We often come across the concept of financial assets, which are intangible assets with dual economic functions. Firstly, they facilitate the placement of surplus funds from entities with excess capital to those in need of short-term funding. Secondly, they transfer the risk associated with funds generated by tangible assets.[1] However, this article shifts the focus to a distinct yet related concept: the legal asset, emerging from the legal finance market. In this sphere, legal funders are prepared to finance, purchase, or monetise claims against other entities. Given these characteristics, it is difficult not to view legal assets as a subset of financial assets.
The legal finance market has experienced growth and maturation since its inception in the 20th century, initially flourishing in Australia, then expanding significantly in the United States and establishing a strong presence in the United Kingdom. However, in continental Europe the market’s development is still in a more nascent phase. Notable exceptions include countries like France, the Netherlands, and Germany, where the market has already reached a more mature state.[2]
In Brazil, the legal finance market is thriving, particularly in the area of “créditos pré-precatórios e precatórios.” “Créditos pré-precatórios” refer to legal assets held by companies or individuals against a public entity, based on an award that is yet to be enforced. “Precatórios”, in contrast, are legal claims where the enforcement proceedings have already been successfully concluded and the owed amount is registered in the budget of the public entity. These creditors are in a queue, awaiting payment. Both types of assets accrue interest, but payments are only made when the public entity has the funds available. To avoid the wait, companies often choose to sell their “créditos precatórios” and “pré-precatórios” against the public entity. It is crucial to note that such credits have already been recognised by a court by a decision with res judicata effect, confirming their legitimacy.[3]
Shifting our focus to other Portuguese-speaking markets, such as Angola, Mozambique, and Portugal, we observe that they are, as a whole, still in the early stages of development. These markets present significant opportunities for investment in arbitration claims and single-case litigation. When considering arbitration claims specifically, the security of the claim is typically high. Take, for instance, Portugal, which is known for its fast and reliable arbitration proceedings. There is a general tendency for companies to comply with rulings, and the enforcement of awards is efficiently executed. Regarding other Portuguese-speaking countries, their legal frameworks are similar to that of Portugal and they are increasingly favourable towards arbitration. For instance, Angola has in recent years joined the New York Convention and the Washington Convention.
The economic value of legal assets derived from single-case litigation claims can be challenging to ascertain. One of the primary concerns is the lengthy nature of proceedings in first instance courts, where delays are common. However, as we know, legal finance markets are highly innovative, and there are strategies to make these legal assets economically attractive. For instance, one can invest in legal assets that are in the appeals phase. In civil law countries—including Portugal, Angola, and Mozambique—appeals courts tend to operate much faster than first instance courts and focus more on legal aspects rather than facts. As a result, these legal assets can quickly become liquid for funders.
Now, let us delve into the realm of class action claims, where the investment of legal funders has been significantly high. These funders have predominantly invested in class actions related to consumer protection and breaches of competition law. Until 5 December 2023, the financing of these legal assets was not directly governed by any specific provision. During the proceedings, various legal reports were submitted – some advocating for the validity of such financing, while others vehemently opposed to it, with one author even arguing that such financing was unconstitutional. However, with the transposition of the directive on collective actions defending consumer interests, the legality of these contracts has now been established by law. Certain provisions of this new law make the legal asset less unpredictable. The litigation funding agreement must adhere to specific requirements designed to uphold the independence of organisations representing consumers. This ensures that their lawyers align with consumer rights and are not influenced by the financial objectives of legal funders. Furthermore, the use of such funding must not jeopardise fair competition. Additionally, the remuneration should be fair and proportional, evaluated in light of the characteristics and risk factors of the collective action in question, as well as the market price of such funding. The legal finance market in civil law jurisdictions is set for significant expansion. It is now widely recognised that financing, monetising, or buying legal assets can significantly aid individuals and companies who either lack the resources or prefer not to allocate their capital to legal expenses. This development in the legal finance market is expected to substantially increase access to justice. An increase in claims does not necessarily imply a rise in speculative claims. Legal funders, who are not in the market to incur losses, meticulously scrutinise legal assets, ensuring that only viable claims receive financial backing. The necessity for regulation in civil law jurisdictions is crucial. It will provide clarity on the legal foundations and strengthen the value of legal assets. However, it is imperative that legislative efforts in this area remain reasonable and pragmatic. Despite these advancements, a conservative mindset is still prevalent in this market. This conservative approach may impact the pace and manner of growth in the legal finance sector, emphasising a cautious and measured adoption of new financing models and regulatory frameworks.
[1] Pamela Castillo Orozco, El derecho litigioso como activo financiero: negociabilidad en el mercado financiero costarricense, 2016, p. 152.
[2] Max Volsky, Investing in Justice, An Introduction to Legal Finance, Lawsuit Advances and Litigation Funding, The Legal Finance Journal, 2013.
[3] Bruna Ferreira Marengoni, A venda de ativos judiciais na gestão empresarial, in Guilherme Setoguti J. Pereira (Coord.), “Litigation Finance e Special Situations”, Thomson Reuters, Revista dos Tribunais, 3.ª Tiragem, 2023, pp. 137 et seq..
