Third-Party Funding: Portuguese and International Experiences and Current Trends

When Third-Party Funding (TPF) is mentioned, surely the first question that (still) arises for most people is: what is it all about? If we translate this expression into “third-party funding of litigation”, perhaps the doubts will be dispelled for the overwhelming majority of people. However, it is inevitable to question right away what TPF really is and how it works.

The business model can be summarised as follows: for a lawsuit or set of lawsuits, there is a third party that will bear all the costs (including the lawyer’s fees and, in the case of arbitration, the arbitrators’ fees) in exchange for a percentage of the amount received by the financed party (usually 30% to 40%) or a multiple of the money invested (typically between three and five times, i.e. for every euro financed, the third party will receive between three and five euros). The specificity of this business model is that there is only an obligation to repay if the client succeeds; if the client loses the case, the funder will not be entitled to recover the amounts that were spent in the case.

This is, broadly speaking, the business model. But, there is an inevitable question that follows: is it “legal”? Is there not a quota litis prohibited by ethical regulation? The answer, categorically, is: no! There is no legal rule that prohibits this business model. Nor does it involve any violation of the ethical duties of the lawyer (in particular the prohibition of quota litis), provided that the lawyer does not allow the relationship with his client and with the cases he handles to become conditioned or submitted to rights and duties that should typically be located only within the agreement between funder and funded party.

By way of example: it may be thought that the funder (because it is the funder who up-fronts the cash to move the case forward), will determine the way the process is conducted and will condition the procedural strategy (including the choice of counsel). This would involve a clear violation of the lawyers’ ethical duties. Admittedly, this type of conditioning may occur, particularly when the funder is not “comfortable” with the legal team, either because they have never worked with them or for any other reason. However, our experience shows otherwise.
In cases where we have worked with third party funding, the funder already knows the team of lawyers well. Often, the funders themselves come to us to understand which cases they can fund, which involves a judgement of trust in the team that is in charge of sponsoring the case. Afterwards, during the case, the funders limit themselves to a monitoring of the case in a “light touch mode”.

Despite the attractiveness that this model involves, there is a catch, because not all the cases are likely to be funded.

Firstly – and one would expect nothing less – the case must have a fair chance of success (better said: the case needs to present a high likelihood of success, typically above 80% of chances of prevailing). It is therefore expected that due diligence of the case and of the entities involved will be conducted to some extent and depth. This immediately raises a concern: information provided to the funder is not covered by professional privilege, which naturally impacts on the confidentiality of the information.

Secondly, not all the amounts involved are attractive to funders. Internationally, and from what we have seen in our practice, it is very difficult to find anyone willing to fund litigation involving sums of less than 10 or 15 million euros. The reason for this threshold is that the entities that, in turn, are behind the third party funders, and the funders themselves, are looking for minimum returns on their investments.

This point means that the phenomenon is not yet very popular in Portugal. It is not that there are not areas of the law where this financing could blossom (for example, companies in insolvency or actions related to intellectual property rights, especially patents). Among us, business initiatives to launch this financial model have already been started but, as we see it, they do not seem to be adjusted to the dimension of the Portuguese landscape. We must keep in mind the scale of our legal market and must direct the focus towards small and medium litigation of SMEs which are the ones that mostly make up the business fabric of our country. Eventually, some more specific and higher value cases may benefit from this funding, but those will be isolated cases.

There are some trends that have been developing, as regards TPF, at the international level, more specifically in international arbitration and, within this, in investment arbitration.
The most prominent one concerns the duty to disclose the existence and identity of the funder in order to ascertain the existence of conflicts of interest. In fact, it is enough to think that one of the arbitrators has a connection with the funder (because the funder has funded another case where the arbitrator acts as counsel for the party, to give just one example) to understand that the integrity of the tribunal (its independence and impartiality) may be at risk.

From this point, a duty of disclosure has been firmly affirmed and is virtually internationally consolidated. However, this (limited) duty of disclosure has quickly evolved into a duty to disclose the terms and conditions of the funding arrangement, with a view to address another very hot topic in this area.

We are referring to the problem of the security to cover the costs of the proceedings (cautio judicatum solvi or “security for costs”). In fact, when the existence of a third-party funder is known, the logical step is to presume, as some (admittedly few) arbitral tribunals have already done, that the (funded) claimant is not in a position to honour a potential “adverse” award obliging him to pay the costs of the winning party. And from this it will invariably follow a request for that funded party to provide security for costs. The understanding of the vast majority of arbitral tribunals has been very restrictive on this point since, addressing it as a typical interim measure, they require the verification of all its requirements (including the danger of not being able to recover the costs). International arbitral tribunals also have made a point that the existence of a TPF is not synonymous to “impecuniosity”. However, it is clear that respondent parties in arbitration, when suspecting or knowing about the existence of a funding arrangement, very hardly escape from the temptation to seek security for costs, as it also represents a weapon to weaken the strategy and distract the procedural endeavours of the claimant.
Nonetheless, often times a poor command of the issue on security for costs endangers the procedural strategy (of either claimant or respondent). A curious example in this regard occurred in an investment arbitration case where the arbitral tribunal relied on a statement made by the legal team (who had stated that the law firm would be responsible for paying the costs of the arbitration) to require from the claimants the filling of a unilateral undertaking to pay those costs. The law firm eventually produced that undertaking.

This is indeed a point where the greatest care must be taken by counsel lest a court considers them to be the “funders of the litigation” and consequently orders them to pay the opposing party’s costs (as has it happened in the past in England).

There is no doubt, however, that the litigation financing by third parties continues to attract a great deal of attention and some criticism as well but, on the other hand, it deserves the necessary support because it represents an undeniably useful tool when it comes to guaranteeing access to the justice.

Photo by Lukasz Radziejewski on Unsplash

Custody Deposit and Publication of Arbitral Awards

Custody Deposit and publication of arbitral awards

Portugal is unquestionably spearheading the use of technology, transparency and publicity regarding arbitration and, more particularly, arbitral awards.

Indeed, the recently enacted Ordinance (Portaria) nº 165/2020 of July 7, 2020 sets forth that all arbitral awards related to disputes involving matters of administrative law (whether or not administrated by arbitral institutions) or tax law (administered by the only authorized arbitral institution) are now subject to a custody deposit and to publication in a web-based platform.

The custody deposit must be requested by the presiding arbitrator or by the sole-arbitrator (not by the Chairman of the arbitral institution in question), through an online process which entails the upload of the award in pdf searchable format. The applicant must fill up the form with, inter alia, the following details:

  • Name and address (and other details) of the applicant;
  • Date of the award and date when the award has become final and subject to no appeal (if applicable);
  • Summary of the decision (redacted from any detail that could identify the parties in question);
  • Identity of the members of the tribunal;
  • Identity of the parties and related details;
  • Arbitration agreement whereby the public entity submitted itself to arbitration.

The platform will make those awards publicly available, with the following details:

  • Number and date of the deposit;
  • Date of the award and date when it has become final;
  • Identity of the members of the tribunal;
  • Summary of the decision (redacted from any detail that could identify the parties in question);
  • Full text of the award (redacted from any detail that could identify the parties in question); and
  • Indication of whether the arbitration was administered by an arbitral institution and, if so, identity of the arbitral institution.

This step certainly represents a progress towards transparency in arbitrations involving public entities, making arbitration less opaque and subject to public scrutiny, which have been the major criticisms that have been levelled against the use of arbitration by those entities.

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Why Arbitrate in Portugal? Reason 8 – Internationally Oriented Community

International Arbitration & Portugal

Internationally Oriented Community

International arbitration in Portugal has taken off in recent years, and as previous posts have discussed, there are a wide variety of compelling reasons why this has been the case. Past posts have touched upon some aspects of how Portugal is internationally oriented in terms of the longstanding cultural and legal ties with Lusophonic countries as well as it being a country where the vast majority of the population speaks a relatively comprehensive level of English.

In Portugal, international standards are applied when dealing with international arbitration cases. International events regularly take place in Portugal and shed new and innovative light on the topic at hand, including the ICC Portugal Arbitration Day, with the second edition having taken place during 2018. ICC Portugal has now existed for 80 years and has had the mission of organizing not only Portugal Arbitration Day but has also taken on the task of putting together several workshops and conferences with the goal of extending a hand to the international arbitration community.

ICC Portugal has members from over 130 different countries, including businesses and associations, making it among the few with such a vast and diverse community. The fact that Portugal partakes in these events show its willingness to open itself up to the world in terms of showcasing the positive qualities as a sound jurisdiction for the resolution of disputes.

Portugal is considered to be among the best jurisdictions, recognized on an international level, when it comes to the ease of resolving disputes. Portugal is 9th in the European Union in regards to the ease of resolving insolvency and considered to be 15th in the world.

Portugal has also been considered appealing to the international community due to the pro-arbitration mindset of the Portuguese Courts. The courts act with swift procedures to assist arbitrations. Another advantage within this realm are dedicated

Portuguese practitioners also regularly publish articles in English, in order to reach a wider audience. The Portuguese arbitration community is in permanent contact with other communities including the Brazilian, Spanish and French colleagues.

Why Arbitrate in Portugal? Reason 7 – Supportive Courts

International Arbitration & Portugal

Supportive State Courts

In addition to the several previously mentioned advantages in regards to selecting Portugal as an all-encompassing jurisdiction for the resolution of international arbitration disputes, it is worthwhile mentioning the adaptive and supportive Portuguese state courts.

As touched upon in previous posts, Portugal shares historic and legal roots with other Lusophonic countries, which has been a critical factor in the selection of Portugal in the execution of bilateral agreements, making it appealing as a jurisdiction for international arbitration. These agreements have led to Portugal being considered as having supportive state courts within the realm of arbitration.

Courts in Portugal consistently adhere to the principle that the arbitral tribunals are competent to decide on their own competency. A number of cases related to swaps show that courts do not hesitate to refer parties to arbitration even in the event that there exist allegations that these contracts are null for violating public policy. Arbitral tribunals are sufficiently competent to decide on the costs of arbitration, and courts will only intervene where excessive situations occur. Arbitral awards are only set aside when there is a violation of public policy or other fundamental principles of arbitration – which is very rare!

The UNCITRAL Model Law contains the fundamental principles of party autonomy as well as all the legal tools necessary for the successful resolution of an international arbitration dispute. These tools, embodied within the Portuguese state court system, include equality of parties, due process as well as the finality of the award. Another advantage of this system entails the fact that any dispute can be subject to arbitration as long as it is not exclusively submitted to the state courts and concern economic interests. Disputes not involving economic interests can also be subject to arbitration so long as the dispute in question is capable of being subject to a settlement by the parties. The state court system also allows for the arbitration of issues concerning labor agreements, which in the past were only open for dispute within judicial courts.


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Why Arbitrate in Portugal? Reason 6 – A Robust Legal System

International Arbitration & Portuguese Law

A robust legal system

When selecting a jurisdiction for international arbitration, as noted in previous posts, there are several important factors to consider, among them, is the legal system of the country chosen. Portugal has recently implemented some changes to its legal system, including to international arbitration laws, which make it an alluring jurisdiction.

On the 14th of March 2012 the new Portuguese Voluntary Arbitration Law (PAL) came into effect and revoked the former, and more outdated, Portuguese arbitration law. The PAL is inspired by the Uncitral Model Law, and aims to introduce a more modernized system for arbitration and further promote Portugal as an appealing jurisdiction for international arbitration.

PAL provides for the most in-demand features ranging from the principle of separability of arbitration agreements as well as the competence of arbitral tribunals to decide on their own competence to the joinder of third parties, as well as the powers that are granted to arbitral tribunals to order interim measures in pending or about to start arbitrations. The general advantageous principles underlying the PAL are:

  • Party autonomy;
  • Kompetenz-kompetenz: the PAL confers jurisdiction on state courts to decide a dispute only where the arbitration agreement is manifestly null and void, inoperative or incapable of being performed;
  • Adhering to procedural principles such as, party equality, due and fair process, and the adversarial principle.

The principle of separability of the arbitration clause recognized by the PAL is also an advantage as a finding of nullity or unenforceability of the contract will not affect the validity of the arbitration clause.

Arbitral awards in Portugal are final and subject to no appeal. An annulment of the arbitral award may only be granted under very limited and special circumstances. This new arbitration law also provides for very constricted and limited circumstances under which a foreign arbitral award may be refused recognition and enforcement.

Portugal is a part of around 60 bilateral investment treaties, making it a prime location for the resolution of international arbitration cases from a varying and wide range of countries.  Portugal is also a signatory party to the most relevant international treaties related to arbitration, such as the New York Convention and the International Centre for Settlement of Investment Disputes (ICSID) Convention. Being a part of these various treaties makes it so that there is less legal confusion when selecting Portugal as a jurisdiction for arbitration.


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Why Arbitrate in Portugal? Reason 5 – Modern Country, Modern Facilities

Portugal & International Arbitration

Recently modernized infrastructures and facilities

Portugal is a developed country with many modern infrastructures and facilities. In recent times, Portugal has been considered a spearhead in terms of new technologies and IT solutions. This is especially relevant in terms of the fact that many of these new technologies have also been applied to the Portuguese judicial system.

Since the late 90’s, Portugal initiated a program to renovate and modernize its infrastructures, including court premises. The judicial system is supported by a modern IT infrastructure that allows almost every lawsuit to be managed online by court judges, court clerks and counsel. Almost every court judge will allow the taking of witness depositions via video-conferencing, including by Skype as well as other applications.

Portugal currently contains modern arbitration centres and state-of-the-art facilities to manage arbitrations and hold hearings. An example of those facilities may be found in the website of the Arbitration Centre of the Portuguese Chamber of Commerce and Industry (CAC) HERE.

Procedures before state courts are almost entirely managed through web-based platforms, the most important and notable of which is referred to as “Citius”, which was introduced by the Portuguese ministry of justice. Thanks to this web-based platform, paperless dockets have been a reality in Portugal for many years now. There are many other advantages of this platform including allowing for the submittal of court documents and decisions, as well as the consultation of proceedings by judges, lawyers and court clerks. Other advantages of this platform included notifications being provided online, as well as the logistical coordination of the proceedings themselves.

Arbitration has been benefiting from this new landscape, for example, if one party intends to begin arbitration and needs an interim measure; all that must be done is to file a request via the “Citius” web-based platform. The request will then arrive at the judge’s desk the following day. This online system works for every arbitration related matter that needs to be dealt with by state courts, with the exception of the Supreme Court of Justice.

What makes Portugal’s adaptation of modernized facilities and the usage of new technology in the judicial system is that not only has this greatly streamlined and facilitated the international arbitration dispute resolution process, but also that Portugal’s path to modernization, in comparison to other countries, has been less fraught with setbacks during this process.


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Why Arbitrate in Portugal? Reason 4 – A Safe and Friendly Place

Portugal & International Arbitration

A safe, stable and reliable jurisdiction

Portugal, with its stable economic, political and legal systems has been growing increasing popular in the realm of being considered as an advantageous destination not only for tourism but also for the resolution of international arbitration disputes. Alongside this, Portugal is considered to be one of the safest countries in the world with a ranking as among the top 5 safest countries in the world, according to World Atlas.

With the recent destabilization in many European countries in regards to political, economic and even in terms of elevated terror threats, Portugal has remained among the very few which has remained stable in all these regards over the past years.

With the looming uncertainty of Brexit in the UK and the fact that the fate legal and political systems has been up in the air until the decision has been completely resolved, has deterred many from selecting the UK as a stable jurisdiction.

The rise of the extreme right in several other European countries has also served to destabilize not only their respective economies but has also brought uncertainty to the fate of their political and legal systems.

The rise of terrorism in Europe over the past few years in many countries has also served to dissuade many in seeking out these countries. There have been several significant terrorist attacks, and in some countries more than one attack, over the past decade alone in France, Germany, Norway, Ukraine, and the UK. Portugal’s terrorist threat index rate is the lowest within the EU, due to political, but also geographic reasons as it only borders Spain, with the other border being the Atlantic Ocean.

These considerations all factor into the selection of a safe and stable jurisdiction for the resolution of international arbitration disputes. Those who select Portugal as a jurisdiction have the peace of mind that at any given moment the political and legal systems won’t simply drastically change, thusly potentially negatively affecting the outcome of a successful resolution.

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Why Arbitrate in Portugal? Reason 3 – Legal Background

The Portuguese Legal Background & International Arbitration

Enduring legal ties between Lusophone Countries

The fact that the Portuguese Civil Code and Code of Civil Procedure are still in force in the Lusophone countries of Angola, Mozambique, Cape Verde, São Tomé Principe, and Guinea Bissau gives Portugal yet another advantage in terms of selecting a jurisdiction for international arbitration. These countries very closely follow, to this day, the Portuguese Case Law, meaning that Portuguese law is still very much embedded and relevant within their respective legal systems. Although these Lusophone countries have their own distinct identities, these countries still continue to share a strong historical and legal background.

Over the past decades many of the Lusophone countries have had their economies and respective investment opportunities grow substantially. Angola is considered to be one of the world’s top diamond producers as well as having many other investment opportunities in the realm of agriculture, construction and transportation sectors. Mozambique is another example with recently discovered natural gas reserves which has boosted, and is projected to continue to boost, its economy substantially. Macau is home to one of the largest gaming industries in the world, with total yearly revenue of about 28.9 billion US dollars. Among the aforementioned countries, Portugal itself is also quickly recovering from a financial crisis, and has been currently housing many technologically oriented startups due to currently having the lowest operational costs in Western Europe.

Due to the enduring legal ties and the rich economic and investment climate currently present within the Lusophone countries, Portugal poses as a strong platform for the resolution of international disputes. The fact that the legal ties still exist have shown to be a factor when deciding on the execution of bilateral agreements and in legal agreements between Lusophone countries and Portugal. Having a common language also eliminates the need for procedural translations and also ensures the trust amongst parties and arbitrators in dispute resolution.

Aside from this, and as mentioned in previous posts, Portugal is a member of the most important international arbitration conventions including the New York Convention of 1958.

The Commercial Arbitration Centre of the Portuguese Chamber of Commerce and Industry (CCIP), which was established in 1987, and has immense experience in the arbitrations of domestic and especially cross-border disputes involving Portuguese speaking countries.

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Why Arbitrate in Portugal? Reason 2 – Language

Language & International Arbitration

Portugal – a country with communication skills

The Language background

Language barriers are one of the most prominent cultural concerns when dealing with business matters in a foreign country, and this makes sense because a seemingly innocuous mishap in wording can lead to a failed business deal. This is even more relevant in the legal world, especially in regards to international arbitration where high stakes are involved.The language used in arbitration can have either a positive or negative impact on party equality since language plays a fundamental role not only during the written pleadings, but also and more importantly during the oral phases of the proceedings. Unfortunately, this is often overlooked and it is not uncommon that advocates and arbitrators find themselves at pains in understanding and showing command of the language used in the arbitration; thusly, this is a matter which should be carefully considered.Portugal has many attributes when it comes to the Portuguese language itself. Over 250 million people speak the Portuguese language throughout the world and it is currently considered to be the 6th most widely spoken language. Portugal also shares a great amount of cultural, economic and legal backgrounds which serve as a common tie between many other countries. Due to this, a large amount of commercial transactions worldwide deal with Portuguese speaking countries.Recently, Portugal has seen a substantial growth in terms of investment and capital flows, due to larger countries, such as Brazil and Angola viewing Portugal as a safe harbor for their investments.

Language to use in arbitration

Portuguese is of course the best language to use in arbitration involving parties from Portuguese speaking countries. But what happens when one of the parties (or both) do not speak Portuguese (but nevertheless consider the option to arbitrate in Portugal)?One may well say that Portugal is one of the countries within the EU well-known for its population having a good understanding and command of English. This is due to many reasons, but mostly due to the high importance that learning English is placed on the educational system as well as the fact that movies are subtitled, rather than dubbed as in many other Western European countries.As many Portuguese citizens are highly adept in their usage of English as a second language, with much of the population speaking relatively comprehensively, this means that when it comes to selecting a jurisdiction as well as the language of arbitration, there shouldn’t be any difficulties in regards to dealing with not just the legal system but also with locals, as well as in making other logistical arrangements.In other words, arbitrations in Portugal can interchangeably use Portuguese and English as working language.

Lisbon as an alternative to London after Brexit

Further, with the looming uncertainty of the end-result of Brexit, this has made the United Kingdom very unstable on many levels. With many legal aspects still to be ironed out in these proceedings, it might not be in the best interest to select the UK as a jurisdiction for international arbitration.It is important to highlight the importance of language when selecting a language for international arbitration. Portugal has many qualities which showcase it as an advantageous choice, with language being high on the list.

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Why Arbitrate in Portugal? Reason 1: Geography

International Arbitration & Portugal’s Geography

An alluring and advantageous jurisdiction

Over the past few years Portugal has been quickly expanding in a number of areas without showing signs of its growth slowing down anytime soon. However, one key area in which Portugal may be overlooked is in regards to being selected as a jurisdiction for international arbitration. Portugal acts as a judicious platform for the resolution of disputes relating to arbitration for a number of reasons, with geography being at the top of the list.

Situated an ocean away from North and South America, and within close proximity to Africa and the rest of Europe, Portugal is a central hub for many who come from across the globe. When considering international arbitration between two countries separated by an ocean, such as Brazil and Angola for example, Lisbon may be considered, not only a fair and neutral jurisdiction, but more importantly a convenient location for both travelling parties.

The After-Brexit: Lisbon as an alternative seat to London

Also, with the ongoing controversy and uncertainty surrounding Brexit, Lisbon may be a sound geographical alternative for international arbitration. Not only is Lisbon a short flight away from London, the political atmosphere has been generally tranquil with no signs of leaving the EU anytime soon.

The Lusophonic legal world and Portugal’s Geography

The Lusophonic world is a vast one, where to this day, strong ties still exist amongst them. Alongside geographical considerations, the fact that the judicial systems of these countries are still very much embedded with the present-day Portuguese judicial system helps for the resolution of disputes in a less complicated, and often times in a timelier manner.

Beyond those pertaining to the Lusophonic world, however, there are many advantages in selecting Lisbon for its geography. Due to Portugal’s rapid growth over the past few years, there has been a large increase in the quantity of non-stop flights to Lisbon. Not only is it more convenient to be able to travel from varying parts of the world without having to deal with arduous layovers, but due to the increase in available flights, this has also proven to be oftentimes more cost-effective.

Lisbon has all the conditions necessary to become an attractive host for dispute resolution. Beyond the logistical considerations of the jurisdiction selected where international arbitration disputes are involved, the jurisdiction chosen may have a larger impact than one would initially realize, especially in regards to the terms of applicable procedural laws and enforcement.

Portugal is currently a member among the most important international arbitral conventions, including the 1958 New York Convention, the ICSID Convention, as well as having 60 Bilateral Investment Treaties (BIT’s) signed with other nations.

Geography plays an important role in regards to international dispute resolution due to the fact that the parties negotiating international contracts which contain arbitral clauses must also settle on a neutral place of arbitration. It is usually favorable for both parties involved to select a jurisdiction that is neutral, geographically easy to travel to and with a well developed arbitrational law and court system in place, all of which Portugal has, especially in regards to issues relating to enforcement under the New York Convention being unlikely to arise.

In next week’s blog post, the topic of Portugal as a place of international arbitration and language will be discussed, and not just in regards to the Portuguese language, but to prevalent usage of English within the country as well.

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