A commercial lender will provide money to a business or person who is seeking a claim in court or arbitration as part of dispute funding. In accordance with a funding agreement, the funder provides a part or all the financed party’s legal expenses and disbursements, such as counselling and specialist fees, lawsuit or judicial settlement costs, and may even give the financed party operational cash throughout the proceedings. Additionally, the funder may consent to assume liability for unfavorable costs and offer security for expenses in response to a judicial court as well as arbitral tribunal’s request. The funder can get a cut of the money won in court or through arbitration in return for providing the funding.
The majority of dispute financing agreements are non-recourse, which means that, in the event that the case is won, the funder’s entitlement to pay is restricted to any sums collected from the responder.
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Although it has a strong presence in several countries, including Australia, continental Europe, the United States, the United Kingdom, and Canada, dispute finance has still been gaining ground in other regions. LatAm or Latin America has recently emerged as the region with the highest need for dispute finance. This is understandable given that the region has all the necessary elements that dispute funding needs to flourish, including highly contentious cases involving claimants with limited financial resources, pro-arbitration court systems, and regulatory frameworks that are not restrictive of dispute funding.
The legislative framework regulating dispute financing in Latin America, the market for dispute funding in the region, factors claimants should take into account when choosing a funder, the considerations funders make when investing in LatAm disputes are all covered within this chapter.
Laws regarding dispute funding in Latin America
The legal system restrictions of champerty as well as maintenance were not inherited by the civil justice, legal systems of Latin America, which are rooted in Roman law. In general, there are no legal restrictions on how to use dispute funding in Latin America. Lawsuit funding agreements (LFAs) are legitimate and enforceable under the fundamental principles of the law of the contract and participants’ autonomy acknowledged in civil court jurisdictions, stipulating they conform with the fundamental requirements in terms of the contract validity within applicable jurisdiction, notably: legal capacity, consent, and an element that isn’t in violation of the law, the moral standards, or the interests of the state.
Civil judicial systems, however, could include rules that are tangentially related to LFAs and could impose limitations that might make dispute financing transactions unprofitable. The following must receive special scrutiny in particular.
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Restrictions on the transfer of judicial rights
Many nations with a civil law system recognize the respondent’s particular prerogative in the event of a transferring of litigation rights. According to several civil rules in the area, if a litigating right gets transferred after claims has been filed, the claimant should inform all parties involved in the proceedings of such transfer, and also the respondent then has the option of paying the transferee the amount they paid to obtain the claim. The transferred litigation right will then be cancelled if the responder does this. This right, which has its roots in Roman law, is acknowledged within civil codes for countries like Chile & Colombia.
Even if an LFA will not include the transferring of a litigious right, extra attention should be taken whenever claims gets sold to funders following the launch of the claim well before the verdict or award becomes final since this might be seen as a kind of litigation right transfer. Given that certain LFAs allow a “true sale” of a future right to collect funds from an underlying lawsuit or arbitration, careful thought must be given first to LFA’s structure. These LFAs must state clearly that the sale would not be a transference of actual claim itself, but the acquisition of future right to receive money from the claim, that is still held and managed by a claimant.
Defending against excessive interest rates
The amount of interest that may be lawfully levied for such a loan is a second limitation that might be present in nations that practice civil law. To shield customers against excessive and unequal interest rates, several nations established a maximum rate of interest. Depending upon the jurisdiction, imposing a rate of interest over the maximum can have a variety of effects, but generally speaking, it will result in either voiding of the contract or a decrease of said interest payable towards the lender. Despite the fact that LFA does not constitute a loan, it’s also crucial that its terms take into account any restrictions regarding the utilization of interest that may be in force within relevant jurisdiction. Funders must make it clear in the LFA’s terms that the deal is invested in assets rather than a promissory note, loan, secured obligation, and other such type of debt instrument (arbitration or litigation ).
Rules of professional conduct
LatAm nations have no ethical rules governing the utilization of dispute financing by attorneys and legal firms, but generally speaking, civil law nations have rules that apply to attorneys. All ethical standards require attorneys to behave impartially, in their clients’ best interests, and in accordance with the rules of professional confidentiality (lawyer–client privilege). In order to minimize conflicts between funders’ expectations and their clients’ interests, attorneys are obligated to have their clients’ express agreement before disclosing sensitive material to funders.
It is also significant to note that international organizations and local arbitral institutions had also enacted principles and regulations regarding the transparency of financing in the arbitration context in particular. The major purpose of this is to provide arbitrators the opportunity to check for conflict of interest to disclose any relevant information on any possible connections to the contested funding. When disclosure is recommended or required by arbitration rules or guidelines, it is only to be confined to the revelation of the presence of financing and also the identification of funder and not the disclosure of either LFA or its conditions.
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