Litigation Funding Comparative Guide

• Law Firm: Uria Menendez
• Subject Matter: Finance and Banking, Consumer Protection, Financial Services, Consumer Law, Consumer Credit
• Author: Ms Constança Borges Sacoto, Fernando Aguilar de Carvalho, Hélder Frias, Lua Mota Soares and Leonar Magalh'es Ramalho
• Published date: 22 February 2023

1 Commercial legal finance basics

1.1 How is commercial legal finance defined in your jurisdiction?

Although this concept is not expressly defined in Portuguese law, 'commercial legal finance' is understood to mean the total or partial financing of a lawsuit by a third party that has no interest in the litigation. This third party, which is completely unrelated to the dispute, bears the costs of the lawsuit of one of the parties - usually the plaintiff, but sometimes the defendant in case of counterclaims. These costs may include lawyers' fees, the costs of legal opinions, the costs of hiring other experts and court fees, among others.

Initially, this type of funding usually arose in the context of arbitration, where disputes tend to have a higher monetary value and a greater degree of complexity and sophistication than court claims. However, more recently, given the surge in consumer-related class actions in the Portuguese courts, third-party funding is increasingly found in judicial disputes.

1.2 How does commercial legal finance differ from consumer litigation finance and contingency agreements?

Consumer legal finance as such is virtually non-existent in Portugal, except in the context of class actions, which tend to be more complex and have higher values than other types of litigation. In such cases, the relevant class is often represented by a consumer association, with sophisticated lawyers.

Contingency agreements under which the legal adviser charges nothing to the client unless the case is successful, in which case it takes a percentage of the award as remuneration, are prohibited and as such are null and void under Portuguese law.

Portuguese lawyers are bound by the Rules of the Portuguese Bar Association, established in Law 145/2015 (as amended), which prohibits pactum quota litis (ie, fee arrangements entered into between a lawyer and a client before the dispute in which the client is involved ends, whereby the lawyer's fees take the form of a percentage of the claim and depend exclusively of the outcome of the litigation).

1.3 What are the major legal finance products/solutions in your jurisdiction? (a) Single case fees and expenses; (b) Portfolio fees and expenses; (c) Monetisation of claims; (d) Monetisation of judgments and awards and (e) Other

Although the Portuguese legal finance market is still developing, with probably no more than a handful of cases being funded each year, several UK, US and European litigation funders have already put the country on their radar and have visiting the leading law firms to offer their services and pursue opportunities. Some have even established local branches and representatives. This means that the full array of solutions offered by reputable and well-established litigation funders are available in the Portuguese market.

1.4 In what areas of law is litigation finance most prevalent in your jurisdiction (eg, competition, insolvency, patents, contracts)?

Please refer to question 1.1. Although initially more prevalent in international and domestic arbitration cases, litigation finance is now becoming more commonly used in litigation - mostly in private enforcement and consumer protection cases relating to collective claims and class actions. As the accessibility and awareness of litigation finance solutions increase, third-party funding is expected to expand into other areas of litigation.

1.5 Who are the major players in the industry (eg, pure players, multi-strategy firms, start-ups)?

The major players in the Portuguese market are UK, US and European third-party funders, with consolidated practices and strong track records, which in our experience has facilitated the access to and availability of third-party funding. There are also some Iberian-based players with greater proximity and knowledge of the local market, many of which have former local litigation lawyers on their management and sales teams.

2 Legal framework

2.1 How mature is the market for legal finance in your jurisdiction? What types of commercial litigations and/or arbitrations may be funded by a third party?

Portugal continues to be a developing and peripheral market for third-party funding, especially when compared to other countries in Europe and across the globe. However, it has significant potential and Portugal is clearly on the radars of international funders, which regularly visit the country's main law firms to showcase their solutions and pursue new opportunities.

However, third-party funding is still making its way into corporation boardrooms, which is where the clients and real growth opportunities for litigation finance can be found.

Given that third-party funding is not regulated in Portugal, as described in question 2.2, there is in principle no immediate limitation with regard to the types of litigation or arbitration that can be funded by a third party. However, in some areas there are hurdles which must be taken into consideration.

2.2 Is there a dedicated legal finance regime in your jurisdiction? What other laws and regulations have relevance to legal finance in your jurisdiction?

Like many other European countries, Portugal has not introduced a specific national statutory or regulatory framework for third-party funding, although calls have been made for such regulation - especially in the wake of the recent resolution of the European Parliament on responsible private funding of litigation.

The first soft law rules on this matter appeared within the arbitration context at the end of 2020 and in 2021. They primarily focused on the duty of disclosure in order to ensure the independence and impartiality of the arbitrators.

However, the lack of specific regulation does not mean an absence of rules applicable to third-party funding. It simply means less certainty and clarity for parties that want to avail of third-party funding, because they will need to seek guidance from and take into account a number of general rules and principles.

The main points of concern are not exclusive to the Portuguese market and include matters such as:

• licensing of the activity itself;
• the independence and impartiality of arbitrators;
• conflicts of interest;
• the national courts' perceptions of third-party funding;
• the legal and ethical issues that third-party funding poses for lawyers; and
• possible interference with control and strategy in the proceedings.

Furthermore, the Code of Ethics published by the Portuguese Arbitration Association (APA) at the end of 2020 also applies to the parties' representatives (lawyers) and other participants in arbitration proceedings, and is binding on all APA members. This was the first time in Portuguese soft law that the matter of third-party funding was regulated. However, the main concern of the Code of Ethics is that the parties provide sufficient information on the participation of any third-party funder in order to avoid potential conflicts of interest with anyone involved in the case.

Finally, in an attempt to provide clarity and certainty on its scope of application, the new Code of Ethics defines a 'third-party funder' as any natural or legal person which is not a party or legal representative of a party to the dispute that:

• contributes financial support (for consideration or for free), or other economic support, for the judgment of the claims of one of the parties to the dispute; and
• has an economic interest in the outcome of the dispute or a possible obligation to indemnify one of the parties as a consequence of such a result.

Finally, there are no known judgments of the Portuguese courts regarding third-party funding. However, this is likely to change in the near future since, as described in question 4, a heated debate remains ongoing about third-party funding in private enforcement and consumer-related class actions.

2.3 Which public sector bodies and authorities are responsible for enforcing the applicable laws and regulations? What powers do they have?

Please refer to question 2.2.

2.4 Do the rules and codes of any self-regulatory organisations or professional associations have relevance to legal finance in your jurisdiction? What powers do such organisations and associations have?

Please refer to question 2.2.

2.5 What is the general attitude towards legal finance in your jurisdiction among the courts and other relevant bodies?

Although it is not easy to find reliable statistics in this field, to the best of our knowledge, the years 2020 and 2021 saw the first cases of third-party funding in the Portuguese courts, as consumer associations filed class actions for private enforcement and consumer-related disputes.

Although the intervention of third-party funders in these types of litigation has prompted heated debate - including on issues such as conflicts of interest and even the legality of third-party funding in light of the Class Actions Act - there are as yet no known judgments of the Portuguese courts on these issues.

In our view - as with many other innovations in the legal market which were initially met with suspicion by local operators - third-party funding is here to stay. However, in order to thrive and respond to the needs of local businesses, it will require not only specific regulation to provide a legal framework which brings certainty, clarity and transparency to the market, but also the adaptation of some existing procedural rules and regulations, which will need to account for third-party funding. In the meantime, legal finance will need to comply with local laws and limitations.

2.6 Is legal finance considered consumer credit and is it captured by the relevant protective regulations in your jurisdiction?

Legal finance is not subject to a specific national statutory or regulatory framework. In addition, the Portuguese courts have not yet ruled on this issue either. This is mainly because this financing mechanism does not fit within any of the regulated structures that exist in Portugal:

• Third-party funders do not fall...