I MARKET OVERVIEW
The legal services market in Spain is mature, highly competitive and well internationalised. Continental Europe's second-largest law firm is Spanish,2 with two additional Spanish firms within the European top 10.3 Four of the United Kingdom's magic circle firms have a local presence in Spain. Costs for legal services in Spain may generally be described as lower than in other civil and common law jurisdictions.4
According to EU statistics on judicial trends,5 in 2018, Spanish courts registered 2.5 civil or commercial claims per 100 people, as did the French and Italian courts, but this was more than German (1.5), Dutch (0.9) or Luxembourgish courts (0.8). The effectiveness of the Spanish courts is comparable to that of other states in the European Union. On average, Spanish first instance courts took, 329 days to solve a litigious civil or commercial case. They were faster than French or Italian courts but slower than German courts (204 days), Dutch courts (124 days) and Luxembourgish courts (108 days).
Spanish civil and commercial first-instance court judgments are rarely appealed (only 16.6 per cent of cases), are habitually upheld at second instance (60.3 per cent), and are usually upheld at third instance (85.7 per cent).6
Demand for litigation risk management solutions is high. Small and medium-sized law firms still show a significant appetite for taking on litigation risks in major consumer and mis-selling claims, and are usually keen to share their financial burden and profit expectations with funders. Spanish corporates are particularly active in the claims and claim-portfolio monetisation segment, with some large listed companies having recently disclosed notable transactions executed in the past months. The level of awareness of third-party funding solutions has grown rapidly among sophisticated claimants, and SMEs and other market participants are expected to follow.
II LEGAL AND REGULATORY FRAMEWORK
Spanish law establishes no explicit legal prohibition on funding others' claims. There are some barratry-related rules affecting lawyers, but common law doctrines of champerty and maintenance are alien to the Spanish legal system. Further, certain forms of buying into someone else's claim for profit are explicitly permitted by the Civil Code, albeit subject to certain restrictions.
Spanish judges have in the past deliberated on the legality of third-party litigation funding (TPF). As liquidation of bankrupt companies in Spain requires a pre-established court-sanctioned liquidation plan, on 4 November 2014, Commercial Court No. 3 of Madrid approved the liquidation plan of the Spanish companies Petersen Energía Inversora, SAU and Petersen Energía, SAU. The liquidation plan, as approved by the Court, contemplated the Petersen companies entering into litigation funding arrangements to initiate proceedings against the Argentine Republic.7
Sharing litigation risks for profit is common for Spanish lawyers under damages-based agreements. This practice was expressly forbidden until 2008, when the Spanish Supreme Court ruled null and void Article 16 of the Spanish Bar Association Code of Conduct, lifting a centuries-old prohibition on the pactum de quota litis.8
Seeking profit on the buying and selling of claims is also addressed by Article 1534 of the Spanish Civil Code; clearly inspired by the Roman Lex Anastasiana, this Article establishes that in the event of the transfer of a 'litigious' credit, the debtor will be entitled to extinguish this by reimbursing the assignee for the price paid to the assignor (plus interest and costs). Notably, a credit will be considered litigious only if a lawsuit demanding payment has already been answered by the debtor. In other words, Article 1534 applies only to claim transfers made after commencement of proceedings. And within those boundaries the restriction may sound reasonable to the extent that it encourages the parties to settle the claim and to put an end to the litigation rather than to let litigation continue by transferring the claim for an amount at which they might have been willing to settle.
For these and other reasons it seems clear that Spanish legislators were never particularly concerned about claimants seeking the assistance of third parties in alleviating both the financial risk and the inefficient diversion of resources caused by the inevitable emergence of commercial disputes in the course of ordinary business. In a framework such as that of Spanish legislation, the validity of funding others' claims is hardly challengeable.
A meaningful, and certainly more interesting, debate may be held as to the legal nature of a TPF agreement.
Most discussions on this topic start by considering whether TPF may be nothing but a new form of credit or loan operation. Under Spanish law this is also a valid question and its answer could be as crucial here as it is in many other jurisdictions. To name just one practical consequence, Spain has usury statutes protecting borrowers from abusive interest rates. Tax and statutory treatment of TPF in Spain also depend heavily on what the legal nature of TPF is in accordance with the law.
Reasons why TPF should not be legally treated as loans were discussed by Professor Victoria A Shannon in 'Harmonizing Third-Party Litigation Funding Regulation'.9 Professor Shannon also noted the eventual restrictions that usury statutes could impose on TPF and identified substantial differences between loans and TPF on two levels. First, the non-recourse nature of litigation funding10 and the absence of an absolute obligation to reimburse the funds. Second, the asymmetric information and uncertainty regarding the funder's future returns. Some of these are not definitive arguments, at least not if considered individually. For instance, loan contracts with no absolute obligation for reimbursement (such as maritime risk loans) existed and were regulated in Spain until 2014, when Articles 719 to 736 of the Commercial Code were derogated.11 Article 140 of the Law on Mortgages expressly authorises non-recourse mortgage loans, whereby the lender is not entitled to pursue any assets of the borrower other than the mortgaged property. The lender's return over monies lent under a participative loan is uncertain and calculated by reference to 'net profit, revenue, total wealth or any other [criteria] freely agreed by the parties'.12
However, unlike any of the above-mentioned forms of loans similar to TPF (despite being loans), only in TPF are both repayment and the size of the returns uncertain and dependent on the outcome of a future event. In any event, it seems uncontroversial that under Spanish law one cannot categorise as a loan any business in which obligation for repayment is not absolute. That may be the reason why it is now generally accepted among Spanish scholars that maritime risk loans were not really loans but something else, closer in legal nature to a form of insurance contract.13 The limited-recourse mortgage loan, however, may be regarded as an exception to this principle.
An additional difference is to be found in the role that time plays in loans, as opposed to the role it plays in TPF. Term and maturity are usually regarded as essential elements of Spanish loan and credit operations. Time defines repayment obligations, remuneration on the amount lent or both. Although the passage of time is not irrelevant in TPF transactions, it is far from being the essential parameter of the transaction's contractual configuration.
When TPF is considered in relation to legal categories other than loans, it becomes clearer that loans and TPF do not share the same substance. TPF finds a much better fit within the legal frameworks that underpin silent partnerships, particularly those regulated by Articles 239 to 243 of the Commercial Code. In fact, a similar approach to the nature of TPF is apparently taken in the German jurisdiction, whose legal system has traditionally been a benchmark for Spanish legislators.14
Spanish silent partnerships enjoy a simple, flexible and consolidated legal regime and have traditionally been used as a hybrid, allowing new forms of financial investments to be accommodated, particularly in the private equity sector. The essence of Spanish silent partnerships is set out in Article 239 of the Commercial Code:
Businesspersons may participate in operations by other businesspersons, contributing to them with a part of the capital they may agree, thus becoming partners in the profits or losses according to the proportion determined.
The party that contributes capital will remain a silent partner throughout the life of the funded operations. Relationships with third parties shall only be entered into by the non-silent partner, who in turn is the only one entitled to take action against those third parties ('unless he formally assigns his rights' to the silent partner, as established in Article 242 of the Commercial Code). In turn, third parties cannot take any action against the silent partner. This latter provision has an obvious impact regarding funders' potential liability for adverse costs.
Although the character of the silent partnership would appear to provide a fitting answer to the question as to the legal nature of TPF and would also clarify any questions about the tax treatment of TPF, the definitive solution will only come with formal regulation of the industry. The currently limited public impact of TPF in Spain suggests that neither legislators nor the various agents involved in the administration of justice have detected a need for regulation, or at least do not see it as a priority.
iii STRUCTURING THE AGREEMENT
With the notable restriction of Article 1534 of the Civil Code, Spanish law permits the buying and selling of claims, entitling the debtor to extinguish the transferred claim by reimbursing the assignee for the price paid (but only if the transfer was made after a lawsuit was answered by the defendant).
Monetisation of awards and judgments through full transfer also fits well with Spanish judicial enforcement procedures. Article 540 of the Law on Civil Procedure expressly regulates situations in which the award or judgment may have been transferred to a third party, who will be entitled to enforce it against the defendant. Enforcement procedures are summary, generally quick and effective, and allow very few defences.
Funding or monetising claims through their purchase simplifies the contractual structure, as the funder becomes the owner of the claim and most of the usual provisions on confidentiality, termination, settlement or liability for costs become rather irrelevant. Yet, for many reasons, a claims purchase agreement may not fit the interests of a funder or a claimant in a particular transaction, even in monetisation deals. Recent monetisation transactions have reportedly been implemented through an assignment of future payment rights rather than as a claim assignment.
If the transaction is not a plain claim purchase but a pure legal costs funding agreement, it will usually include all the contractual provisions that are common in international TPF practice. The essence of the agreement will be the undertaking by the funder to pay all costs arising from the pursuance of the claim, in exchange for a fee that is contingent on the claim being successful.
Beyond the essential elements of a TPF transaction (undertaking to pay legal costs in exchange for a future and contingent fee) the remaining contractual issues are those typically addressed by international standards. TPF agreements entered into with Spanish counterparties will usually include a due diligence and exclusivity period, unless the claimant is in formal liquidation or under receivership, where exclusivity is usually avoided to allow formal tender processes. Putting various funders in competition tends to maximise returns for the insolvent estate and increases transparency throughout the contracting process.
The issue of the funder's control over how the claim is conducted is one of the key contractual discussions. In England and Wales, the Code of Conduct of the Association of Litigation Funders (ALF) addresses this matter clearly and directly by prohibiting funders who have accepted the Code from taking material control of the dispute. This prohibition in the ALF Code of Conduct is probably designed to mark the dividing line between TPF and the practices of champerty and maintenance. However, the need to mark that line vanishes in a jurisdiction such as Spain, where prohibitions on funding someone else's claims have never existed. Consequently, Spanish TPF agreements are certainly more flexible when it comes to distributing control rights between the claimant and the funder.
Linked to the question of control over the dispute is the termination of the agreement at the funder's request. Funders understandably seek to preserve an option to discontinue funding when success expectations are materially and adversely affected. The contractual construction of this right has to respect the prohibition on leaving the performance of the contract 'to the discretion of one of the contracting parties'.15 Hence, it is advisable to include contractual mechanisms to ensure that the funder acts reasonably when it chooses to stop funding the claim. The most common of these mechanisms is the submission of the matter to an independent third party, who will evaluate the reasonableness of the funder's behaviour if the funded party so requests.
Recourse to an independent third party is also a valid solution to disagreements over settlement offers, which is another common issue dealt with by Spanish funding agreements.
Upon success of the claim, distribution of the proceeds will be made in accordance with a priorities agreement, which may be put in place as a separate document or embedded in the funding agreement. Lawyers and court agents may also become a party to this agreement, as litigation proceeds are usually paid by the losing party into the court bank account. The court will forward the funds to the successful party following the court agent's request and instructions. Although trust schemes are not common in Spain (and unlikely to be enforceable if purported to be governed by Spanish law), escrow accounts can also be put in place, either through domestic entities or abroad.
Lastly, security documents would also be executed by the parties, particularly when the funded party is under insolvency proceedings. In the insolvency context, courts and court-appointed insolvency practitioners will be able to provide the funder with much of the comfort it seeks, especially in ensuring that the litigation proceeds will be available for the funder to collect its fee. In the absence of any insolvency proceedings (or even within them), funders will tend to obtain security over the claim or over the proceeds arising therefrom. Taking security over any forms of credit rights is valid and relatively simple under Spanish law (notice to the debtor-defendant is not required for perfection). Funders, however, must act carefully when taking security over international claims or over proceeds to be paid by non-Spanish residents, as the question of the law applicable to this type of security remains unresolved.
Preservation of confidentiality or privilege is rarely affected by the fact that a claim has been funded. Litigant parties in Spain have a general duty to disclose all documents requested by the other party, but only if the court recognises they are directly relevant and useful to clarify the facts that gave rise to the dispute. Disclosure orders to third parties, such as a funder, will be made by a court following the petition of a litigant party, but only if the document is 'transcendent' for the outcome of the proceedings and, again, if it refers to the facts giving rise to the dispute.
In Spain, procedures for obtaining evidence from the opponent party are not comparable to the Anglo-Saxon standards of discovery or disclosure. Mechanisms for obtaining evidence prior to commencement of civil proceedings exist in Spain, but they are of limited efficacy and thus not very commonly used. Besides, the general rule is that documents or information requests shall refer only to facts that constitute the object of the proceedings but not to satellite circumstances, such as whether the claim is being funded. There are no public precedents regarding requests for disclosure relating to TPF transactions, but under the current civil procedural rules it seems unlikely that a defendant could successfully force disclosure of the fact that a claim is being funded.
According to the above, it seems that disclosure of the fact that a claim has been funded will rarely be the consequence of the defendant's or the court's actions. However, disclosure of this circumstance may be advisable when certain forms of security are taken. As noted previously, perfection of security over credit rights does not require the serving of notice to the debtor-defendant. Yet, such notice may be of practical use, as it would eventually permit the funder to force the debtor-defendant to satisfy the credit by paying its amount not to the claimant but to the security's beneficiary (the funder).
Legal professional privilege in Spain is both an obligation and right of the lawyer (who cannot be forced to disclose any privileged information) established under the Spanish Constitution (in respect of criminal proceedings) and under Article 542 of the Law on the Judiciary (in respect of all kinds of proceedings). Privilege thus protects all communication from being disclosed. Although there is a general consensus regarding the client's right to waive privilege (general, but not unanimous), a valid discussion would concern the question of whether disclosing privileged documents to third parties (such as a funder) also entails an implicit waiver of privilege in relation to the opposing party. As stated, no relevant judicial precedents exist on the issue, but in light of the constitutional relevance of the right to privilege and the very limited scope of disclosure and discovery procedures, it appears very unlikely that a court could find there to be a waiver of privilege in the disclosure of information to a potential funder, especially if the disclosure is also made under a confidentiality agreement.
Awards for costs in Spain are driven by the loser-pays rule.16 Exceptions may apply if the court finds that the facts or the law applicable to the case were seriously doubtful.
The Spanish costs rule is not effectively based on an indemnity principle, so litigants are not truly entitled to recover costs they have incurred but to obtain a generic compensation fixed by the provincial bar associations. Most of the bar and professional associations have published guidelines for calculation of costs. In the absence of an agreement between the litigants as to the amount of costs, the court will order the corresponding bar or professional association to study the case and issue an opinion. The opinion, although not legally binding, tends to be followed by the court.
Recoverable costs are only those listed in Article 241 of the Law on Civil Procedure, including judicial taxes, lawyer's and expert's fees or court agent's fees. The current drafting of Article 241 of the Law on Civil Procedure, together with the lack of an effective ruling on the indemnity principle, leaves little or no room to request the reimbursement of the costs of securing funding for bringing a claim.
Security for costs is a virtually non-existent phenomenon in Spanish litigation. There is no procedure for requesting or ordering this specific type of security. Hence, it would be beyond the courts' authority to order the provision of security for costs.
In a typical funding transaction, correctly structured as a silent partnership, the funder would never be found liable for adverse costs. Article 242 of the Commercial Code expressly protects the silent partner from claims by third parties. Forms of partnership other than the silent partnership established under the Commercial Code may not offer the same degree of protection for the funder, as some of them do not limit the liability of the partners in relation to third parties. Be that as it may, the issue has never reached the courts and, even if it does, the rather inflexible current costs rule makes it very unlikely that a non-litigant party could ever be found liable for costs.
VI THE YEAR IN REVIEW
Notable claims monetisation transactions were executed during 2019, with several taking top positions in terms of capital deployment. In its Q1 quarterly results, Spain's major telecom operator, Telefonica, announced that it had sold a claim portfolio for approximately €103 million,17 with Fortress being the alleged purchaser.18
In June 2019, Acciona notified the Spanish financial markets authority (CNMV) that its subsidiary ATLL Concesionaria de la Generalitat de Catalunya (in bankruptcy liquidation) had sold a claim of approximately €1 billion against the regional government of Catalonia for €170 million (plus a contingent additional amount).19 Later, in September, the media reported that Acciona had also monetised a 70-claim portfolio valued at €300 million.20 According to media sources, Fortress was again the capital provider in both transactions.
In July 2019, the press confirmed that the listed Spanish infrastructure company OHL was reportedly in talks with Davidson Kempner to transfer certain credit rights related to multimillion-euro litigation over a failed project.21 In September, the media also reported that Fortress was allegedly finalising a claim-portfolio monetisation with Iberdrola.22
Lastly, Abengoa notified the CNMV that it had sought approval to partially monetise its arbitration claims against the Kingdom of Spain under the Energy Charter Treaty for a price of €75 million (plus an additional amount contingent on the outcome of the arbitration). The identity of the purchasers was not disclosed, but they were said to be 'of recognised prestige'.23
In the classic funding-model segment, Vannin Capital recently announced that it is funding Trucks Cartel-related claims in Spain, by co-investing with a local family office.24
VII CONCLUSIONS AND OUTLOOK
It may come as a surprise to some international TPF practitioners, but the Spanish market has evolved rapidly from having only a very limited awareness of the existence of TPF in 2017 to being a vibrant multibillion-euro claims monetisation market in 2019.
Market activity is now primarily focused on monetisation of large claim portfolios held by premium listed corporations. These transactions have attracted significant media attention and will decisively spread the word on claims monetisation and litigation finance as valid and powerful tools for enhancing all kinds of businesses. There is little doubt that Spain will continue to embrace litigation finance and that the Spanish market will continue to grow exponentially in the coming years.
1 Antonio Wesolowski is general counsel for Spain and Latin America at Calunius Capital LLP. He is also a partner and co-founder at Wesolowski Abogados SLP.
3 The Lawyer European 100 at https://www.thelawyer.com/cuatrecasas-goncalves-pereira; https://www.thelawyer.com/uria-menendez.
4 See Study on the Transparency of Costs of Civil Judicial Proceedings in the European Union, implemented by Hoche (Demolin, Brulard, Bathelemy) for the European Commission – DG for Justice, Freedom and Security.
5 The 2019 EU Justice Scoreboard. Publications Office of the European Union.
6 La Justicia Dato a Dato Año 2018. Consejo General del Poder Judicial.
7 Details of the Petersen v. Argentina case are publicly available at https://law.justia.com/cases/federal/district-courts/new-york/nysdce/1:2015cv02739/440752/63/ (Opinion and Order of Judge Loretta A Preska in the New York Southern District Court (9 September 2016), Court File No. 15-CV-2739 (LAP)).
8 Supreme Court Sentence dated 4 November 2008.
9 36 Cardozo Law Review 861, 2015.
10 Under Spanish standards, TPF can hardly be regarded as non-recourse financing from a strictly technical perspective. The funder's right to receive its fee or return is certainly conditional upon payment of the litigation proceeds by the defendant, but once the right becomes effective the funder would be entitled to collect its fee from any of the claimant's assets. If, for instance, another creditor of the claimant successfully forecloses on the litigation proceeds before the funder collects its fee, the funder would probably still be entitled to collect from other assets of the funded party, unless agreed to the contrary.
11 These maritime risk loans were a form of bottomry whereby repayment was contingent on the ship successfully completing the voyage. They were common in ancient Greece and described by Plutarch in his Life of Cato the Elder as 'the most disreputable of all ways' of lending money (The Parallel Lives by Plutarch, p. 325, published in Vol. II of the Loeb Classical Library edition, 1914). In the thirteenth century, Pope Gregory IX criticised this practice for being usurious in his Decretal Naviganti.
12 Article 20 of Royal Decree-Law 7/1996.
13 Formación del contrato de Seguro y cobertura del riesgo, Miguel L Lacruz Mantecón, Editorial Reus, Madrid, 2013.
14 Chapter by Burkhard Schneider and Heiko Heppner in International and Comparative Legal Guides. Class and Group Actions 2017. 9th edition published by Global Legal Group, in association with CDR.
15 Article 1256 of the Civil Code.
16 Article 394 of the Law on Civil Procedure.
17 Telefonica, SA January–March 2019 interim management report.
19 Relevant fact No. 279374 notified by Acciona, SA to CNMV on 21 June 2019.
23 Relevant fact No. 281788 notified by Abengoa, SA to CNMV on 17 September 2019.