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The Directive (EU) 2020/1828 on class actions, litigation funding and the impacts on international arbitration

1.      Introduction

In Portugal’s legal scene, there’s a noticeable rise in class actions across different areas, to which third-party funders are contributing in a significant manner. Not surprisingly, this contribution has raised questions about the legitimacy of those class actions, including one distinguished scholar who went so far as to consider the phenomenon of third-party funding as “unconstitutional” in the class actions’ domain.

Coincidentally, the Portuguese Government enacted Law Decree nr. 114-A/2023 (of 5 December 2023), which implemented in Portugal the Directive (EU) 2020/1828 of the European Parliament and of the Council of 25 November 2020. This European Directive and the Portuguese legislation aim at regulating a number of aspects related to so called “representative actions” for the protection of the collective interests of consumers. In a word, it sets forth a regulation of “class actions” related to consumers’ protection.

One of the most interesting topics subject to this regulation is the regime related to the funding of these class actions by third parties (third-party litigation funding). The Portuguese legal regime established several requirements that are worth mentioning and questioning whether they will pave the way to apply in the international arbitration realm.

2.      Third-Party Funding under EU Directive 2020/1828 and its Implementation in Portugal

According to EU Directive 2020/1828, the funding of class actions is subject to the following requirements (Arts. 4 and 10):

–          Independence of the funded party towards the funding provider: Member States shall ensure that “conflicts of interests are prevented” in the sense that third-party funders holding an economic interest in the “bringing or outcome” of the “class action” do not divert such class action from the protection of the collective interests of consumers: In this regard, third-party funders may not “unduly influence” the decisions of the entity carrying out “class actions”, in particular those decisions related to the settlement, in a manner that would be detrimental to the collective interests of the consumers. In addition, the representative entities must have in place “procedures to prevent such influence as well as to prevent conflicts of interest between itself, its funding providers and the interests of consumers”.

–          Transparency and non-competition: The representative action is not brought against a defendant that is a competitor of the funding provider or against a defendant on which the funding provider is dependent.

–          Transparency and disclosure: The entities that are allowed to bring class actions are obliged to “disclose to the court or administrative authority a financial overview that lists sources of funds used to support the representative action”. To this end, the representative entities shall make available on their website “information about the sources of its funding in general”.

–          Intervention of courts and administrative authorities, which “are empowered to take appropriate measures, such as requiring the qualified entity to refuse or make changes in respect of the relevant funding”.

By contrast, Art. 10 of Law Decree nr. 114-A/2023 provides for a much broader reach, as can be seen by the following requirements:

–          Disclosure: the plaintiff shall present to the court a certified copy of the funding agreement, which must be drafted “clearly” and “understandably” in Portuguese language and must include a financial summary of the sources of funding and a list of costs and expenses that will be borne by the litigation funder.

–          Approval of amendments: any amendments to the funding agreement must be subject to the approval of the court judge.

–          Independence: the agreement must ensure the independence of the plaintiff and the absence of conflicts of interest. A plaintiff is considered to be “independent” if it is the sole responsible for making all the decisions regarding the lawsuit and is guided by the principle of defending the interests at stake. These decisions include the choice of the counsel, definition of the procedural strategy, and also those related to the initiation, pursuit, withdrawal, settlement, appeals and the taking of any procedural step. The funder is impeded from prevent, influence in any way the decisions of the plaintiff and is not allowed to have vetting influence (such as authorize or be consulted before making those decisions and may not impose any negative consequence for the plaintiff in making any of these decisions.

–          Remuneration: the funding agreement cannot provide for a remuneration to the funder which is beyond a fair and proportionate amount, assessed in light of the characteristics and risk factors of the lawsuit and of the market price of such funding.

–          Non-competition: the lawsuit brought by a plaintiff who has entered into a funding agreement is inadmissible when at least one of the defendants in the action is a competitor of the funder or is an entity on which the funder depends.

–          Intervention and supervision of the court: The court holds the power to impose that these conditions are inserted in the funding agreement and remove the plaintiff’s standing if the latter does not comply with those conditions.

3.      The scope of the existing regulations in Portugal

While the EU Directive emphasizes preventing conflicts of interest and ensuring transparency, the Portuguese law takes a broader approach, requiring disclosure of funding agreements and court approval for any amendments. Notably, it mandates independence for plaintiffs and “fair remuneration” for funders, with courts empowered to enforce compliance.

One of the most interesting points of the Portuguese law is the provision related to “fair remuneration” for funders, which refers to ensuring that the compensation received by third-party litigation funders is reasonable and proportionate in relation to the services provided and the risks assumed. This principle aims to strike a balance between incentivizing funders to invest in legal claims while also preventing excessive or disproportionate returns that could undermine the integrity of the legal process.

In the context of the Portuguese legislation, fair remuneration provisions seek to prevent funders from exploiting class actions for excessive financial gain. Funders should be compensated for the capital invested, the risk taken on, and the expertise provided in evaluating and managing litigation. However, remuneration should not be set at a level that is unreasonably high or disproportionate to the value contributed, the risks involved, and prevailing market standards.

4.      Possible impacts on international arbitration

There is a growing trend in investment tribunals to order claimants to disclose the existence of third-party funding and the identity of the funder. Some tribunals have also ordered the disclosure of the details of the funding agreement. This trend seems to have no significant echo in commercial arbitration.

But international tribunals (even commercial tribunals) may be called upon to analyze and decide on the funding agreements when allocating costs, particularly when deciding which portion of the funding roll-out should be compensated by the losing party.

In this context, many questions may be posed. The first that comes to mind is whether tribunals are entitled to use similar powers as to those that the Portuguese courts have?

More specifically, are tribunals empowered to deny a claim for compensation of the funding costs (including the uplift) for being “unfair”, “disproportionate,” and apart from market price conditions?

And what are the criteria to assess the “market price” of litigation funding? Which is the “market” where the price for funding should be assessed? When should it be considered as out of proportion or unreasonable?

5.      Conclusions

In conclusion, the regulatory landscape surrounding third-party funding in Portugal, particularly in the realm of class actions, is undergoing significant development with the implementation of EU Directive 2020/1828 and its corresponding national legislation. While the Directive emphasizes conflict prevention and transparency, Portuguese law takes a more comprehensive approach, incorporating stringent requirements such as court approval for funding agreements and ensuring independence and fair remuneration for plaintiffs and funders alike.

The concept of “fair remuneration” for funders introduced by Portuguese law is particularly noteworthy, aiming to prevent exploitation of class actions for excessive financial gain while incentivizing investment in legal claims. However, this principle raises questions about its potential implications on international arbitration, where tribunals may be tasked with scrutinizing funding agreements and determining their fairness and proportionality.

As international tribunals increasingly confront issues related to third-party funding, there arises a need for clarity on whether they possess similar powers to those of Portuguese courts in assessing funding agreements. Moreover, defining criteria for evaluating the “market price” of litigation funding and determining when it becomes unreasonable or disproportionate presents a complex challenge for tribunals.

Addressing these questions requires careful consideration of legal principles, market dynamics, and the overarching goals of ensuring access to justice while maintaining the integrity of dispute resolution mechanisms. As the legal landscape continues to evolve, collaborative efforts among stakeholders and international cooperation will be essential in navigating the complexities surrounding third-party funding in both domestic and international contexts.

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The Evolving Landscape of Investor-State Dispute Settlement (ISDS) in Portugal

Over the years, Portugal has witnessed significant developments in its approach to Investor-State Dispute Settlement (ISDS), reflecting broader global trends and policy shifts. This evolving landscape is crucial to understand how the country navigates the delicate balance between attracting foreign investment and safeguarding its regulatory autonomy. Here, we delve into a few key aspects of this evolution, exploring recent developments, ongoing challenges, and the implications for both investors and the Portuguese government.

 

1. Termination of BITs and the European Union’s influence

One of the most notable shifts in Portugal’s ISDS landscape has been the termination of Bilateral Investment Treaties (BITs) between the European Union (EU) Member States – this is in line with the EU’s broader policy position to reform ISDS. As of July 2022, Portugal ratified the termination of such BITs, emphasizing a unified EU approach to investment protection. Such decision reflects a move towards a more integrated and standardized system, where intra-EU investment disputes are resolved within the EU framework.

 

2. European Union’s push for Investment Court System

Portugal’s alignment with the EU’s broader strategy can be seen in its potential support for the Investment Court System (ICS). The ICS represents a departure from traditional ISDS mechanisms, aiming to establish a permanent international investment court with appointed judges and an appeal procedure. By endorsing this approach, Portugal will likely be able to signal its commitment to a more transparent, accountable, and institutionalized system for resolving investment disputes. This new paradigm is consistent with the EU’s efforts to address criticisms of traditional ISDS mechanisms, such as a lack of transparency and potential conflicts of interest.

 

3. Flexibility in Dispute Resolution Mechanisms

Portuguese investment treaties still demonstrate a certain degree of flexibility in dispute resolution mechanisms. Including options such as local courts, ICSID Arbitration, and ad hoc arbitration under UNCITRAL rules offers investors with choices. However, some treaties limit recourse to local remedies, emphasizing a balance between encouraging diplomatic resolution through negotiation and providing international arbitration channels available.

 

4. Ongoing challenges and concerns

The termination of BITs and the shift towards the ICS model are not without challenges. Critics argue that the ICS might introduce complexities and delays into the dispute resolution process, potentially deterring investments. Additionally, the reliance on local courts in some treaties raises concerns about impartiality and the effectiveness of domestic judicial systems. Finding the right balance between investor protection and preserving regulatory autonomy remains a key challenge for Portugal.

 

5. Implications for investors and the Portuguese government

The evolving ISDS landscape in Portugal has significant implications for both investors and the government. Investors benefit from a clearer and more standardized framework for dispute resolution, promoting confidence and predictability. At the same time, the Portuguese government gains greater control over its regulatory processes thereby decreasing the exposure to external arbitration. The emphasis on diplomatic negotiations as a precursor to arbitration indicates a commitment to settling disputes amicably whenever possible.

 

6. Future directions and international cooperation

Looking ahead, the Portuguese approach to ISDS is expected to further develop in response to global trends and challenges and Portugal could play a key role in shaping EU debates on investment protection. International cooperation to improve the ICS model and address concerns is indeed vital and, in this sense, Portuguese diplomatic and legal experience could contribute to the ongoing dialogue on the creation of a sound and fair international mechanism for resolving investment disputes.

All in all, the ISDS landscape in Portugal is changing, mirroring the dynamic nature of international investment law. The termination of BITs, the alignment with the EU’s ICS model and the focus on the flexibility of dispute resolution mechanisms highlight Portugal’s willingness to adopt a balanced and adaptable approach. Implications for investors and government underline the importance of navigating this evolving landscape with caution and foresight.

 

To learn more, please read the Portuguese chapter of the GAR Investment Treaty Arbitration, submitted by the Portuguese team of Victoria Associates, available here.

Victoria Associates has successfully represented clients in disputes related to international investment arbitration and welcomes any question that may arise in this context (info@victoria.associates).

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Costs of Arbitration in Portugal

Arbitration Costs in Portugal

When selecting a dispute resolution method, the expense of arbitration is a primary consideration. As disputes become unavoidable, parties often first wonder, “What will the financial implications be?” Sometimes, by this stage, it might feel late for such considerations.

Surprisingly, many arbitration agreements don’t directly address cost concerns. Typically, detailed discussions on this topic emerge only in prominent cases during dispute resolution clause negotiations. One reason might be that during the initial agreement, parties either don’t anticipate conflicts or underestimate the financial ramifications of their chosen method. In some instances, due to time constraints (a situation often referred to as “midnight clauses”), parties might hastily use a standard clause from an arbitration institute, assuming it addresses all potential concerns. However, by the time conflicts manifest, reevaluating such decisions is often not feasible.

This overview generally aligns with the situation in Portugal. Arbitration in Portugal often incurs higher costs than state court litigation.

There’s a belief that for disputes involving sums greater than €3 million, arbitration proves more economical. But this notion isn’t entirely grounded. The Judicial Procedural Costs Regulation grants judges the discretion to forgo final account preparations in cases, implying parties might not face additional costs beyond initial procedural fees. When making such a determination, judges consider the case’s intricacies and the efforts invested. Portugal’s Constitutional Court has clarified that any decision that fails to account for these factors, while still mandating parties to adhere to the full Regulation’s cost schedule, contravenes the national Constitution. Thus, in most cases, judges are inclined to trim the payable amounts.

Furthermore, the prevailing party in a court scenario cannot fully recuperate all costs tied to their claim or defense, especially legal team expenses. These recoverable sums are generally a fraction of the total legal fees. On the contrary, according to Portuguese Arbitration Law and prevalent arbitration institution rules, arbitrators have the liberty to incorporate legal fees into the final award, determining the extent borne by the unsuccessful party.

This flexibility often renders arbitration more enticing compared to court proceedings. However, it’s pivotal to juxtapose this with the initial financial outlay that arbitration participants typically need to cover, often in full, prior to the award.

Lastly, when looking globally, Portugal boasts several competitive advantages in arbitration expenses. One of the advantages is that, while maintaining high-quality legal services, attorney charges are considerably lower than in other leading jurisdictions. Another advantage in this respect is that arbitral institutions usually entail reduced costs when compared to other international venues.

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Independence and Impartiality of Arbitrators and Artificial Intelligence

Victoria Associates - International Disputes

The independence and impartiality of the arbitrators is a long lasting hot topic in international arbitration. Indeed, one of the fundamental requirements of the decision-making process of arbitration is that the arbitrators must be, and remain throughout the entire proceeding, independent and impartial.

When selecting the arbitrators, there are a number of questions that arise, and running a proper conflict of interests check is paramount, lest there is any circumstance related to the arbitrator’s independence and impartiality that may jeopardise the entire process.

In this regard, we can ask the questions: can AI help in selecting (or even make the final decision on the selection of) the arbitrator? How does the use o AI help in relation to the independence and impartiality of the arbitrators?

The use of AI in the selection of arbitrators can definitely help and have a positive impact on the independence and impartiality of arbitrators.

Here are some specific advantages:

1. Objective evaluation: AI algorithms can assess the qualifications, experience, and performance records of potential arbitrators in an objective manner, without being influenced by personal biases or subjective factors. This helps ensure a fair and unbiased evaluation of candidates based on their merits, enhancing the independence of the selection process.

2. Reduced human bias: human biases, conscious or unconscious, can sometimes affect the selection of arbitrators. By relying on AI algorithms, which are designed to be neutral and objective, the risk of bias in the selection process can be minimized. This promotes greater impartiality in choosing arbitrators.

3. Comprehensive analysis: AI systems can gather and analyse extensive data on potential arbitrators, including their past cases, decisions, and feedback from parties involved. This comprehensive analysis allows parties to make more informed decisions based on objective information, reducing the reliance on subjective assessments and further enhancing the impartiality of the selection process.

4. Diverse and inclusive selection: AI can help address concerns about diversity and inclusivity in arbitrator appointments. By examining a wide range of data and criteria, AI algorithms can identify a more diverse pool of candidates, including individuals from different backgrounds, genders, and regions. This promotes inclusivity and contributes to the independence and impartiality of the arbitration process.

5. Transparent and traceable process: The use of AI in arbitrator selection can provide transparency by offering a clear and traceable process. Parties can understand the criteria and factors that led to the selection of a particular arbitrator, ensuring transparency in the decision-making process. This transparency fosters confidence in the independence and impartiality of the selected arbitrator.

It is important to note that while AI can enhance the independence and impartiality of arbitrator selection, it should not replace the exercise of human judgment. Human oversight and final decision-making remain crucial in considering the unique circumstances of each case. AI should be viewed as a tool to assist and augment the selection process, reinforcing the core principles of independence and impartiality in arbitration.

Photo of Saúl Bucio on Unsplash

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Arbitration and Art Law: Navigating the Intersection of two Complex Fields

The need for expertise

As the art world continues to grow, so does the need for professionals who understand both the legal and commercial aspects of the industry. With the increasing frequency of disputes in the art market, it is crucial to have a deep understanding of arbitration and its relationship with art law.

Arbitration is a method of resolving disputes outside of the traditional court system. It is often used in art law to settle disputes between buyers and sellers, collectors and museums, and artists and galleries. The key benefit of arbitration is that it provides a confidential and efficient process for resolving disputes, without the need for public court proceedings.

Art law, on the other hand, covers a wide range of legal issues related to the creation, ownership, and sale of art. It encompasses areas such as copyright, trademark, and cultural heritage laws, as well as contracts and negotiations in the art market.

As arbitration and art law intersect, it is essential for professionals to have a thorough understanding of both fields. Whether you are a lawyer, art dealer, or artist, having a deep understanding of both arbitration and art law will give you a significant competitive advantage in the art world.

Types of Disputes in the Art sector

The art sector is subject to a variety of disputes, including:

  1. Ownership disputes: when multiple parties claim ownership of the same work of art.
  2. Authentication disputes: when the authenticity of a work of art is called into question.
  3. Contract disputes: when disagreements arise over the terms of an agreement between an artist, gallery, or collector and a buyer.
  4. Copyright disputes: when someone uses a work of art without the permission of the copyright holder.
  5. Forgery disputes: when a work of art is found to be a fake or counterfeit.
  6. Insurance disputes: disagreements between insurance companies and policyholders over coverage for losses related to works of art.
  7. Financing disputes: when a work of art is used as a collateral in a financial facility.
  8. Valuation disputes: when the value of a work of art is in dispute, often in the context of insurance or tax matters.
  9. Cultural heritage disputes: disputes over the ownership and display of cultural artifacts, including works of art.

Stakeholders to Disputes in Art Law

In art law disputes, there can be several potential stakeholders, including:

  1. Artists – They have a vested interest in the protection of their work and the recognition of their rights as creators.
  2. Collectors – They may be involved in disputes over authenticity, title, and ownership of artworks.
  3. Dealers and Galleries – They can be impacted by disputes over commission, fraud, and breaches of contract related to the sale or exhibition of art.
  4. Auction Houses – They can be parties to disputes involving the sale or authenticity of artworks.
  5. Insurance Companies – They may be involved in disputes over coverage for loss or damage to artworks.
  6. Museums – They may be involved in disputes over the ownership, loan, or exhibition of artworks.
  7. Estate Executors and Heirs – They may be involved in disputes over the distribution of artworks in an estate.
  8. Governments and Public Institutions – They may be parties to disputes over the return of cultural heritage or stolen artworks.

These stakeholders may seek to assert their rights and interests through various legal mechanisms and arbitration is surely the best tool to do so.

***

Duarte Henriques is a founder member of Victoria Associates and he is arbitrator listed at the Court of Arbitration for Art (CAfA)

#Arbitration #ArtLaw #Legal #ArtMarket #Culture #Heritage #Copyright #Trademark #Negotiations #Disputes #Confidentiality #Efficiency #CompetitiveAdvantage #Lawyers #ArtDealers #Artists

(Photo of Steve Johnson on Unsplash)

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Dispute Settlement in Outer Space: an odyssey in the making

I. Outer space and dispute settlement: a glimpse of the last five decades.

Space: the last frontier. Since the launch of the first artificial satellite Sputnik 1, which started the “Space Age” back in 1957, Humanity has been actively present in outer space. At that time, space activities were conducted by a handful of countries, and in practice only by the former USSR and the US, the two belligerent superpowers of the Cold War era. The first discussions on space activities within the United Nations (UN) showed the international community’s main concern to anticipate and therefore prevent a scenario of militarization of outer space, as well as to promote exploration and use of outer space for peaceful purposes only: this is the origin of Space Law. As early as 1961, the UN General Assembly adopted the Resolution 1721 (XVI), 20 December 1961, laying down the first core legal principles applicable to outer space. Such principles were then crystallized in 1967 with the approval and entry into force of the “Outer Space Treaty” (OST), which was followed by four other treaties, among them the 1972 “Liability Convention” (LIAB).

As these treaties were drafted at a time when only a few States possessed space industry and capability, one can understand why the OST established a State liability regime, i.e., in addition to their own activities, States are also responsible and liable for their private entities. The LIAB would further develop the provisions laid down in the OST, defining damage from a collision perspective, whether it is a bodily damage (loss of life and injury) or a material damage. In addition, the LIAB adopted the “Launching State” criterion, the basis of its dual system of liability: (i) objective/absolute liability, for damages caused by space objects on the surface of the Earth or to aircraft in flight; and (ii) subjective/fault liability, i.e., damages being caused elsewhere than on the surface of the Earth to a space object of one launching State or to persons or property on board such a space object by a space object of another launching State. To this end, LIAB holds States liable for damage caused by their space objects and comprises a dispute resolution procedure consisting of diplomatic negotiations followed by the establishment of a Claims Commission. However, this mechanism is only available to States and not to private parties – or rather, any private entity would need to resort to its respective State, which will then diplomatically approach the other State(s) in question, and the latter may not even have anything to do directly with the dispute, in case it concerns another private entity registered in that country – and the award given by the Claims Commission is of a merely recommendatory nature, unless States involved agree otherwise. The LIAB was invoked only one time: in 1978, the Soviet satellite “Cosmos 954” crashed on Canadian territory, and Canada issued a claim against the USSR, but the dispute was eventually resolved through diplomatic channels, with the specific amount paid to Canada being unknown to this day.

Even though the LIAB still remains very relevant today, its legal framework presents many difficulties and has very limited practical use for commercial space entities. In fact, given the accelerated increase of private actors in space, the UN recommends and encourages States to develop their own national space laws, outlining, e.g., the scope of application of activities to be addressed, conditions for authorization and licensing or insurance requirements. Besides, considering the world and present-day challenges, it is not the appropriate legal instrument to address and settle other types of disputes, such as investor-state disputes or any others regarding complex, multi-party, international contracts. 

II. Outer space in the 21st century: many actors, activities, and disputes. A role for arbitration?

Over the course of the last three decades, space has evolved from a status of a vast majority of state-owned space objects and activities to a much broader presence of non-state actors, notably, private commercial space entities, developing a wide range of space applications (e.g., telecommunications, satellite navigation, etc.), thus entering the space industry, in contrast with a previous (almost) exclusive public environment – representing the so-called “New Space”. But along with new actors and opportunities, new obstacles also arise, including legal ones. As outer space is open to more and more private entities, the number of space objects also increases, thus, the congestion of Earth’s orbits (specially, the lower earth orbit) adds substantial risks to space operations which are exposed to a greater danger for collisions, one of the reasons for the growing need for space traffic management tools. Moreover, such growth of space activities has led to an increasing amount of space debris that will most likely cause more accidents. In this context, as space gets more “crowded”, the risk of damages to space objects consequently increases, including those of non-governmental actors.

It goes without saying that if the number of actors in space is gradually rising, it will soon result in more disputes. But disputes are not only those based on collisions, as they may encompass any contractual disputes that may arise, e.g., satellite-related disputes; disputes regarding any components of the space industry, from manufacturing, to launching, and operating; seizure of assets related to space-related contracts; disputes relating to the launch of space objects into space orbits; as well as disputes in regulatory, insurance or even intellectual property rights domains. Consequently, space disputes are (and will be) numerous, diverse, and complex, which may include States, private actors, or both. In the latter cases, international space law does not have a specific dispute resolution mechanism available for private parties.

As highlighted, although such private entities can indeed request the State to trigger the application of the LIAB, the Convention operates via diplomatic channels that certainly presents an uncertain outcome based on a burdensome procedure that is ultimately non-binding and unsuitable for many disputes. This being said, non-state actors lack legal resources provided to States by international law, and domestic litigation addressing cross-border space disputes is also likely to be insufficient in many levels because obstacles such as lengthy decisions on the  jurisdiction of national courts or the applicable law, loss of confidentiality, uncertainty about the recognition and enforcement of judgments in other jurisdictions, as well as possible scenarios on sovereignty immunity if the claim is filled against a State. As many legal scholars point out, space, space activities, and the diversity of space actors mean that space law should not rely solely on a unique dispute resolution mechanism, instead, it should be open to a diversity of legal instruments to address cross-border and highly complex disputes.

In this context, in recent years we have witnessed the emergence of alternative dispute resolution (ADR) in space, with a clear preference for arbitration: in 2011, the Permanent Court of Arbitration adopted its “Permanent Court of Arbitration Optional Rules for Arbitration of Disputes Relating to Outer Space Activities,”; last year, Dubai has established its own specialized “Space Court.” On a broader international scale, it appears as though the role of arbitration for space disputes is not an “alternative” but is by far the default option for resolving disputes. This is not surprising considering that international contracts usually have an arbitration clause, and arbitration truly is the most popular solution chosen by the parties in light of the technical complexity associated with space issues. For example, it is well-known that the European Space Agency has been preferring arbitration in its model contracts for some time. Arbitration is anchored on several principles, including, e.g., that of consent of the parties and the principle of autonomy.

If parties do consent and submit their dispute to arbitration – without prejudice of space accidents between parties not bound by any contractual relationship, and thus lacking an opportunity to agree to submit a possible dispute to arbitration – parties may appoint their respective arbitrators, surely to be chosen based on their expertise and know-how required to handle space matters and understand the characteristics of a specific case. Besides, flexibility and suitability are features in arbitration proceedings, both international and domestic, that escape from the rigidity of the so called “one-size-fits-all” of national courts, and which renders them inappropriate to resolve outer space disputes.

On a final note, it is also known the possibility of investor-state dispute settlement regarding space activities, whose bilateral and multilateral investment treaties around the world contain arbitration clauses that could allow, as the case may be, a private entity (investor) to choose the applicable rules, for example, ICSID Arbitration Rules or the ICC Rules of Arbitration – this is a very interesting but complex topic, worthy of considerations in a future article.

III. Outlooks

The current international framework addressing dispute settlement in outer space, foreseen both the LIAB and the OST, although of greater importance, does not provide favourable mechanisms to facilitate outer space disputes to private entities, particularly because space technologies, applications and activities have grown at a much faster pace than the legal system drafted back in the 1960s and 1970s. ADR proceedings, notably arbitration, both international and domestic, are useful and capable of resolving disputes on a wide variety of space-related issues, and may indeed help space stakeholders, public and private, to overcome legal pitfalls.

Victoria Associates has a unique track record in all sorts of international proceedings with a keen interest and focus on international arbitration, including international commercial and investment disputes, but also advising and representing clients in ADR proceedings in domestic arbitration and litigation before national courts in jurisdictions where we are qualified.

Above all, Victoria Associates’ members understand their clients’ business and motivation, helping them “reaching for the stars”.

João Nuno Frazão

Victoria Associates

joao@victoria.associates

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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

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Setting up distribution contractual relationships in Portugal

1. Context

Setting up a business in Portugal, including any distribution contractual relationships, usually begins with choosing the business entity that best suits specific cases. To this effect, the most common and best suited types of business for an importer owned by a foreign supplier are: (a) public limited liability company; (b) private limited liability company (Lda.); and (c) single shareholder limited liability company.

In the case (a) of public limited liability companies, the basic (mandatory) elements for its incorporation are: (1) minimum of five shareholders; (2) minimum share capital of € 50,000; (3) articles of association; (4) commercial name; (5) board of directors and supervision board, which must be composed of at least one public certified auditor.

For (b) private limited companies, the basic elements for incorporation are: (1) minimum of two shareholders; (2) minimum hare capital of € 2,00 (€ 1,00 per shareholders); (3) articles of association; and (4) commercial name.

Unlike both previous options, (c) single shareholder limited liability companies are based on individual investment, and the basic elements are similar to private limited liability companies with minor exceptions: in addition to the sole shareholder, the minimum share capital is € 1,00.

Bearing this in mind, any distribution relationship (producer-distributor-final consumer) is available in Portugal, including the following and best known:

  • Agency – by which an agent (an individual or a company) undertakes the obligation to promote contracts on behalf of the principal, with autonomy and stability;
  • Concession – by which one of the parties undertakes to sell its products to the other party who the undertakes to buy them and sell them to the third parties, on its own account and on a stable basis, in a given constituency;
  • Franchising – by which one party grants another the right to exploit its trademark, company name or patents or any other licenses of intellectual property rights for certain consideration, often committing to provide its assistance and knowledge of the market, as well as its know-how.

2. Key Legislation

In the case of suppliers’ internal personnel, the rules of the Portuguese Labour Code apply, which regulate employment contracts. Regarding other distribution relationships, when the distributor is independent, the rules for service contracts mentioned in the Portuguese Civil Code apply. This is without prejudice to the agency law regime set forth in Decree Law nº 178/86 of 3 July 1986 (DL 178/86), which may be applicable to certain distribution contractual relationships.

The basic legal aspects to consider when assessing the contractual relationship between suppliers and distributors are the following:

  • Agency contracts – are subject to the legal regime laid down in DL 178/86. In line with the case law and legal commentary, the provisions of this regime may apply to other contracts that present similarities, although they do not operate automatically, but rather on a case-by-case basis.
  • Concession contracts – are not subject to a specific legal regime. In general, they follow the principle of contractual freedom, as well as the general rules of contracts. When admissible, the agency regime may be applicable by analogy.
  • Franchise contracts – are not subject to a specific legal regime either. Like concession contracts, franchise contracts are common. Such contracts are also governed by the principle of contractual freedom and other general rules of contracts.

It is important to mention that certain industry regulatory constraints exist, generally adopted in the form of codes of conduct, (e.g., in the context of the automobile industry, alcoholic drinks and publicity).

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To learn more, please read the Portuguese chapter of the Lexology Getting the Deal Through’ guide “Distribution & Agency 2022”, submitted by the Portuguese team of Victoria Associates (available here).

Victoria Associates has successfully represented clients in disputes related to distribution contractual relationships and welcomes any question that may arise in this context (info@victoria.associates).

Victoria Associates

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New Office in Lisbon

  • Meetings Room | Victoria Associates

We are pleased to announce the opening of our new Lisbon office on January 17. You can find our new office at Av. Duque de Ávila, no. 23 – 3 Dto., 1000-138 Lisbon, Portugal and opening time 09:00 AM.

This is a necessary but truly delightful step since we are growing on a steady pace: more and bigger cases to handle by a growing team of talented and enthusiastic people. Onwards and upwards, doing what we like and liking what we do.

We would like to thank you for your consistent support and look forward to assisting you in our areas of expertise.

If you have any questions regarding the new location, you can contact us at +351 213530560 or send us an email to info@victoria.associates

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Portuguese International Arbitration – Chapter of the International Comparative Legal Guides

A practical cross-border insight into international arbitration work.

Victoria Associates’ members Duarte Henriques, João Frazão and Teresa Roldão (trainee), in collaboration with International Comparative Legal Guides (iclg.com), have written the International Arbitration Portuguese Guide*.

This Guide provides an overview of the most important aspects of the Portuguese International Arbitration legal framework and practice related to arbitration.

The Guide provides answers to questions such as:

  • What has been the approach of the national courts to the enforcement of arbitration agreements?
  • Are there any subject matters that may not be referred to arbitration under the governing law of your jurisdiction? What is the general approach used in determining whether or not a dispute is “arbitrable”?
  • Are there any limits to the parties’ autonomy to select arbitrators?

Read the full Guide HERE and contact us if you have any question (info@victoria.associates)

About Victoria Associates

Victoria Associates is international and knows no borders. 

We are qualified to practice in France, Arizona, California, D.C., Massachusetts, New York, England & Wales, Portugal,  Spain, Greece, Frankfurt, Brazil and Venezuela.  

We work in English, Greek,  French, German, Spanish and Portuguese.

We advise and represent our clients in international commercial arbitration, investment arbitration and sports arbitration. Our team has vast experience in representing clients in arbitral proceedings under the rules of the main international arbitration institutions, including the Court of Arbitration for Sport – CAS, the International Chamber of Commerce – ICC, the International Centre for Settlement of Investment Disputes – ICSID, the London Court of International Arbitration – LCIA, the American Arbitration Association (AAA) and its international arm (ICDR), as well as in “ad hoc” arbitrations under the UNCITRAL Arbitration Rules. While Victoria Associates covers disputes in a wide range of business and commercial areas, our team has strong expertise in disputes related to Banking & Finance Law, Oil & Gas, Insurance & Reinsurance, Shipping, Energy, Public International Law and Human Rights, Construction, Engineering & Real Estate, Distribution, Business & Commercial Law, Intellectual Property and Internet Gaming, Mergers & Acquisitions and International Frauds and tracing assets.

* First published in the ICLG – International Arbitration –

https://iclg.com/practice-areas/international-arbitration-laws-and-regulations/portugal