Article 9 December 2015

Is litigation funding in peril?

Litigation funders are facing more scrutiny than before in the United Kingdom, but for now, they are on safe ground in Finland. Recent Supreme Court rulings in Finland and Sweden, however, could be used as ammunition against litigation funders in the future.

Litigation funding enables a party to litigate without having to invest significant amounts on legal costs. A professional third-party funder pays some or all of the costs associated with a dispute in return for a share of the proceeds if the case is successful. The funding can be arranged in multiple ways, and the funder's role can vary from traditional financing to financing via specialised claim vehicles and independently instituted legal proceedings.

While litigation funding is presently not commonplace in Finland, this business could be on an upswing in the coming years.

Under Finnish law, the general rule is "loser pays". The party who loses the case is liable for reasonable legal costs of the prevailing party. Until the recent court rulings in Finland and Sweden, the prevailing view in the Nordics has been that liability for other party's legal costs does not extend beyond the actual parties, save for rather remote liability of counsel.

Piercing the corporate veil – possibly not so limited liability for opportunists?

In its ruling (KKO 2015:17), the Finnish Supreme Court found that under certain criteria it is possible to hold the shareholders of a limited liability company liable for the company's liabilities.
The case concerned an Estonian company that had a Finnish parent company. The Estonian subsidiary sold devices to Finnish customers without paying the applicable private copying levies. The Finnish Supreme Court held that the corporate structure had been utilised chiefly to avoid its statutory obligation, i.e. payment of levies, and held the Finnish parent company liable for its subsidiary's obligation regarding the levies.

Almost simultaneously with the Finnish Supreme Court's ruling, the Swedish Supreme Court also tackled similar issues in its ruling (HD T 2133-14). In that case, the shareholders established a company for the purposes of pursuing litigation against a third party. As soon as the company lost the litigation it was declared bankrupt.

The Swedish Supreme Court held that the shareholders used the corporate structure to avoid its statutory obligations, i.e. liability for winning party's legal costs, and, therefore, ordered the shareholders to bear the winning party's legal expenses.

Litigation funder ordered to pay winner in the United Kingdom

In the United Kingdom, there have been number of cases in which a litigation funder has been ordered to pay the winning party's legal costs, irrespective of the fact that the funder has not been a party to the actual proceedings.

For example, in 2005, in Arkin v Borchard Lines Limited the UK Court of Appeal held the professional funder liable for the winning party's legal costs. However, the amount was limited to the extent of the funding provided.

Last year the UK High Court went further in its ruling Excalibur Ventures LLC v Texas Keystone Inc. Here, the court found that in a situation where a claim pursued under litigation funding is unsuccessful, the funder should be held liable for the opposing party's legal costs on the same basis as the party to the proceedings. The court reasoned that, in particular, if the claim has been speculative and opportunistic or with no sound foundation in fact or law, the funders should be held liable for the costs of the litigation.

Litigation funders are safe, at least for now

In Finland, the courts do not have as far reaching statutory discretion to decide who should be liable for the winning party's legal costs as the courts do in the United Kingdom.

Under the Finnish procedural code, only the losing party or, in exceptional circumstance, the counsel of the losing party can be liable for the winning party's legal costs. Therefore, in Finland, the parties have to rely on case law and legal doctrines if they wish to extend the liability of legal costs beyond the parties in the proceedings.

The recent Finnish and Swedish Supreme court rulings leave a lot of room for interpretation. However, some conclusions can be made especially in relation to litigation funders.

First, the Finnish and Swedish Supreme courts' rulings imply that corporate veil may only be pierced if corporate structures have been employed to circumvent liabilities. Second, so far the liability for the legal costs has been extended only to the shareholders of the company. Extending the liability to third party funders would require one or two extra steps further.

It is very unlikely that, in Finland, a litigation funder could become liable for legal costs solely based on the fact it has provided funding to the losing party. However, it is important for a litigation funder to evaluate this risk as part of the investment decision.

For parties who are facing claims from insolvent counterparties, these rulings may offer a handy tool to argue for a wider liability regarding legal costs.

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