Litigation Finance
In the event of a legal action or execution proceedings, it is the claimant party who cover the litigation costs at the beginning, in Turkey. The claimant may request the reimbursement of certain costs from the defendant at the end of the proceedings, if it is resolved in favor of the claimant.
Insurance is possible in Turkey for litigation costs since 1996 under the “General Terms on Legal Protection Insurance”, though not much applied in practice. To promote the system, the government has commenced to develop the relevant legislation in 2015.
As for litigation finance or funding where a third party undertakes to cover the costs of a dispute; such system has not yet been regulated in Turkey. As per Turkish Civil Procedure Law, only the persons/entities whose interests or legal benefits are effected can be involved in legal proceedings. Accordingly, we may say in general that claimants may freely receive funds from a third party provided that such party does not participate to the litigation process. Third parties may also be allowed to be involved in legal proceedings concerning the benefits of primary right holders in certain circumstances, in accordance with the relevant laws. Insurers can be shown as an example in this respect. Turkish Supreme Court also has precedents that support the assignment of monetary claims to third parties.
World Practice
When we review the implementation of litigation financing/funding in the World; we can well say that it is a rising trend mostly preferred by the persons or companies who have well-based claims and solid evidences to constitute a strong case. Funders evaluate the applicant’s case especially in terms of its risks and possible outcome, namely the likelihood of winning. This due diligence phase may last for 3-4 months or even more, depending on the case hence it is advised to apply to the eligible fund providers as soon as possible, before the start of legal proceedings. The funders also consider the attorney/law firm who will represent the applicant in the legal dispute, so working with reputable legal professionals from the very beginning is of utmost importance.
If an application is deemed appropriate as a result of the assessment process, the litigation funder will determine the amount it would cover, which may as well be the whole litigation costs, including the attorney fees. The funder will also request a certain percentage over the legal proceeds to be obtained as a result of a successful outcome and/or a certain multiple. The percentage is determined on a case-by-case basis, depending on the risk factor.
Current Status in Turkey
Since there is no legal background, there are no providers of third-party funding for litigation purposes in Turkey yet.
It is not certain whether a similar system will be accepted in Turkey in the future or, if ever regulated, it will be parallel with the above-explained practice. However, there are international litigation funds especially within Europe, accepting the applications of Turkish companies.
Arbitration Funding
Funding needs in the cases filed before arbitral tribunals have been gradually increasing due to the heavy costs incurred during the arbitration process. There are many funders in the World currently financing arbitration cases. Operationally, it is similar to the litigation finance; the funder undertakes the costs of a person/entity partially or wholly in consideration of a certain percentage over the outcome of the award or a certain multiple. The funder conducts a due diligence and evaluates the chances of winning the case here as well, before providing finance.
However, funding has not been regulated in general arbitration rules yet. Accordingly, this trend raises questions as to the impartiality and independence principles governing the arbitration. 2014 version of IBA Guidelines on Conflict of Interest included a new provision that requires third party funding to be disclosed for the purposes of ensuring the impartiality and independence arbitrators, as follows;
“The parties’ duty of disclosure of any relationship, direct or indirect, between the arbitrator and the party …. has been extended to relationships with persons or entities having a direct economic interest in the award to be rendered in the arbitration, such as an entity providing funding for the arbitration, or having a duty to indemnify a party for the award.”
It is also stated in the IBA Guidelines that the funder of a party in an arbitration case should be deemed to be the same with that party, via below wording;
“Third-party funders and insurers in relation to the dispute may have a direct economic interest in the award, and as such may be considered to be the equivalent of the party. For these purposes, the terms ‘third-party funder’ and ‘insurer’ refer to any person or entity that is contributing funds, or other material support, to the prosecution or defense of the case and that has a direct economic interest in, or a duty to indemnify a party for, the award to be rendered in the arbitration.”
Though not having a binding nature, IBA Guidelines have a wide acceptance within the international arbitration community. The arbitrators generally consider the rules set forth in IBA Guidelines while reaching a decision. Similarly, the legal professionals representing the parties in an arbitration case commonly use it as a roadmap, when the need arises.
Ketenci & Ketenci | ILP
