The Third Party Litigation Funding Law Review: France

Market overview

When considering litigation funding in France, a distinction should be made between third party funding in international arbitration, focused on Paris, and the financing of domestic court litigation. The use of third-party funding in international arbitration has grown in recent years and it is now a well-established financing tool enabling companies to file claims without paying all the costs of doing so. Arbitration teams in the French offices of international law firms and boutique firms (which are usually based in Paris) have found their way to litigation finance solutions offered by UK- and US-based litigation funders that are internationally active (e.g., Burford Capital and Vannin Capital) as well as funders based in the EU (Nivalion, Deminor, and Paris-based Ivo Capital and Profile Investment).

Compared to international arbitration, the market for funding French domestic court cases is still fairly small, which is probably due to the limited adverse costs risks (compared to UK courts or arbitral tribunals). However, there is a growing interest in legal finance in certain fields such as the private enforcement of antitrust cases, and certain types of mass consumer claims. Moreover, other areas, such as insolvency and restructuring, or technology and IP, could also be market segments to watch in the near future.

To date and to the best of our knowledge, there are no specific French litigation funding industry associations akin to the Association of Litigation Funders of England and Wales (ALF) or the European Association of Litigation Funders (EALF).

Legal and regulatory framework

France does not have a specific legislative or regulatory framework governing third party funding. The French civil law principles governing commercial contracts will apply, with contractual freedom as an overarching starting principle. It is worth noting that French courts are not bound by the parties' classification of their contracts. The courts have the power to reclassify a contract when the contractual relationship is found to be governed by a specific legal regime, such as those relating to an insurance or partnership contract. Given the implications of this reclassification (from a legal and regulatory perspective), it is of the utmost importance to verify whether the litigation funding agreement at hand includes any provisions that could lead to reclassification as a specific type of contract.

While there is no direct regulation of third-party litigation funding, the regulations governing the legal profession (essentially the Bar rules, see hereunder) may have an impact on the trilateral relationship between funders, lawyers (members of the Bar), and clients.

The professional ethics rules and specific legislation (in particular the Law of 1971 governing the legal profession) apply to lawyers (members of the Bar) advising and assisting clients with third party litigation funding. The most relevant rules concern the duty of professional secrecy and independence, and the prohibition on charging (full) contingency fees.

Professional secrecy applies to all oral and written communications between a lawyer and a client. This is a mandatory rule of public order that cannot be waived. Violation of professional secrecy can give rise to disciplinary or even criminal sanctions. However, the client is free to communicate documents and information received from their lawyer to third parties, including funders.

The duty of independence applies to any strategic decision regarding proceedings, including advice on settlement. This duty implies that a lawyer should receive instructions from the client, not the third-party funder. This was confirmed in a resolution of the French National Bar Council of 20 and 21 November 2015. This resolution makes clear that, although there is no legislative framework regulating the funding practice in France as such, its development does not contravene French law. However, it also calls for the adoption of regulation to uphold the lawyers' ethical obligations and the legal privilege surrounding the client relationship. Therefore, a lawyer (member of the Bar) may not advise the client and the third-party funder simultaneously and should refrain from meeting with the funder in the client's absence.

The Paris Bar Council has explicitly recognised the use of third-party litigation funding in the context of international arbitration, stating that 'it is favourable to the interest of litigants and lawyers (members of the Paris Bar), particularly in international arbitration' (Paris Bar Council Resolution dated 21 February 2017).2 This did not come as a surprise, as international arbitration is a relatively mature market for third party funding. As mentioned above, Paris is a key international arbitration hub, and a significant number of Paris-based law firms are active in the field.

The Resolution insists on the aforementioned ethical principles and obligations towards the clients. It also recommends the disclosure of funding arrangements to arbitral tribunals and suggests managing money flows with the funder via the lawyers' trust account3 that is traditionally used to handle client funds.

French lawyers (members of the Bar) are prohibited from entering into full contingency agreements. However, partial contingency fee arrangements are allowed provided that they are entered into in advance. International arbitration is again a notable exception to the full contingency fee prohibition. In 1992, the Paris Court of Appeal ruled against applying this principle in international arbitration when such agreements are voluntarily entered into and not abusive since they are internationally recognised and accepted in numerous countries, regardless of the legal system.4

Contingency fee arrangements are, therefore, another way for a law firm to fund the case, whether partially (in domestic litigation and arbitration) or entirely (in international arbitration).

Other funding possibilities include legal costs insurance, or a before-the-event insurance policy where parties agree with an insurer to cover the costs of legal proceedings before the need arises. After-the-event insurance, offering protection against a potential adverse costs award if the case is unsuccessful, is mostly used as specialist insurance in international arbitration where adverse costs awards can be much higher than in domestic court litigation.

Legal aid is a mechanism of state-provided financial support to (partially or fully) cover a litigant's court costs and fees. It is only open to physical persons who must evidence insufficient personal resources.

Class actions were introduced by Law 2014-344 dated 17 March 2014, which modified the French Consumption Code in matters of consumer protection. This has been extended to class actions in healthcare, the environment, data protection and discrimination cases (Law No. 2016-1547 of 18 November 2016). Third party funding of such actions is not formally prohibited. However, consumer protection class action provisions provide for certain direct pay-outs that make the possibility of the direct payment of proceeds to a funder doubtful.

Structuring the agreement

Litigation funding agreements as such are not regulated by French law. However, as noted above, the principle of contractual freedom set forth in French civil law (e.g., Articles 1101–1104 Civil code) allows the parties to tailor the funding agreement to their specific needs.

As mentioned above, parties should be aware that if a dispute arises between the funder and the client, the court will not be bound by the parties' classification of their agreement. Rather, the court can decide, depending on the specific elements of the case, that the agreement qualifies as a specifically regulated contract (e.g., insurance or partnership). That said, we are unaware of existing case law on this particular subject.

The litigation funding agreement will often be structured as a financing operation, as selling the claim may give rise to the retrait litigieux litigious withdrawal right. According to Article 1699 of the Civil Code, 'the person against whom a litigious right has been assigned may be held harmless by the assignee, by reimbursing him the actual price of the assignment together with costs and interest from the day on which the assignee has paid the price of the assignment made to him'.5 In other words, the Civil Code allows the debtor to terminate the debt and the lawsuit the debtor may be facing simply by reimbursing the assignee the price paid to the assignor.

This may be interesting for a debtor (a defendant in a lawsuit) where an assignment has taken place at a relatively low price (compared to the value of the litigious right). At the same time, this is potentially harmful for the assignor (who would take the place of the initial creditor) as the lawsuit will end and there is no further possibility of recovery.

In two rulings handed down on 28 February 2018, the French Court of Cassation accepted that the debtor of a claim assigned during arbitration proceedings is entitled to exercise its right to withdrawal in post-award proceedings, at the stage of the dispute over the annulment6 or the exequatur7 of the arbitral award.

French courts have already been asked to rule on a dispute regarding the funder's remuneration and whether they have the power to reduce a contractually agreed funder's fee if it would be considered disproportionate in light of the funder's obligations. On 23 November 2011, the French Court of Cassation ruled that the agreement to pay 30 per cent to a funder (a physical person) of all net amounts recovered in an inheritance dispute could be subject to a reduction by the court if the latter found it disproportionate.8 While the Versailles Court of Appeal had refused to reduce the contractually agreed funder's fee of 30 per cent, the Court of Cassation quashed the decision. The Paris Court of Appeal eventually reduced the remuneration to 15 per cent, taking into account the relatively short duration of the proceedings and the limited services to be provided by the funder.9 Given the specific circumstances of the case, it remains to be seen whether this case law will set a lasting trend.

Clients have the right to retain the counsel of their choice. This does not prevent the funder from proposing counsel, provided that the client is not yet represented. Funders will often request that both they and the client must agree on any new legal team if there is a change of counsel during the litigation. In practice, clients often turn to funders for advice on the best representation if no lawyer has been retained yet, but the final decision will always remain with the client.

The funder's attendance at hearings can also be covered in the litigation funding agreement. However, unlike domestic litigation where court hearings are open to the public (subject to certain exceptions), arbitration hearings will generally remain confidential. There is no possibility of a funder attending unless otherwise agreed between claimant(s) and respondent(s), which is not common in our view.

One of the key provisions parties will address in their litigation funding agreement is the funder's rights regarding settlement. Generally speaking, the funder will not play an active role. However, questions over the initiation of settlement discussions, settlement thresholds and the acceptance of a settlement offer will often find their way into the litigation funding agreement. Provisions concerning settlement, especially in terms of value, are often directly linked to the financing provided by the third-party funder. The latter will seek to protect itself against the client accepting unreasonably low settlement offers. Thus, it will often be a question of finding the right balance between the client's power to enter a settlement and the protection of the funder's investment. This balance could be subject to review by the French courts.

Parties to a litigation funding agreement are free to agree on the circumstances in which the litigation funding agreement can be terminated. Usually, parties agree on a predefined list of circumstances that may adversely impact the funded proceedings. The following examples are frequently cited: full or partial dismissal of the claim, the revelation of previously unknown facts or circumstances, the loss of evidence or the appearance of previously undisclosed evidence and events adversely affecting the enforcement position (e.g., loss of creditworthiness, a composition with creditors, restructuring or bankruptcy). Under these circumstances, the funder may lose the financing provided up to the terminating event and will bear the costs resulting from such termination. A breach of the litigation funding agreement by the funded party may also lead to termination, either with or without notice depending on the importance of the breach, as well as the duty to reimburse costs and expenses to the funder.

There is no equivalent in France of the common law doctrines of champerty and maintenance that still apply in some jurisdictions. Therefore, parties may contractually agree on a more active role for the funder in the proceedings (e.g., offering certain administrative support, or acting as a sounding board for strategy purposes). In any event, however, this will be limited by French professional (ethics) rules applying to members of the Bar. Those rules include the prohibition on taking instructions from the funder rather than the client and/or meeting the funder without the client, legal privilege in the relationship between the lawyer and the client, and more generally, the fact that in case of a conflict of interest between the client and the funder, the lawyer will need to follow the client's instructions.

Given the extensive contractual freedom of the parties, the funder's other rights and obligations in relation to the conduct of the proceedings will need to be agreed upon. This is especially important for information rights, access to documents (which can be complex in arbitration proceedings), confidentiality, and consultation rights on certain strategic decisions.

Disclosure

In French domestic court litigation, French law does not contain a formal obligation to disclose the litigation funding agreement.

In arbitration proceedings, a distinction should be made between the professional (ethics) rules and the arbitration rules parties agree to apply to the arbitration proceedings. The Paris Bar Council Resolution of 21 February 2017 encourages members of the Bar who represent funded parties to advise their clients to disclose the existence of third party funding to the arbitral tribunal to allow arbitrators to identify potential conflicts as a result of certain ties with a funder.

As to the applicable arbitration rules, an illustration can be found in the recently amended ICC Rules, which apply to any ICC arbitration commencing from 1 January 2021(unless otherwise agreed between the parties) (the 2021 ICC Rules). One of the most significant changes in the 2021 ICC Rules is the focus on third party funding. This confirms a trend of acknowledging the existence of third party funding and the need for transparency surrounding its use. With the 2021 ICC Rules, the ICC joins other renowned arbitration institutions such as CIETAC, HKIAC, CAM-CCBC and the Milan Chamber of Arbitration. Provisions on this have also been included in the proposals for the Amendment of the ICSID Rules (see Working paper #4 dated February 2020).

The trend in favour of increased transparency regarding third party funding is expressed in Article 11 (7) of the 2021 ICC Rules that now provides that parties:

must promptly inform the Secretariat, the arbitral tribunal and the other parties, of the existence and identity of any non-party which has entered into an arrangement for the funding of claims or defences and under which it has an economic interest in the outcome of the arbitration'.

This provision aims to prevent a conflict of interest between the arbitral tribunal, the parties to the dispute, and non-parties such as third-party funders. This includes situations where an arbitrator has connections to an entity providing third party funding. If he or she is a member of the funder's investment committee, advises the funder on its investments or owns shares in the funder, this should be identified and disclosed to avoid possible follow-on proceedings (i.e., the setting aside of the arbitral award or proceedings challenging the arbitrator).

This stance in the 2021 ICC Rules also echoes the previous Paris Bar Council recommendation and takes a clear position in the ongoing debate regarding the extent of disclosure (i.e., disclosure of the provisions of the litigation funding agreement, as against disclosure of the existence of the funder and the identity of the funder). It appears that Article 11(7) of the 2021 ICC Rules favours a balanced approach reflecting existing practice.

Finally, client–lawyer communications are privileged and should not be disclosed to third parties (including funders). The communication between funded litigants, their lawyers and third-party litigation funders is not covered by any privilege. Again, the litigation funding agreement offers a way to organise this confidentiality contractually.

Costs

According to Article 696 of the French Code of Civil Procedure: 'the losing party shall be ordered to pay the costs, unless the court, by reasoned decision, orders another party to pay all or part of them'. These legal costs are listed in Article 695 of the Code of Civil Procedure and include court fees, translation fees, expert fees, and lawyers' fees 'to the extent they are regulated'.10

Article 700 of the Code of Civil Procedure allows additional lawyers' fees and other sums not covered by Article 695 to be claimed. Costs under Article 700 are usually not awarded based on actual costs incurred, but rather they are somewhat discretionary. If granted, they are generally only a fraction of the actual costs incurred by the winning party. It remains to be seen whether funding costs could be claimed as part of Article 700.

In both domestic and international arbitration, the arbitral tribunal can award adverse costs (including lawyers' fees) to the prevailing party in the proportion it seems fit.

Unless the litigation funding agreement provides otherwise, the funder has no obligation to cover adverse party costs, and the prevailing adverse party has no enforceable right against the funder to cover such costs. From the factual background of a ruling dated 1 June 2006 rendered by the Versailles Court of Appeal, it appeared that in a matter related to payment of costs in an international arbitration, the successful respondent in that arbitration (Onyx, which later became Veolia Propreté) attempted to obtain payment of the costs of the arbitration from the third-party funder (Foris AG) before the French courts. At first instance, the Nanterre Commercial court decided in favour of Veolia Propreté (the successful respondent in the underlying arbitration) and ordered provisional enforcement against the third-party funder. However, the Court of Appeal remanded the lower court's judgment for lack of jurisdiction

Domestic French court proceedings have no specific rule for imposing a security for costs order on a third party. However, a provision for security for costs can be requested from the opposing party by way of a request for interim measures requiring the requesting party to prove that the substantive obligation that is subject to the dispute is undeniable.

In international arbitration proceedings, parties can request the arbitral tribunal to make security for costs orders as part of a request for provisional measures. This generally requires the requesting party to demonstrate that it is urgently needed given the circumstances of the case and the requesting party's exposure to irreparable harm in the absence of the order.

The year in review

The past 12 to 18 months were defined by the consequences of the covid-19 pandemic. As a result, virtual hearings and reshuffled procedural timetables became (unexpectedly) widespread. While it is still early to draw conclusions, the economic impact of the crisis may lead to a more fundamental questioning of the use of scarce resources for the conduct of litigation. This may foreshadow the growing popularity of more sophisticated forms of third-party litigation, such as funding portfolios of claims, defence-side funding and the monetisation of judicial or arbitral decisions.

The growing interest in third-party litigation funding has also led to a call for regulation. Two types of regulation can be distinguished: self-regulation by the actors in the litigation funding sphere (possibly in combination with industry-standardised documentation, as in structured finance operations in the banking sector) or (partial) government-imposed regulation.

In this respect, it is worth mentioning that a draft report with recommendations to the EU Commission on Responsible private funding of litigation was issued on 17 June 2021.11 While this report recognises the growing importance of third-party litigation funding, it appears to show a certain scepticism towards third-party funders' ethics, calling, for example, for funders' liability for adverse party costs, limits on recovery (minimum 60 per cent of the gross settlement or damages should be paid to the claimants) and enhanced regulatory control. The enclosed proposal for a Directive on the regulation of third-party litigation funding aims at regulation to the fullest extent possible, hereby making some questionable choices (e.g., including the content of the litigation funding agreement), which promises some heated debates ahead.

Conclusions and outlook

The French third-party litigation funding market is characterised by a mature segment for international arbitration with Paris as a hub (not least due to the presence of the ICC) and a developing segment for domestic arbitration and litigation, with class actions and the private enforcement actions of antitrust actions being developments to watch.

France appears to have chosen a professional obligations-driven approach, which does not prevent funders from developing their activities but impacts the relationships and interactions funders necessarily have with litigants and lawyers (members of the Bar). This has caused the Paris Bar (whose lawyers are involved in the bulk of international arbitration cases seated in Paris) to reconcile professional ethics rules with international arbitration practice to maintain Paris' competitive position. Regulation is, therefore, mostly soft law or derived from professional ethics rules, which leaves much room for contractual freedom but may cause some uncertainties.

Footnotes

1 Mehdi Mellah is senior legal counsel at Deminor.

2 Free translation.

3 i.e., the Caisse Autonome des Règlements Pécuniaires des Avocats (CARPA).

4 Paris Court of Appeal (1er Ch. B), 10 July 1992. It appears that this is not the only source of tension between traditional bar rules and international arbitration where French lawyers could be disadvantaged. The same applies to the traditional prohibition on French lawyers preparing witnesses for cross-examinations, leading the Paris Bar Council to conclude unanimously that preparing witnesses fell within a French lawyer's duties as it was a common practice in international arbitration proceedings (Bulletin du Barreau 2008 No. 9, 4 mars 2008, at 45–46).

5 Free translation.

6 Cass. civ. 1, 28 February 2018, No 16-22.112.

7 Cass. civ. 1, 28 February 2018, No16-22.126.

8 Cass. Civ.I, 23 November 2011, No 10-16.770.

9 Paris Court of Appeal, Pole 3, 1st ch. 17 October 2012, N11-22443.

10 Free translation.

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