Introduction
The commencement of a commercial dispute very often presupposes the availability of funds to cover the inherent expenses. The lack of financial resources may make it impossible or discourage the impecunious claimant to make use of arbitration or litigation to settle claims. This can lead to cases with merit never being settled and can take entrepreneurs to bankruptcy. To address the need for dispute financing, some solutions have been developed in the global market, including insurance for legal expenses and third–party funding (TPF).
This article aims to answer the question on the legality of TPF in Mozambique.
What is Third–Party Funding?
Third–party funding (TPF) is one of the most topical issues when it comes to dispute resolution, especially arbitration.
In the Mozambican context, the first challenge lies at the definition of the “TPF” concept. This difficulty is due to two reasons: on the one hand, the concept is globally new. On the other hand, the idea of third–party funding is not yet sufficiently developed in the civil law legal system, of which Mozambique is part.
As the concept is poorly developed in the civil law legal system, we will rely on the definition brought by the Africa Arbitration Academy (AAA), recently published in the Model Bilateral Investment Treaty for African States According to AAA, third–party funding means any funding provided by a natural or legal person who is not a party to a dispute (…), but who enters into an agreement with a Disputing Party in order to finance part or all of the cost of the proceedings either through a donation or grant, or in return for reimbursement dependent on the outcome of the dispute.
How does TPF operate?
Third–party funding is a mechanism designed to fund the resolution of a dispute in the courts or arbitral tribunals. Through this mechanism, a third party, generally without any interest in the dispute, makes financial resources available to the claimant to pay the costs pertaining the dispute resolution
process.
Thus, third–party financing presupposes an existing demand, either to be started or already started. Generally, funders do not invest in any type of claim. Funding is directed to high profile claims which have a high probability of success.
The funder bears the risk of failure of the claim and, possibly for this reason, the funding is only carried out after a thorough due diligence and research, aimed at assessing the probability of a successful claim.
The remuneration of the funder for the return on his investment is made through a percentage of the result (compensation for damages), most often in cash, deriving from the successful claim.
Third–party funding differs from legal expenses insurance, a mechanism available in Mozambique. While in third–party funding there is pending or yet to be initiated dispute, in legal expenses insurance, in principle, there is not a dispute at the time the insurance is contracted, although there is a risk of it occurring.
On the other hand, in third–party funding, the funder’s remuneration is conditioned on the success of the claim, while in insurance, the insurer’s remuneration is the premium, which, as a rule of thumb, is paid at the initial stage of the signing of the contract.
TPF should also not be confounded with contingency fee arrangements, considering that this is an agreement between the lawyer and the client providing that the later pays the lawyer’s fees in a form of a percentage of the money to be recovered in the case. This arrangement is lawful in Mozambique.
Is TPF legal in Mozambique?
The Survey on Costs and Disputes Funding in Africa, published by AAA in March 2022, found that 51% of the respondents answered that third–party funding is not legally provided for and is not commonly used in their jurisdictions, while 21% of respondents were completely unaware of this funding mechanism.
These figures reveal that this funding mechanism is still a novelty in Africa. One of the notable efforts to legalise third–party Funding comes from Nigeria. In May 2022, the Senate of that country passed legislation legalising TPF, making Nigeria one of the few jurisdictions that expressly legalises TPF, after Singapore and Hong Kong.
In the Mozambican context, we are not aware of any legislation that provides for TPF. However, this does not mean that TPF is prohibited. It just means that, there is no legislation on this financing mechanism.
It should be noted that Mozambique also has no legislation on champerty and maintenance, expressly prohibited in the majority of common law jurisdictions, and which consist in the promotion of claims, or their financing, by third parties with no interest in the matter.
The absence of regulation on the PFT creates uncertainty and may result in anarchy, which discourages funders from operating in the Mozambican market, given the fear of seeing their investment lost because of court decisions that may declare the funder’s actions illegal.
The adoption of an express position around the legality of the TPF, among other advantages, would supply the parties with a funding mechanism for their claims and would make Mozambique an attractive jurisdiction as a seat for international arbitrations.
Conclusion
The TPF is a dispute funding mechanism still under consolidation globally, and a novelty in Mozambique.
It is true that Mozambique still faces priority challenges regarding international arbitration (e.g., modernization of the legislation and arbitral institutions),
however, it is recommended that a future review of the legal framework on arbitration consider the issue of Third–Party Funding.
A clear position around allowing TPF is an indispensable condition for funders to operate in the Mozambican market.
Dimétrio Manjate
Managing Partner
Filipe Sitoi Dimétrio Manjate, Law Firm
