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Third-party funding in France: an overview
Third-party funding (or litigation funding) is a practice that consists of entrusting a third party with the financing of the costs related to a dispute in exchange for a share of the sums recovered in case of success. This practice, long regarded with suspicion in France, has developed thanks to the rise of international arbitration, which offers prospects of profitability and legal security to funders. However, third-party funding is not governed by specific legislation or regulation in France, which raises ethical and practical questions for the actors of the sector. This article provides an overview of the main issues and challenges of third-party funding in France up to 2024.
Third-party funding is valid under French law
French courts recognized the validity of third-party funding contracts in a decision rendered on June 1, 2006, concerning the enforcement of an arbitral award. The case turned on an unrelated issue, but the Court of Appeal of Versailles established that these contracts are of a "sui generis" nature, uncommon within European Union member states (except in Germany), but legally sound and valid.[1]
French law and the French Civil Code do not address third-party funding per se, but French courts apply the usual French obligation and contract mechanisms to this distinctive type of contract. Moreover, they are not bound by the legal terms prescribed by the parties. Thus, French courts may reduce a contractually agreed fee if it is considered disproportionate or excessive in comparison to the services rendered. The French Supreme Court ( “Cour de Cassation”) previously held that the agreement to pay a physical third-party person as a funder, thirty per cent of all net amounts recovered in an inheritance dispute could, in principle, be subject to a reduction by the courts if found to be disproportionate.[2] In that case, the French Supreme Court quashed a decision by the Court of Appeal of Versailles, which had refused to reduce the contractually agreed fee of thirty per cent.
Third-party funding raises ethical and deontological questions
Third-party funding poses several ethical and deontological questions for lawyers, arbitrators and parties involved in a funded dispute.
For lawyers, the main issue is that of the potential conflict of interest between the client, the funder and the lawyer himself. Indeed, the funder may influence the litigation strategy, the selection of the lawyer or the decision to settle or not. The lawyer must therefore ensure to preserve his professional independence and to respect his deontological obligations towards his client, notably professional secrecy and respect of the mandate.
For arbitrators, the question is that of transparency and impartiality. Third-party funding may create a risk of conflict of interest between the arbitrator and the funder if the latter is linked in one way or another to the arbitrator or his firm. The arbitrator must therefore be informed of the existence and identity of the funder to verify his independence and disclose any circumstance that may affect his neutrality.
For parties, the problem is that of equality of arms and cost-sharing. Third-party funding may create an imbalance between the parties if one of them benefits from financial support that allows it to bear the costs of litigation without affecting its financial situation, while the other party has to bear alone the risk and burden of litigation. Third-party funding may also have an impact on the allocation of litigation costs, especially in arbitration, where parties have to advance arbitration fees and arbitrators' fees. The funder may thus be required to pay part of these costs, but he may also claim reimbursement from the adverse party in case of success.
Third-party funding is not regulated in France
Unlike other jurisdictions, France has adopted a more "laissez-faire" approach, with no legislative or regulatory guidance, leaving it to the various stakeholders of the sector to shape the contours of the applicable framework.
There is no code of conduct or professional standards specific to funders in France. However, some funders have adhered to international codes of conduct, such as the Code of Conduct for Litigation Funders established by the Association of Litigation Funders of England and Wales, or the Code of Conduct for Litigation Funders in Singapore.
There are also no specific rules for lawyers working on funded cases in France. However, as mentioned above, the Paris Bar published in 2017 a report and a resolution on third-party funding, in which it recognizes the legality and usefulness of this practice and makes recommendations to lawyers to preserve their deontological obligations.[3]
Finally, there are no specific rules for arbitrators regarding disclosure of third-party funding in France. However, some arbitral institutions have introduced provisions in their rules or practice notes to encourage or oblige parties to inform the arbitral tribunal and other parties about the existence and identity of the funder.[4]
Conclusion
Third-party funding is an undeniable reality of the French legal landscape, especially in the field of international arbitration. This practice offers undeniable advantages to parties who wish to access justice without bearing the cost and risk of litigation. However, third-party funding also raises ethical and practical challenges for lawyers, arbitrators and parties, who must be attentive to the legal and contractual consequences of this form of financing. France has not chosen to regulate third-party funding by specific legislation or regulation but has left it to the actors of the sector to self-regulate this practice. It remains to be seen whether this approach will be sufficient to ensure the legal security and transparency necessary for the development of third-party funding in France.
References
[1] Court of Appeal of Versailles, June 1, 2006, n° 05/05331.
[2] French Supreme Court, 1st civil chamber, July 9, 2009, n° 08-16624.
[3] Paris Bar, Report and resolution on third-party funding (Third Party Funding), February 21, 2017.
[4] See for example article 44 of the ICC Arbitration Rules (2021) or the Note to Parties and Arbitral Tribunals on the Conduct of Arbitration under the ICC Arbitration Rules (2021).
- Third-party funding is a practice that allows parties to finance their litigation costs by a third party in exchange for a share of the outcome.
- Third-party funding has developed in France thanks to international arbitration, which offers attractive opportunities for funders.
- Third-party funding raises ethical and practical issues for lawyers, arbitrators and parties, such as conflict of interest, transparency, equality of arms and cost allocation.
