Introduction

Particularly in international commercial and investment arbitration, commencing a commercial claim requires financial resources to cover associated expenses, including lawyers' fees, arbitration costs, arbitrators' fees, administrative expenses and the costs of producing evidence, among others.

Lack of financial resources may prevent or discourage recourse to arbitration. Meritorious cases may consequently never be resolved, limiting access to justice and potentially causing commercial businesses to fail or sustain significant financial losses.

These challenges prompted the emergence of 'litigation funding', originally in United States court litigation towards the end of the last century. It rapidly spread to other jurisdictions, including the United Kingdom, Australia and Germany, and subsequently became popular in arbitration, particularly international commercial arbitration and, more recently, investment arbitration1.

This article aims to introduce third-party funding (TPF) and address its legality in Mozambique.

What is third-party funding?

Third-party funding (TPF) is a topical issue in dispute resolution, particularly arbitration.

In Mozambique, an initial challenge is conceptual. Duarte Gorjão Henriques's analysis of Portuguese law, published in 2015, provides useful context. The following description should be read in its historical setting, rather than as a current account of Portugal.1

“The subject of litigation funding by third parties, or 'third-party funders', has received little attention in our legal system.

Legal literature consists of an article or a brief reference in some works on arbitration. As far as is known, our courts have not addressed the subject even superficially. Finally, statutory regulation is entirely absent.”2

To define the concept, we draw on the Africa Arbitration Academy (AAA) definition published in its Model Bilateral Investment Treaty for African States3.

Under the AAA model, the concept covers funding by a person who is not a party to the dispute and agrees to finance some or all costs through a donation or grant, or through reimbursement dependent on the outcome. This broad definition should be distinguished from the commercial model described below.

How does third-party funding work?

Third-party funding finances the resolution of a pending or prospective dispute before a court or arbitral tribunal. A third-party entity, generally with no interest in the dispute, provides the litigant with financial resources to cover the costs of the dispute resolution proceedings.

This 'investment' generally carries no guarantee of repayment by the funded party. Only if the claim succeeds will the funder be reimbursed for expenditure and receive a percentage of the proceeds or a success fee, or a combination of both, usually in monetary terms4.

Third-party funding therefore presupposes a pending or prospective claim. Funders generally do not invest in every type of claim: funding is directed towards high-value claims with a strong prospect of success.

The funder assumes the risk of failure, which may explain why funding is committed only after extensive legal due diligence assessing the probability of success

Third-party funding differs from legal expenses insurance. Funding involves a pending or prospective dispute, whereas legal expenses insurance generally involves no dispute when the policy is taken out, although there is a risk of one arising. A funder's return also depends on the claim's success, whereas the insurer receives a premium, generally paid when the contract is concluded.

TPF should not be confused with an agreement fixing lawyers' fees in advance, including as a percentage of the value of the matter, or an agreement providing for an uplift based on the outcome in addition to fees calculated using other criteria. This type of agreement is lawful in Mozambique.

Is third-party funding legal in Mozambique?

A Pesquisa sobre os Custos e o Financiamento dos Processos de Resolução de Litígios em África, publicada pela AAA, em 20225found that 51% of respondents said third-party funding was not provided for by law and was not commonly used in their jurisdictions, while 21% reported being entirely unfamiliar with this financing mechanism.

These findings reflect respondents' limited familiarity with TPF at the time of the 2022 survey. The regulatory landscape has since evolved, as illustrated by Nigeria's 2023 reform discussed below.

For this review, we did not identify in the sources consulted a general Mozambican regime specifically dedicated to TPF. The absence of specific regulation does not itself amount to a prohibition. Each agreement's validity nevertheless requires assessment under the provisions applicable to it.

In the sources consulted for this review, we did not identify a Mozambican framework specifically dedicated to maintenance and champerty. These historical doctrines concern assistance or funding of litigation by third parties and, in the case of champerty, participation in the proceeds. Their treatment varies between jurisdictions and should not be presented as a uniform common-law prohibition.6

The absence of TPF regulation may create uncertainty and discourage funders from operating in Mozambique, given the risk of losing their investment if courts declare the funding arrangement unlawful.

An express position on TPF's legality would, among other benefits, offer parties a financing mechanism for their claims and make Mozambique more attractive as a seat or place of international arbitration.

Comparative analysis of the adoption and regulation of third-party funding

Nigeria

Nigeria's 2023 arbitration reform made it a reference point in Africa: the Arbitration and Mediation Act 2023 (AMA 2023) permits and regulates TPF. It abolished the doctrines of maintenance and champerty for arbitration (section 61), imposed disclosure duties covering the funder's identity and address and notification timing (section 62), and defined 'third-party funder' and 'third-party funding arrangement' (section 91). The Act also links TPF to security for costs applications and costs decisions, allowing funding costs to be considered in the final costs assessment7.

South Africa

In South Africa, case law and institutional rules recognise TPF even without a dedicated general statute. In PricewaterhouseCoopers Inc v National Potato Co-operative Ltd (2004), the Supreme Court of Appeal recognised that funding agreements are not inherently contrary to public policy, provided there is no abuse of process8. In 2021, the AFSA International Arbitration Rules introduced an express regime: Article 27 requires disclosure of TPF's existence and the funder's identity to the tribunal, the opposing party and the Secretariat, and defines 'third-party funder'9. This institutional approach aligns with good transparency practices.

Singapore

Singapore introduced third-party funding for international arbitration and related proceedings in 2017. From 28 June 2021, its scope was extended to include domestic arbitration and certain proceedings in the Singapore International Commercial Court. Funder qualifications and professional conduct rules form part of the framework.12

Hong Kong

Hong Kong followed a similar path: the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance 2017 removed the traditional champerty and maintenance restriction and permitted TPF in arbitration10. The Department of Justice issued a specific Code of Practice addressing disclosure duties, conflicts management, capital adequacy and contractual good practice in TPF11. The regime became fully effective on 1 February 2019, and the Hong Kong International Arbitration Centre provides guidance notes.

Conclusion

TPF is a litigation financing mechanism still developing globally and is new to Mozambique.

Mozambique still faces other priorities in international arbitration, including updating arbitration legislation and institutions. Nevertheless, a future review of the arbitration framework should address third-party funding.

A clear position on TPF's admissibility and limits would help reduce uncertainty and encourage funders to enter the Mozambican market.

Notes and references

  1. HENRIQUES, Duarte Gorjão, “Third Party Funding” ou o Financiamento de Litígios por Terceiros em Portugal, 2015, p. 575; disponível em https://www.josemigueljudice-arbitration.com/xms/files/02_TEXTOS_ARBITRAGEM/19_Financiamento_Arbitragem/Gorjao_Henriques_-_Financiamento_de_litigios_em_Portugal.pdf
  2. HENRIQUES, Duarte Gorjão, cited work, 2015, p. 574 (Introduction).
  3. Disponível na versão inglesa, em: https://africaarbitrationacademy.org/wp-content/uploads/2023/04/AAA-Model-Bilateral-Investment-Treaty-for-African-States-2022.pdf
  4. HENRIQUES, Duarte Gorjão, cited work, 2015, pp. 576–577 (funding and repayment model).
  5. Disponível em https://africaarbitrationacademy.org/aaa-survey-report-portuguese/
  6. Supreme Court of Appeal of South Africa, Price Waterhouse Coopers Inc and Others v National Potato Co-operative Ltd, [2004] ZASCA 64, 1 June 2004, particularly paragraph 25. Judgment: https://www3.saflii.org/za/cases/ZASCA/2004/64.html
  7. Arbitration and Mediation Act 2023 (Nigeria), sections 50(1)(g), 61, 62 and 91. Statutory text: https://www.lawyard.org/wp-content/uploads/2023/05/Arbitration-and-Mediation-Act.pdf
  8. Supreme Court of Appeal of South Africa, Price Waterhouse Coopers Inc and Others v National Potato Co-operative Ltd, [2004] ZASCA 64, 1 June 2004. Judgment: https://www3.saflii.org/za/cases/ZASCA/2004/64.html
  9. AFSA International Arbitration Rules, 2021 edition, Article 27 (Third-Party Funding). Institutional source: https://arbitration.co.za/arbitration/international-arbitration/international-rules/
  10. Vide https://www.elegislation.gov.hk/hk/2017/6%21en
  11. Vide https://www.doj.gov.hk/en/community_engagement/press/20181207_pr4.html
  12. Ministry of Law, Singapore, 21 June 2021 announcement of the expansion effective from 28 June 2021. Official source: https://www.mlaw.gov.sg/news/press-releases/2021-06-21-third-party-funding-framework-permitted-for-more-categories-of-legal-preceedings-in-singapore/ . Legislation: Civil Law (Third-Party Funding) (Amendment) Regulations 2021, S 384/2021: https://sso.agc.gov.sg/SL-Supp/S384-2021/