The Third Party Litigation Funding Law Review: Norway
Although third party litigation funding 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 2020, there is only one professional provider of third party funding services based in Norway: Therium Capital Management Nordic AS (Therium Nordic). The company, which is partly owned and funded by UK-based Therium Group Holdings Limited, was established in 2016. There are other providers of third party funding in Norway, although they are not actively promoting their services in the market at the time of writing.
Further, a number of foreign-based funders are said to be assessing Norwegian cases. By way of example, in 2020 the Swiss funding company Nivalion AG is funding private investors in a liability claim of 150 million Norwegian kroner in an action against the state of Norway. The claim is based on the state's interpretation of European Economic Area (EEA) regulations on the export of certain seafood products.
While an increasing number of Norwegian legal practitioners are advertising the benefits of third party funding to their clients, many still appear sceptical about 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. 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.
Legal and regulatory framework
i Absence of legislation explicitly regulating third party funding
As at September 2020, there is no legislation or other mandatory rules in Norway explicitly regulating third party funding.
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.
ii Compliance with the Code of Conduct
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, we will discuss only the most practical issues, 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.
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. 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. 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.
iii Licensing requirement for third party funding
In general, any financing activity in Norway is subject to the grant of a licence by the Norwegian Financial Supervisory Authority (FSA) or a cross-border passport under the Capital Requirements Directive (known as CRD IV) (for credit institutions within the EEA). The FSA has newly confirmed that professional third party funding also constitutes a financing activity and thus is subject to the requirement for an FSA licence.
iv Legal and regulatory framework summary
In summary, third party funding is a largely unregulated practice but requires extra prudence on the part of the lawyers involved.
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.
Contracts should be carefully drafted to safeguard funders' interests regarding control over payments from counterparties awarded in final judgments, to avoid exposure to the risk of insolvency or financial distress of their customers– with the potential worst case scenario of ending up with an unprioritised claim towards an insolvent estate producing a late and low dividend.
i Disclosure best practice in the absence of explicit obligation
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 identity of a third party funder could pose serious legal and ethical challenges for the parties and lawyers involved.
As explained in further detail below, failure to disclose can, among other things, lead to delays or to the judgment or award becoming void or unenforceable. For instance, the validity of the judgment could be challenged on grounds of a lack of impartiality and independence of the arbitrating tribunal or ordinary courts.
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.
ii Arbitrators' lack of competence due to lack of impartiality and independence
In most arbitration proceedings, issues concerning impartiality and independence are governed by the Norwegian Arbitration Act. 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 Act 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). Since 2014, the IBA Guidelines have 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 party.
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.
iii Judges' lack of competence due to lack of impartiality and independence
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.
iv Practical consequences of non-disclosure
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. 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.
Failure to disclose the existence and identity of a third party funder may entail serious consequences, as well as the risk of delays owing to untimely recusals and reputational damage; for example, 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 courts or enforcement of the award may be refused. 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 timely fashion, the court of appeal shall consider the judgment to be annulled and void, and the case must be retried. If the deadline for appeal has passed, the judgment may still be re-opened and subsequently retried.
In the case of non-disclosure, one might argue that the arbitrator or judge had no knowledge of the funder's identity. Consequently, the arbitrator or judge was in fact impartial and independent at the time of the award or judgment. However, this argument would be most unlikely to stand, as the relevant legal standard is whether the relationship between the funder and judge or arbitrator is 'capable of undermining confidence' in the judge's impartiality. One cannot rule out that the judge or arbitrator had knowledge of the funder, simply because the funder's identity was not disclosed to the court or arbitration panel.
v Summary and recommendation regarding non-disclosure
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.
vi Disclosure of documents relevant to the case
Parties to Norwegian litigation are obliged to share relevant documents, including those unhelpful to their case. There is no equivalent obligation in arbitration proceedings; however, it is common practice to disclose all relevant documents. 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 relates to the parts of the evidence (such as sections of an agreement) that are relevant to the dispute in question. 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.
The year in review
In the past year, there have been some developments in the Norwegian market for third party funding. We have seen funded actions – by both Norwegian and foreign-based funders.
There are signs that these actions 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.
Although there is no legislation or other mandatory rules in Norway explicitly regulating third party funding, lawyers, funders and funding parties should be aware of the recent statement from the FSA regarding licence requirements for professional third party funding (for more information, see Section II).
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.