convention. This is especially the case since holding a party responsible for the other party's funding costs could multiply its costs exposure manifold.
Therefore, as things stand, we believe that Norwegian courts and tribunals are highly unlikely to award a funded party compensation for its funding costs under the main rules that we have described above.
In certain exceptional circumstances, however, arbitrators and courts could award compensation for funding costs as damages. Pursuant to case law from the Norwegian Supreme Court, a party can be held liable for other costs than legal costs in 'abuse situations'.22 A typical abuse situation would exist if a party sets out or rejects claims despite knowing that its position has no merits. As an example, if a party is found to have rejected a claim that it knew was merited and that the rejection left the claimant with few other options but to seek funding to enforce its claim legally, a Norwegian court or tribunal court could award the funded party compensation for its funding costs. The threshold for proving the grounds for such a claim would be high, however, and there are few examples of claims that have prevailed on these bases.
In summary, applying existing statutory and case law, claimants seeking to recover their funding costs from the other party would face an uphill battle. To be awarded compensation for such costs, a funded party would probably have to prove that its counterparty had abused the legal system by knowingly maintaining an untenable position, and that the added costs were incurred as a consequence of the 'abusive' party's behaviour.
The loser-pays principle applies in most Norwegian litigation and arbitration proceedings.
As a main rule, only direct parties to litigation or arbitration proceedings may be held liable for adverse costs. In most third party funding arrangements, the funder will not be a party to the arbitration or litigation proceedings. Hence, as a starting point, there are no legal grounds to hold a third party funder liable for adverse costs. When it comes to claims purchase arrangements, the company that owns the claim will be party to the proceedings. Thus, the claim purchaser would risk becoming liable for costs.
In terms of security for adverse costs, the rules differ between arbitration and litigation proceedings. In arbitration proceedings governed by the Arbitration Act, parties can only be requested to put up security for the arbitrators' fees and not for adverse costs. In litigation proceedings, however, courts may order claimants to put up security for adverse costs if the claimant is registered in a country outside the European Economic Area.23
None of the above-mentioned main rules apply to third parties, even in cases where the claimant is in such a poor financial condition that it will be unable to pay the respondent's legal fees and costs. As explained below, however, certain narrow exceptions exist and there are circumstances in which third parties risk becoming liable for adverse costs.
First, under non-statutory law, company representatives (such as board members) can be held personally liable for adverse costs provided that they instituted or continued the legal proceedings on behalf of an insolvent entity, while at the same time knowing that the chances for the claim to be successful were low.24 In civil litigation proceedings, parties may request the court to include the representatives to the proceedings by way of joinder.25
Second, while there is no statutory or case law on the issue, it is possible that courts and tribunals could award compensation for adverse costs from third parties in abuse situations similar to the one exemplified above. The same applies for claims against shareholders or effective beneficiaries of 'claims vehicles' that are unable to settle an award for adverse costs. Here, non-statutory rules could evolve with inspiration from recent case law from Sweden26 and Denmark.27
vi THE YEAR IN REVIEW
The past 18 months saw some interesting developments in the Norwegian market for third party funding.
In June 2018, in its first-ever case known to be funded by a third party, Oslo City Court found for a claimant backed by Therium Nordic.28 The claimant, the construction company Atlant, was awarded damages from a Norwegian municipality after being thrown out of a major construction project.
Atlant was always open about the fact that it had received funding to pursue its damages claim and it even tried to recover its funding costs from the respondent.29 Although the claim for compensation for funding costs was unsuccessful, the court did not appear to have any other issues with the concept of third party funding.
Several other Norwegian companies are also using third party funding to finance their claims. By way of example, Norwegian Energy Company ASA (Noreco), an oil and gas company listed on the Oslo Stock Exchange, received funding to pursue major claims against a group of insurers in Denmark. The Danish first-instance court awarded Noreco compensation of US$470 million including interest (of which, reportedly, US$200 million was payable to the funders).30 However, in May 2018, an appeals court overturned the decision and only awarded Noreco US$12.5 million plus interest.31 The Danish Appeals Permission Board declined to submit Noreco's appeal to the Supreme Court in October 2018.
There are signs that these matters have contributed towards demystifying the concept of litigation funding in Norway. In May 2019, Therium Nordic reported that it receives between five and 10 requests for funding each month, which is a substantial increase from previous years.32
vii CONCLUSIONS AND OUTLOOK
The Norwegian market for third party funding is still in its infancy. In recent years, however, the concept of litigation funding has slowly started moving towards becoming an established dispute resolution tool. Although the Norwegian market for third party funding is largely unregulated, parties involved in funded matters need to carefully observe applicable laws and be mindful of the risks they face.
In the coming years, as the global litigation funding industry is predicted to expand, it is likely that the Norwegian market for third party funding will grow too. The Norwegian litigation and arbitration climate appears ripe for more funders to enter. Further to the high-value oil and energy-related disputes that continue to dominate the market, 'funding-friendly' claims such as cartel damages claims, patent infringement claims and class action lawsuits are becoming increasingly common. On this basis, there is definitely potential for the continued development of third party funding in Norway.
1 Andreas Nordby is a partner and Eivind Tandrevold and Jan Olav Aabø are senior lawyers at Arntzen de Besche Advokatfirma AS.
2 'Third party funding' will be used as an umbrella term for any arrangements where a party to a dispute seeks financing by non-parties to the dispute.
4 Sections 2.1, 2.2, 2.3 and 3.2.1 of the Code of Conduct.
5 Sections 2.1.2, 3.3.2, 3.3.2 of the Code of Conduct.
6 The Norwegian Arbitration Act is based on the UNCITRAL Model Law on International Commercial Arbitration.
7 Section 14 of the Norwegian Arbitration Act is based on Article 12 of the UNCITRAL Model Law.
8 As supported by leading authorities, see for instance G Woxholth, Voldgift ['Arbitration'] (1st edn Gyldendal Norsk Forlag, Oslo 2013), p. 407.
9 General Standard 6(b) of the IBA Guidelines.
10 Pursuant to General Standard 7 of the IBA Guidelines, parties have a duty to inform the arbitrators of circumstances such as these.
11 Section 43 of the Arbitration Act.
12 Section 46 of the Arbitration Act, which corresponds with Article V of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) (the New York Convention).
13 Sections 29-21 and 29-12 of the Dispute Act.
14 Section 31-3 of the Dispute Act. A judgment shall not be reopened, however, if there is a reasonable probability that a new hearing of the case would not lead to an amendment of significance to the party; cf. Section 31-5 of the Dispute Act.
15 T Schei et al., Tvisteloven: Kommentarutgave ['The Dispute Act: Commentary'] (2nd edn, Oslo 2013), p. 961.
16 Section 20-2 subsection 1 of the Dispute Act.
17 Section 20-5 subsection 2 of the Dispute Act.
18 Section 40 subsection 2 of the Arbitration Act.
19 Section 20-2 subsection 1 of the Dispute Act.
20 JE Skoghøy, Tvisteløsning ['Dispute resolution'] (3rd edn, Oslo 2018), p. 1327.
21 Atlant Entreprenør Svs v. Oslo kommune (Oslo District Court, 5 June 2018, case No. 16-094601TVI-OTIR/08).
22 Judgment reported in Supreme Court Reports (Rt.) 2015 on p. 385.
23 Section 20-11 subsection 1 of the Dispute Act.
24 JE Skoghøy, Tvisteløsning ['Dispute resolution'] (3rd edn, Universitetsforlaget, Oslo 2018), p. 1318, referencing, inter alia, judgments reported in Supreme Court Reports (Rt.) 2014 on p. 706 and p. 817.
25 Section 20-7 of the Dispute Act.
26 Deloitte AB v. MH and JL (Supreme Court of Sweden, 11 December 2014, reported in NJA 2014 p. 877).
27 Van der Boom Holding B.V. v. Danish Business Authority et al. (Supreme Court of Denmark, 19 January 2018, reported in UfR 2018 p. 1487).
28 See footnote 20.
29 As explained in Section V.
30 Noreco Oil Denmark A/S et al. v. Zurich Insurance Public Limited Company et al. (Maritime and Commercial High Court, 15 December 2016, case No. S-2-14). See also Noreco's Annual Report for 2017 on p. 5, available at www.noreco.com.
31 Noreco Oil Denmark A/S et al. v. Zurich Insurance Public Limited Company et al. (Eastern High Court, 4 May 2018, reported in FED2018.04). See also Noreco's Annual Report for 2018 on p. 4, available at www.noreco.com.
32 Newsletter issued by Therium Nordic AS on 10 May 2019.