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In the context of globalization and the increasing complexity of international commercial transactions, dispute resolution has become a crucial and sometimes challenging issue for businesses. In response to this urgent need, a new trend has emerged, attracting the attention of lawyers and businesses worldwide: Third Party Funding (TPF).
This is a mechanism in which a third party, not directly involved in the dispute, provides financial support to a party engaged in the dispute in exchange for a share of the benefits resulting from the case. This trend not only brings new opportunities for access to justice, especially for parties with limited financial resources, but also creates many challenges and legal issues that need to be addressed.
This article will delve into the nature of TPF, its legal regulations, and propose the establishment of this form in Vietnam in the context of increasing international commercial disputes, while also evaluating the benefits and risks it brings.
Third Party Funding – TPF
Although there are no official regulations or translations for this model, Third Party Funding can be tentatively translated as “Tài trợ bên thứ ba” in Vietnamese.
The concept of TPF is that in a legal dispute, a party acting as a professional funder will establish an agreement with a client, who may be the plaintiff or the defendant in the case, but in most practical cases, the funded party will be the plaintiff.
According to the agreement, the funder will pay or partially or fully fund the legal costs the client must pay to proceed with the lawsuit in exchange for specific benefits, usually the compensation or assets recovered from the case.
In the event that the client loses the case, meaning they do not receive any compensation, they will not have to repay the funded amount and, of course, will not have to pay any agreed benefits to the funder.
In practice, in Western countries, the TPF model is often divided into two types: commercial funding and consumer funding.
The most common commercial funding agreements are between funders, who are private businesses or law firms, and the litigants in the dispute, who can be either the plaintiff or the defendant. In these cases, with the requirement of providing legal funding in exchange for a portion of the court’s compensation ruling if the client wins, funders can often collect up to millions of USD per case.
Conversely, consumer funding agreements are less common and are established between funders and individuals to provide them with living expenses. Typically, these individuals are plaintiffs in personal injury lawsuits, seeking compensation from an organization. The funding amount in these cases is usually quite small, under 10,000 USD. Plaintiffs will use this amount to cover living expenses, and when the plaintiff wins the case, they will have to pay a portion of the awarded amount to the funder.
From the Funders’ Perspective
Typically, private companies receive capital from investors and then use this invested capital to continue investing in other profitable forms. In this case, it involves investing in their clients’ potential to win a lawsuit.
This form of investment is very suitable for companies wishing to diversify their investment portfolios, moving beyond traditional investments such as stocks, bonds, mutual funds, real estate, and gold.
With TPF, businesses with deep legal knowledge and expertise in assessing and valuing clients’ assets can have a higher win rate compared to other forms of investment, as well as the ability to recover investments with better profit margins.
In terms of specific operational methods, the funder can agree to pay the legal fees and costs associated with the lawsuit on a non-recourse basis if the lawsuit fails. If the lawsuit is successful, they will receive a portion of the benefits from the total compensation their client receives.
Although generally the funder is the one who benefits more, given that all forms of investment carry a certain degree of risk, they can also lose the entire funded amount if the lawsuit is unsuccessful and their client loses.
Beyond profit motives, TPF can also be a tool for these businesses to prepare financial reports and balance sheets to balance expenses and revenues.
From the Funded Party’s Perspective
The costs of legal proceedings, such as arbitration or court cases, are often quite expensive, with unpredictable expenses and processing times, leading to high risks. An individual, or even some small and medium-sized enterprises, often lack the financial resources to pursue a prolonged lawsuit.
Legal costs include not only attorney fees but also other expenses such as arbitration fees, court fees, expert costs, and additional investigation costs. These expenses can escalate quickly, creating a significant financial burden for the litigating party.
Therefore, seeking funding from third parties through TPF may be the only option for them to access methods that protect their legal rights and interests. TPF not only provides the funded party with the financial resources to continue pursuing the lawsuit but also helps them mitigate financial risks if the lawsuit is unsuccessful, as the funder will cover the incurred costs.
In many cases, having TPF support can also motivate financially weaker parties to stand up against giant corporations, who often use their financial power to suppress and use ‘legal fees’ to eliminate accusations against them, instead of relying on arguments, fairness, creating an unfair competitive environment.
Moreover, having a third-party funder can bring credibility and confidence to the funded party, as the funder typically only invests in cases they assess as having a high chance of winning. This can also encourage the parties involved in the dispute to reach a settlement or resolve the case more quickly, thanks to the presence of a financially committed and knowledgeable third party.
Legal Perspective on Third Party Funding in Vietnam
Since TPF has only emerged in recent years and is not yet globally widespread, Vietnam currently has no official or unofficial regulations regarding Third Party Funding or TPF in legal documents.
Therefore, in arbitration and court proceedings, even if the disputing parties involve entities as third-party funders or have financial relations with the litigants, Vietnam cannot adjudicate these parties as TPF due to the lack of legal provisions.
However, with Vietnam actively joining and signing international trade agreements recently, including provisions on funding relationships (such as the Vietnam-EU Investment Protection Agreement (EVIPA)), it is necessary for Vietnam to consider researching and codifying detailed regulations on funding forms, including legal funding through TPF.
Article 3.28, Section B, Chapter III of EVIPA defines Third Party Funding as when a natural or legal person, without direct dispute involvement, enters into a funding agreement with a funded party participating in a dispute. The agreement content is entirely dependent on the parties’ will, based on the principles of freedom, independence, and non-coercion.
The investor or funder may cover part or all of the litigation costs through various forms, and the benefits they can receive may include a portion of the compensation when the funded party wins the dispute or a fixed amount, depending on the negotiation results.
Additionally, EVIPA also stipulates that the funded party must notify the competent authority of the existence and content of the funding agreement, along with the funder’s name and address, as well as other related regulations.
Although Vietnam has committed to international treaties, codifying the regulations to fit Vietnam’s context is not an issue that can be easily resolved. Therefore, currently, Vietnam has no regulations on TPF or similar funding forms, even though many recent lawsuits exhibit funding characteristics similar to TPF.
Although these lawsuits are still adjudicated, the funders are not recognized as TPF, leading to many difficulties and inconsistencies in the resolution process.
The most notable case is that of lawyer Dang Dinh Thinh disputing reward money with his client, where the Ho Chi Minh City People’s Court of Appeal accepted Thinh’s appeal, ordering the defendant to fulfill the reward contract as signed to recover the house, valued at 113 billion VND, instead of 68 billion VND as ruled by the first-instance court.
The Ho Chi Minh City People’s Court of Appeal ruling in favor of Thinh, awarding 113 billion VND, is the clearest evidence of Vietnam acknowledging the legality of out-of-court agreements with third-party funding characteristics.
This is an important motivation for Vietnam to move towards building a comprehensive and clear legal mechanism to regulate third-party funding relations in commercial disputes in Vietnam and internationally, thereby legalizing this funding form, reducing the cost burden of arbitration and court proceedings for litigants, and addressing current shortcomings in the practical application of TPF, providing solutions for improvement.
Building and Developing Third Party Funding Regulations in Vietnam
As analyzed above, currently, Vietnam has witnessed some disputes involving agreements that possess the nature of Third Party Funding (TPF), with a trend of increasing over time as this form becomes more popular both in Vietnam and internationally. However, the lack of detailed regulations on TPF could affect the resolution of disputes related to this field.
To build a legal framework for TPF in Vietnam, the drafting authority should consider the content of international treaties that Vietnam has joined concerning TPF, thereby considering domesticating suitable provisions or learning, adjusting, and then implementing the revised version.
Simultaneously, Vietnam can consider the experiences of countries with economic and social conditions similar to Vietnam in the field of legal funding. For example, Singapore and Hong Kong are two jurisdictions with remarkable developments in the TPF legal model. Initially, these countries studied international regulations on funding and gradually implemented each content, evaluated, and reviewed similar points, and eliminated shortcomings.
This caution is a necessary condition to successfully expand and develop the TPF model as seen today in these two regions. Some notable contents that Vietnam can consider applying include:
Detailed Regulations on the Funder’s Conditions in Transactions, Especially the Financial Capacity of the Funder
To ensure the funder has the capability to provide finance to the litigants in the dispute, it is necessary first to ensure the funder meets the conditions to operate as a funder. Not only financial conditions, but the third party must also fully meet the legal requirements to be allowed to provide funding. Defining criteria for the third party to meet the conditions to become a funder in litigation procedures will be an effective solution, helping Vietnam build a sustainable TPF model in the future.
Regarding financial capacity, funders must maintain a minimum capital to ensure the ability to provide funding. This minimum capital level will be flexible depending on the economic and social conditions of each country, with no international common standard that can be suitable. Countries can adjust the capital level according to their economic development trends.
Determining the minimum capital level for funders not only ensures that third-party funders have sufficient financial capacity to fulfill their commitments but also helps prevent and eliminate weak entities from the market, avoiding economic issues becoming a barrier while resolving ongoing disputes.
Detailed Regulations on the Amount of Funding and the Purpose of Funding, Benefits Derived from Funding
The funding amounts provided by the funder to the litigant in the dispute should be clearly stated in the funding agreement/contract, specifying the legal responsibilities of the parties in all possible scenarios.
For instance, on the funded party’s side, it should be stipulated that the funder does not require reimbursement of the funded amount nor any compensation in case of losing the lawsuit. If the lawsuit is won, the amount the funder will receive should be specified to avoid conflicts such as in lawyer Thinh’s case mentioned above, where there was a dispute over the ‘reward value won by the litigant’ at 68 billion VND and the ‘total property value’ at 113 billion VND.
Other fees to note include insurance fees, arbitration fees, attorney fees, witness fees, expert fees, risk reserves, disadvantage costs, etc., which also need to be clearly stated in the contract. However, in general, the law will find it challenging to impose rigid regulations and will emphasize and respect the freedom of agreement between the parties.
Regulations on Disclosure and Confidentiality of Information
In a TPF agreement, some content needs to be publicly disclosed, but some content needs to be kept absolutely confidential.
For example, the content, information to be publicly disclosed includes the existence of the funding agreement and the identity of the funder, including basic information such as the name and address of the funder. In some countries, disclosure requirements not only ensure transparency, avoiding risks for the parties but also prevent conflicts of interest, ensuring the objectivity of the trial/arbitration.
However, the funded party is not required to disclose the entire content of the funding agreement. Some content needs to be kept confidential. This is the obligation of both the funded party and the funder.
This means that parties in commercial disputes will be limited in providing information to the funder, leading to fewer potential funders willing to fund the lawsuit, as funders in the role of investors need to assess the likelihood of success or failure when deciding to invest, something challenging to do if only basic information is received.
Without sufficient detailed information to evaluate and assess the success potential, funders will not choose to invest, providing capital for the disputing parties.
Therefore, when drafting regulations on information disclosure and confidentiality, the drafting authority needs to find a balance between publicly disclosable information and information that needs to be kept confidential to ensure the interests of the parties. If confidentiality regulations are too stringent, it will easily lead to the impractical implementation of TPF.
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