The Third Party Litigation Funding Law Review: Poland
Defining 'third party litigation funding' is crucial in light of the fact that the term is not defined under Polish law and has so far rarely been seen as an economic activity category in the country.
For the purpose of this chapter we use a broader definition of the phenomenon that includes claim financing sensu stricto, claim purchasing, as well as class action funding and insurance contracts. All these features must be addressed distinctly, since market recognition and assessment vary.
The market for third party litigation funding (understood as the financing of litigation, or arbitration, in exchange for a contingency fee) does not seem particularly well developed in Poland. Even though there are no public records or statistics available showing either the scale of the litigation funding market or its results, in the past few months, litigation financing has gained wider media attention.
There are a few companies (originating mostly from common law countries) addressing their litigation financing services to legal and natural persons, including law firms, in Poland. Typically, it is not the sole activity of a company; rather, litigation financing is part of a company's broader offer. Companies whose offer focuses on litigation finance are a novelty on the Polish market. One such company is a US-based private equity fund, Delta Capital Partners Management LLC, which provides financial resources to companies and legal professionals in various forms, including non-repayable funds in return for a part of compensation awarded by the court, the purchase of already accepted or awarded but not yet enforced claims, and the financing or purchase of portfolios of litigation and arbitration claims, as well as granting loans and credit as an alternative to those customarily provided by banks. Another novelty has been the creation of a litigation financing fund by one of the international law firms operating on the Polish market, together with a global participant on the litigation financing market. As a consequence of the limited coverage of litigation financing in the public domain, not many examples of the practice have been widely reported, although randomly surfacing records go back as far as 1995. Recently, given the public interest at stake, Prairie Mining Ltd garnered a lot of media attention when it secured US$18 million to pursue, in the course of international investment arbitration, a damages claim against the Republic of Poland for the alleged breach of its obligations under the Australia–Poland Bilateral Investment Treaty and the Energy Charter Treaty.
In view of the sparsity of available information, it is difficult to assess the strength of this market segment or assess its development, although it is worth mentioning that some new entities entered the market over the past two years. Moreover, legal professionals in cooperation with litigation financing companies have recently stepped up their activities, seeking to broaden the scope of their target audience by organising seminars and conferences and this is expected to raise awareness among both the public and companies active in the litigation management sphere. In parallel with these developments, market experts anticipate that interest in third party litigation funding is likely to increase following the market instability caused by the coronavirus pandemic. Because of the pandemic, companies are exposed to business disruption, unfair practices and the erosion of their financial liquidity. Other areas where the interest in litigation funding is expected to grow include renewable energy resources, disputes concerning financing agreements, construction disputes, disputes related to public procurement and breaches of competition law.
Notwithstanding the above, it is fair to say that litigation funding has yet to flourish in Poland, and it is still given little media coverage, marketing or separate identification in official statistics. There are several reasons for this. In simple terms, the economic reasons for the existence and development of the industry are the high value and complexity of claims, which require extensive funding. Most frequently, these claims are associated with healthy, strong legal entities with large operations that can produce such funding without a struggle, whereas for individuals, state legal aid seems to be the remedy for limited funding resources. It is also worth mentioning that there are pro rata limits on the entry fee in relation to the value of the claims. The cap on the entry fee in common (state) courts has doubled following the latest amendment to the Code of Civil Procedure and currently amounts to 200,000 zlotys.
The element of third party litigation funding is more common on the insurance market. However, at the end of the second quarter of 2020, of a total of 50,044,532 policies, legal expenses insurance policies numbered only 1,374,195. More importantly, only 2,800 claims were settled between January and June 2020 (at the end of 2019, the number of claims settled had reached 6,429). The data suggests a low level of legal awareness in Polish society or a lack of interesting insurance products, which leaves a broad field for development in this branch of insurance.
The most popular and the fastest growing 'branch' of the third party litigation funding industry seems to be claims purchasing. This kind of investment takes different forms on the Polish market, ranging from securitisation funds, through debt recovery entities, to claims purchasing replacing class actions. Currently, claims alienation seems to be of utmost importance for business entities facing a growing number of overdue receivables. According to a survey of the Conference of Financial Companies in Poland, in the third quarter of 2019, Polish businesses dealt with 22.2 per cent of overdue receivables on average, whereas 12.4 per cent of companies dealt with at least 50 per cent of overdue receivables in their portfolio. The most recent data shows that the percentage of overdue receivables dealt with by companies has decreased lately, reversing the upward trend observed in previous years. However, despite some improvement in receivables recovery, the numbers still remain relatively high. The above conditions make Polish companies more and more likely to use the services of professional debt recovery entities of any kind.
As regards prospects for potential growth, there are different solutions for different market segments. The segment involving claims purchases, insurance and (considering its specifics) class action funding is developing and seems fairly mature. The segment that is lagging behind is claims financing, which is less popular and difficult to identify. When discussing the potential of the latter, we feel its use largely depends on a properly identified target. In general, it should not target individuals or corporates. However, small and medium-sized business entities may find the industry's offer attractive, since they are often intimidated by the prospect of complex, challenging disputes with high-value claims and strong counterparties. They also tend to back off when faced with disputes with foreign entities in another jurisdiction. Also, the above-mentioned latest amendment to the Code of Civil Procedure and other acts of law may create new opportunities for claims financing entities, since the new legislation increased the maximum entry fee from 100,000 zlotys to 200,000 zlotys.
The attitude to carrying out disputes in Poland seems to be another inducement for the development of the market; court disputes and litigation in particular are frequent and, with the growth of the economy, higher-value claims are more and more common. In the first half of 2019, 5,737,556 cases were brought before Polish civil courts and 864,453 were brought before Polish commercial courts.
Legal and regulatory framework
Neither Polish statutory law nor the rules of two leading Polish arbitration courts (the Court of Arbitration at the Polish Chamber of Commerce in Warsaw and the Court of Arbitration at the Confederation of Lewiatan) provide specific rules on third party litigation funding. Since the phenomenon of third party litigation funding, in terms of its core feature (i.e., claims financing), is not yet popular in Poland as a commercial activity, there are also no court precedents regarding the field. The industry thus operates under the general framework of freedom of economic activity, currently regulated (in addition to Poland's Constitution) by the Act of 6 March 2018 – the Entrepreneurs Act. Agreements for claims financing are subject to the rules and principles of Polish private law (i.e., the Act of 23 April 1964 (the Civil Code)), which offers far-reaching flexibility for parties. In principle, no licences are required (see, however, the comments on securitisation funds below). According to the Civil Code's regulations on contractual obligations, any agreement of this kind should therefore be considered on the basis of the general rule of freedom of contract, which means that its content or purpose shall not prejudice the nature of the relation, a statute or the 'principles of community coexistence'. The aforementioned rule means that every litigation funding contract should be analysed within the scope of, at least, its possible non-compliance with the rules of community coexistence. In this context, for example, grossly excessive remuneration may constitute an infringement of these rules.
Apart from the minor limitations of a general nature mentioned above, there are certain restrictions on the conduct of litigation funding activities by Bar-admitted lawyers (i.e., legal counsellors and attorneys-at-law). These restrictions affect the opportunities available to Polish law firms in relation to offering services of this kind.
First, it is forbidden for professional lawyers to agree on remuneration consisting solely of a contingency fee. At least part of the lawyer's remuneration should be fixed; however, it is not defined or specified how big the fixed part should be. As litigation funding is frequently based entirely on a success fee, this rule hinders litigation funding being provided by law firms. It should, however, be emphasised that, in general terms, the concept of a success fee is widely applied by Polish lawyers and is now becoming more common following clients' growing demands.
Second, it is questionable whether litigation financing (or financial intermediation) is permissible in light of the codes of conduct of professional lawyers. According to the rules applicable to professional lawyers, it is forbidden to carry on any activity that can potentially give rise to doubts as to the impartiality of the lawyer. Financial services and financial intermediation, as well as intermediation in commercial transactions, are examples of activities that are considered likely to influence the impartiality of a lawyer; therefore, it is questionable whether professional lawyers are allowed to engage in cases of litigation funding. Furthermore, this may also raise doubts because a professional lawyer's core duty is to act in the best interests of the client, which may prove controversial if funding is the key driver for a client's involvement in a dispute. Therefore, it seems that any such funding involving law firms acting on the Polish market would in fact have to be provided by a third party or a law firm that does not provide legal services on the Polish market.
In contrast to third party litigation funding, strictly speaking, claims purchasing is widely used and based on statutory regulations of a supplementary character. A claim purchase agreement itself may be concluded by anyone and no specific licence or permission is required to purchase a claim. More complex rules apply to securitisation funds, which are funds that issue investment certificates for the purpose of raising funds to acquire receivables. The fund is obliged to apply for a permit from the Polish Financial Supervisory Commission. The operation of the fund is also subject to supervision by the Financial Supervisory Commission and the National Bank of Poland, the President of the Personal Data Protection Office, the Inspector General of Financial Information or the Office for Competition and Consumer Protection.
Apart from the above, specific rules on insurance contracts are also worth mentioning.
Polish regulation of legal expenses insurance policies is consistent with Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking up and pursuit of the business of Insurance and Reinsurance, also known as Solvency II. The act implementing the Solvency II Directive provides general rules on legal expenses insurance, such as the obligation of an insurance company to bear the costs of court proceedings and services directly related to the pursuit of the claim before a court or by extra-judicial settlements, or the right of a policy holder to freely choose a lawyer. Limitations on insurance contracts derive from the Civil Code. Although the market offers a wide range of legal expenses insurance, in Poland, contrary to many other jurisdictions, only before-the-event insurance is available. It is highly questionable whether after-the-event (ATE) insurance is permitted by Polish law since, according to the Civil Code, an insurance agreement concluded after the event being subject to the agreement occurred shall be ineffective. Therefore, concluding an ATE insurance agreement would involve a high risk of nullity of the contract.
In conclusion, taking into account the still relatively low level of market interest in third party litigation funding, and the marginal number of cases of such funding, it is quite unlikely that this market will be regulated in the near future and, from the legal and regulatory framework perspective, the foregoing should be considered an inducement to potential investors.
Structuring the agreement
Since cases of third party funding agreements (as regards claims funding only) are rarely accessible in the public domain on the Polish market, it is difficult to outline the typical structure and provisions of such agreements. Nevertheless, there are certain guidelines on critical stipulations.
First and most importantly, the parties generally indicate that the funding is to be reimbursed, and to what extent, only if the case is won. This may be a fairly straightforward agreement, or fairly sophisticated, for instance, by making it conditional on whether the case is won in full or in part. Accordingly, specific rules on the distribution of the award should be provided for. The parties can specify whether the funder gets a percentage of the award, costs incurred increased by a percentage of the award or a multiple of costs incurred. It seems indispensable to provide for the rules of settlement if the costs incurred exceed the award.
Since court proceedings, especially in complex cases involving significant capital, can take many years (sometimes more than 10), the parties should set out the maximum level of funding provided throughout the litigation. The parties to a contract should also bear in mind that Polish civil procedure consists of two instances and extraordinary review procedures. During the main proceedings some additional, interlocutory proceedings may also arise, along with proceedings resulting from the counterclaim of the other party to a process. All the aforementioned proceedings can considerably extend the duration of the main court proceedings, increase the costs incurred by the funder and therefore decrease the profitability of the funding; thus, these should be settled in the contract. The remuneration may also be structured as a lump sum without making the fee contingent upon the percentage of the value of the claim.
Second, the contract should stipulate the rules on exchanging information between the parties to a contract as well as the rules on disclosing information to third parties. The arrangements of the parties should cover the admissibility of disclosure of funding by any of the parties, specifying the information that shall remain confidential. Furthermore, the parties should be aware that the funder may come to possess information classified as a company secret and thus it is highly recommended to provide for rules of confidentiality.
Third, it is recommended that the funder protect against any fraudulent misrepresentation or non-disclosure of any information or document important from the point of view of a risk assessment or a profit–loss analysis. In cases of such misrepresentation or non-disclosure, the funder should be allowed to withdraw from the contract and claim damages or contractual penalties, or both.
Finally, the parties should consider other minor issues such as who chooses the lawyer or whether (and, if so, under what conditions) the claimant is allowed to settle the dispute. In general, defining the scope of the funder's interference in the proceedings needs to be determined, otherwise it opens the way to a potential dispute between the party and the funder over the trial's handling and pursuing liability in the case of an unfavourable verdict.
In the case of claims purchasing, the agreement concluded by the parties usually constitutes a purchase agreement and an assignment. Hence, it should include elements typical for a purchase agreement, such as price and the timing of the passing of the claim, as well as related profits and burdens to the buyer, and provisions on the assignment.
In structuring the provisions on the assignment, the parties (particularly the purchaser) should focus on the responsibility of the seller for his or her entitlement to the claim and the possible insolvency of the debtor. Even though the responsibility of the seller for the entitlement to the claim is based on statutory provisions, it is in the purchaser's best interest to verify whether the disposability of the claim was limited by the parties; hence, an agreement concluded contrary to a provision limiting disposability shall be ineffective. Contrary to the seller's responsibility for his or her entitlement, the responsibility for the insolvency of the debtor does not arise from statutory provisions, and it should therefore be subject to the parties' arrangements.
In addition, in respect of claims purchases, the parties to a claim purchase agreement should be aware that according to the statutory provisions, the performance of an obligation to the former creditor shall be effective towards the acquiring party until the alienating party notifies the debtor of the assignment. Therefore, the parties should consider whether to notify the debtor of the assignment, which party is responsible for notification and how to settle any payments made by the debtor between the conclusion of the contract and the notification of the debtor (if applicable).
It is important to note that as a result of a claim purchase agreement, the seller disposes of all his or her rights towards the claim; thus, the seller will usually not have any interest in providing for rules on the choice of lawyer or the costs of proceedings arising in relation to the claim. Nevertheless, in every case the parties should consider concluding a non-disclosure agreement.
In general terms, the obligation to pay the costs of litigation (or arbitration) is imposed on the party to the process. There are, however, no regulations preventing a third party from paying the costs on behalf of the party, as long as it is clear that the court cost was paid in the case in question. It is allowed under the Civil Code to pay someone else's dues, except for these of a personal nature (which is rarely the case). There are also no regulations imposing on the party the obligation to disclose the source of financing, any agreement in this regard or, for example, a contract with a lawyer (apart from in class action claims). The party to a process is free to organise its relationship with the funder in the most convenient way. It is also important to note that even if disclosed, the third party litigation funder is not a party to a process and cannot be held liable for adverse costs.
Furthermore, Bar-admitted lawyers are not only allowed, but are also under a duty, to keep confidential all information obtained in connection with their professional activities. A confidentiality obligation applies to all the information concerning his or her client disclosed to the lawyer by the client or obtained in any other way, regardless of the source or the form of the information. Legal privilege also applies to the documents created by the lawyer and any correspondence between the lawyer and the client. Legal privilege or a confidentiality obligation has no time limits. It is even disputable whether the client can release a lawyer from the obligation of preserving secrecy. On the basis of the confidentiality obligation, the lawyer is allowed to refuse to answer any questions concerning the information covered by the obligation.
The party to the process and the third party litigation funder are, therefore, quite able to keep the financing, and any circumstances related to the financing, secret.
The situation is entirely different when the funding consists in claims purchasing. In a case of this kind, the rules on legal privilege and confidentiality remain unaltered, whereas the seller and the purchaser of the claim, as well as the claim purchase agreement itself, shall be disclosed (at least before the court). The disclosure of the legal relationship between the purchaser and the seller is necessary to prove that the transaction took place and was valid. It is important to note that hearings are public in most cases. The court can order the hearing to be held in camera upon request by a party that is a business entity if information constituting a company secret may be revealed; however, there is no actual option to limit the access of another party to such information revealed during the hearing or included in the case file. Nevertheless, company secrets shall be protected on the basis of the Act on Fair Trading providing that disclosure or making use of someone else's company secret constitutes an unfair trading practice, and as such subject to punitive measures.
Conclusions and outlook
Third party litigation funding (namely the financing of a claim of a party to a court or tribunal dispute) has no strong presence in Poland, and data regarding this practice is difficult to access. However, as evidenced by the media coverage, there has been an observable increase in the number of claimants interested in seeking funding and an intensification of promotional activities in 2020. The segment of the claims funding industry that is recognised is claims purchasing, performed under various schemes. Most frequently it involves entities dealing with difficult-to-collect or non-collectible receivables that wish to use debt recovery services or that will sell their claims to securitisation entities to recover at least part of their funds, making the claims purchasing market buoyant. Some entities would rather insure against legal expenses to mitigate any future risk of their inability to bear the costs of litigation; however, legal expenses insurance constitutes only a marginal share of the insurance market.
Part of the growing industry segment is class action claims (albeit with the state as the rather unusual 'funder').
The insignificant size of the market in third party litigation funding (in its core feature) is reflected by the lack of specific regulations in this regard. It can be expected that as soon as this branch of business starts to grow, relevant regulations shall be introduced. For now, litigation funding is considered a commercial activity allowed under the general rules of freedom of economic activity, whereas the specific legal framework is driven by the regulations of the Civil Code. Since third party litigation funding is not a regulated activity, investors can take up and pursue this kind of economic activity without any limitations. Obviously, certain specific regulations apply to some areas of the industry related to claims purchase schemes, such as securitisation funds or insurance; third party litigation funding is not subject to any of these.