Third-Party Litigation Funding: Navigating Ethical and Legal Boundaries

G.R. No. 259832, November 06, 2023

Imagine a seafarer, injured and unable to work, struggling to navigate the complex legal system to claim his benefits. A company offers to help, covering legal fees and expenses, with the promise of reimbursement and a share of the eventual payout. Sounds like a lifeline, right? But what if the agreement is deemed illegal, leaving both parties in a worse position? This is precisely what happened in the case of RODCO Consultancy and Maritime Services Corporation vs. Floserfino G. Ross and Antonia T. Ross. The Supreme Court examined the legality of a litigation financing arrangement, highlighting the fine line between legitimate assistance and prohibited champerty.

Understanding Champerty and Maintenance in Philippine Law

The concepts of champerty and maintenance are deeply rooted in legal history, designed to prevent abuse of the legal system. Maintenance refers to assisting a party in litigation without having a legitimate interest in the outcome. Champerty, a specific type of maintenance, involves financing a lawsuit in exchange for a share of the proceeds if the case is successful. Philippine law, while not explicitly using the terms “champerty” and “maintenance” in statutes, frowns upon agreements that smack of these concepts, especially when they undermine the integrity of the legal profession or exploit vulnerable litigants.

The Civil Code enshrines the principle of autonomy of contracts, allowing parties to freely agree on terms and conditions, subject to certain limitations. Article 1306 of the Civil Code states: “The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.” However, this freedom is not absolute. Contracts that violate public policy, such as those that encourage frivolous litigation or create conflicts of interest, can be deemed void.

The Code of Professional Responsibility and Accountability also prohibits lawyers from certain financial arrangements with clients that could compromise their independence or exploit the client’s vulnerability. This stems from the fiduciary duty a lawyer owes their client, requiring utmost good faith and loyalty.

The RODCO Case: A Story of Assistance Gone Wrong

Floserfino Ross, a repatriated seafarer, sought RODCO’s assistance in pursuing claims against his employer. He signed a Special Power of Attorney and an Affidavit of Undertaking, granting RODCO broad powers to represent him and manage his claims. RODCO, in turn, hired Atty. Napoleon Concepcion to provide legal services. Crucially, the agreement stipulated that RODCO would finance the litigation expenses, with Floserfino promising to reimburse these expenses and give RODCO a portion of any monetary award received.

After Floserfino successfully collected his claim, he issued two checks to RODCO, which were later dishonored due to a closed account. RODCO sued Floserfino and his wife, Antonia, to recover the amounts. The Regional Trial Court (RTC) ruled in favor of RODCO. However, the Court of Appeals (CA) reversed the RTC’s decision, finding the contract void. The CA emphasized that RODCO was not composed of lawyers and thus could not render legal services. It also questioned the lack of a specific agreement on the amount of contingent fees and the absence of proof that RODCO had provided cash advances to Floserfino. The Supreme Court affirmed the CA’s decision.

The Supreme Court, in its decision, highlighted several key issues:

• Champerty-like Arrangement: The Court found the agreement to be similar to a champertous contract, where RODCO financed the litigation in exchange for a share of the proceeds.
• Lack of Specificity: The absence of a clear agreement on the amount to be paid to RODCO created an opportunity for abuse and financial overreaching.
• Public Policy: The Court emphasized that champertous contracts are against public policy, particularly when they exploit vulnerable litigants.

The Court quoted:

“The litigation financing arrangement between RODCO and Floserfino is prohibited because it is similar to a champertous contract. It is grossly disadvantageous to Floserfino as there is no specific agreement as to the amount to be given to RODCO…“

“…the Irrevocable Memorandum of Agreement, as well as the Special Power of Attorney and Affidavit of Undertaking, are void for being champertous contracts.“

Practical Implications for Businesses and Individuals

This case serves as a warning to businesses and individuals considering litigation financing arrangements. While providing assistance to those in need can be commendable, it’s crucial to ensure that such arrangements are structured ethically and legally. The RODCO case underscores the importance of clear, specific agreements that avoid the appearance of exploitation or overreaching.

Key Lessons:

• Transparency is Key: Clearly define all terms and conditions, including the amount or percentage to be paid in exchange for financing.
• Avoid Ambiguity: Ensure that the agreement is specific and leaves no room for interpretation or abuse.
• Seek Legal Advice: Consult with a lawyer to ensure that the arrangement complies with all applicable laws and ethical rules.

Frequently Asked Questions

Q: What is champerty?

A: Champerty is an agreement where a person without a legitimate interest in a lawsuit finances it in exchange for a share of the proceeds if the case is successful. It’s generally considered against public policy.

Q: Is it illegal to lend money to someone pursuing a lawsuit?

A: Not necessarily. However, if the lender expects to receive a portion of the proceeds from the lawsuit in exchange for the loan, it could be considered champerty.

Q: Can a company provide legal assistance to individuals who cannot afford it?

A: Yes, but the company must not engage in the unauthorized practice of law. It should also avoid arrangements that could be seen as exploitative or contrary to public policy.

Q: What should I do if I’m approached by a company offering to finance my lawsuit?

A: Carefully review the terms of the agreement and seek legal advice. Ensure that the agreement is clear, specific, and fair. Be wary of arrangements that seem too good to be true.

Q: What are the potential consequences of entering into a champertous agreement?

A: The agreement could be deemed void, meaning that neither party can enforce it. This could leave you without the financial assistance you need and without the ability to recover the money you promised to the financier.

ASG Law specializes in maritime law, contract law, and civil litigation. Contact us or email hello@asglawpartners.com to schedule a consultation.