The lack of funds to afford the high costs of initiating certain litigation proceedings, judicial or arbitral, can make it very difficult or even impossible to file lawsuits or initiate arbitration proceedings.

To remedy this problem, third-party funding was created. This resource makes it possible for a third party that is not a party to the dispute, be it a financial institution, a company, or even an individual, to bear the costs and expenses of a certain proceeding.[1]

In return, this third party usually receives a portion or percentage of the financial advantage eventually obtained by the funded party, should the latter win the dispute.[2]

On the other hand, if the funded party loses, the funder will bear all the costs of the proceeding without receiving any consideration. This is precisely the risk of the deal, and the reason why the arrangement is usually preceded by a careful analysis of the funders' probability of success.

This concept is not yet all that widespread in Brazil, although third-party funding of litigation is already a widely recognized practice in international arbitration and judicial litigation in other countries. In the United States, for example, third-party funding is quite usual, especially in the filing of so-called class actions.

Its use, however, is gradually growing in the Brazilian scenario, especially with the creation of funds for this specific purpose. Those who defend this type of arrangement point out the following as positive points:

  • Feasibility of initiating proceedings (especially arbitration) that would be financially unfeasible for the holder of the right;
  • Dissemination of the arbitration proceeding among parties with less economic power;
  • Reduction in the number of "weak merit" proceedings, as third party funders tend to make an independent and impersonal assessment of the claim, accepting only those that meet their investment criteria, i.e. have a reasonable chance of success;
  • The third party investor's concern is that the proceeding be as economical and objective as possible; and
  • The unburdening of the Judiciary, as it allows access to other more costly means of dispute resolution.

On the other hand, some counterpoints still generate resistance to third-party funding in Brazil, for example:

  • The risk of violating the impartiality of the arbitrators and the judgment, as well as corrupt conduct;
  • The possibility of stimulating unnecessary litigation, as a way for funders to profit from the claims;
  • The risk of the so-called "minority activism", which could result in the filing of liability lawsuits by the funders against the controller, aiming to receive the premium and fees referred to in article 246 of the Brazilian Corporations Law; and
  • The possibility of disagreement between the funded party and the funder during the proceeding.

Another factor that generates insecurity and, consequently, delays consolidation of the practice of third-party funding across Brazil is the absence of any specific regulations on the matter. There are only a few best practice recommendations issued by arbitral chambers.[3]

A relevant issue to be evaluated and for which there is still no secure definition, for example, is whether or not the funded party is obliged to disclose information about the funding and the identity of the funder(s).

On this point, Brazilian arbitration chambers have recommended that the parties report, at the first opportunity, the full identification of the funder(s) to the arbitral tribunal, which should transmit this data to the arbitrators and other parties. The goal is to prevent impartiality on the part of the arbitrators towards the funder from being compromised in any way.[4]

Although the case law on the subject is still quite incipient, the Court of Appeals of the State of São Paulo (TJSP) issued a recent decision on the subject and established the first outlines of the information that must be disclosed in third-party funding situations.

In the case, a minority shareholder had filed a liability suit against the controller of a company alleging abuse of power. The controllers began to request that, in addition to the name of the funder, the contracts and documents related to the funding of the litigation by the third party be presented.

The lower court judge ordered that the contracts signed with the those responsible for funding the litigation be submitted to the record. The argument is that it would be necessary to determine whether, in that case, the funded party was being used as a straw man to conceal the identity of the real plaintiffs.

The judges of the 2nd Chamber of Business Law of the TJSP, however, in a unanimous opinion, found irrelevant presentation of the documents related to the funding, as well as disclosure of the identity of other potential funders.

The decision was handed down on September 20 of this year by the reporting judge Natan Zelinschi de Arruda, in Interlocutory Appeal 2153411-63.2022.8.26.0000 filed by the funded party. The judges of the 2nd Chamber of Business Law of the TJSP who reviewed the case found that:

  • the funding of litigation is allowed in the legal system, and there is no impediment to the party "seeking the help of others to share the high costs and results of a lawsuit"; and
  • investigating the identity of the funders would be totally irrelevant to resolving the merits of the dispute.

The issue will reach the Superior Court of Appeals for the first time, since the appellee has recently filed a special appeal against the appellate decision of the TJSP.

Whether or not one agrees with the resolution of the issue given by the TJSP, the mere fact that the matter is now being faced in our courts is commendable. With the decision, the trend is that funders and funded parties will have greater certainty and a better ability to predict the information that may be disclosed. This will allow these players to make better informed decisions when choosing to fund a particular dispute.

If the international trend is followed, third-party litigation funding in Brazil will be an increasingly frequent and usual practice. Consequently, more controversial issues on the subject will certainly be subject to much discussion in Brazilian courts until the matter is finally regulated or settled in our case law.

 

[1] The funding can cover administrative costs, fees for arbitrators, lawyers, experts, and even money judgments.

[2] Although this is the most common practice, the lender and the funded party are free to decide the funder's remuneration as they see fit.

[3] Following the example of the guidelines established in Administrative Resolution 18/16, established by the Arbitration and Mediation Centre of the Brazil-Canada Chamber of Commerce (CAM-CCBC) and Administrative Resolution 14/20, issued by the Chamber of Business Mediation and Arbitration - Brazil (Camarb).

[4] See Administrative Resolution 18/16, established by the Arbitration and Mediation Centre of the Brazil-Canada Chamber of Commerce (CAM-CCBC) and Administrative Resolution 14/20, issued by the Chamber of Business Mediation and Arbitration - Brazil (Camarb).