REUTERS | Arnd Wiegmann

Third-party funding: a Swiss law perspective

Third-party funding (TPF) has attracted a great deal of attention over the last decade in numerous jurisdictions, including in Switzerland. TPF arrangements are usually motivated by a party’s lack of the necessary funds to commence arbitration proceedings or its desire to outsource the costs of the arbitration and any associated financial risks. The third-party funder will typically earn an agreed percentage (usually ranging between 15−50%) of any award or a success fee if the arbitration is successful. Conversely, the funder will not receive any payment or return of the funds should the arbitration be ultimately unsuccessful. Unlike banks, third-party funders endorse the risk of the arbitration. As such, TPF is stated to be a variation of the “no win, no fee” approach.

Favourable environment

Although few arbitration or litigation finance providers are based in Switzerland (Omni Bridgeway, Invest4Justice and JuraPlus are some of the few operating in Switzerland), Switzerland provides a favourable environment for TPF. Notably, in 2004, the Swiss Supreme Court decided to strike down a law preventing parties from resorting to TPF (ATF 131 I 223, 2P.4/2004 of 10 December 2004). In that case, the Swiss Supreme Court made it plain that a general ban on TPF would violate the principle of freedom of commerce protected and guaranteed by the Swiss Constitution. Since then, there has been no further attempt to try and regulate TPF in Switzerland. In light of this, the doors are wide open for TPF in Switzerland.

Ethics

In terms of ethical standards applying to lawyers practising in Switzerland, the Professional Rules of the Swiss Bar Association prohibit “no win, no fee” arrangements. Yet, a modified version of such agreements to “no win, less fee” (that is, charging a fixed legal fee with the promise of an additional fee should the claim succeed) is authorised under those professional rules. This consideration should not arise in the classic case of TPF whereby the third-party funder is an entity distinct and separate from a party’s counsel.

Having said that, the growing trend of TPF in international arbitration raises a host of practical and ethical challenges for arbitration practitioners, such as issues of transparency and disclosure of the funding arrangements, confidentiality and privilege, conflicts of interest, or allocations of costs and security for costs. This contribution is (self-evidently) not the proper forum to explore in detail all of those important and complex ethical and procedural issues. Despite this, it is important to note that, in Switzerland, some provisions of TPF agreements are likely to raise some ethical issues for counsel when a third-party funder becomes involved in the arbitration (including, amongst others, issues of confidentiality, attorney-client relationship and control over the arbitration proceedings).

Control

Because third-party funders bear the financial risk of the arbitration, TPF agreements typically address the extent to which a third-party funder may exercise control over the conduct of the arbitration. Conflicts of interest may arise between the third-party funder and the funded party, or between the funder and the counsel retained by that funded party, and such conflicts are of particular concern in the context of settlement negotiations. The risk of conflicts of interest is exacerbated where the third-party funder expects to take an active role in management and strategy decisions, such as the selection of arbitrators and expert witnesses.

In other words, TPF can pose a threat to the foundation of the attorney-client relationship because of the potential for control that third-party funders may exert over the proceedings. While funders and funded parties have broadly the same interest in maximising any settlement or damages award, there is potential for conflict. In Switzerland, irrespective of whether counsel is retained by the funder or funded party, counsel will owe its professional and fiduciary duties to the client, that is, the (funded) party to whom the claim belongs, and not to the third-party funder. If engaged prior to funding, it would be advisable for counsel to ensure that the funding arrangement confirms that in the event of a conflict of interest between the funded party and the funder, counsel may continue to act solely for the funded party.

Schellenberg Wittmer Sebastiano Nessi

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