In the Philippine jurisdiction, there is no direct prohibition on litigation third-party funding. For non-counsel third-party funders, there are no set rules and regulations on litigation funding. However, the Supreme Court has set specific restrictions for counsel-funded litigation.

In instances where litigation is financed by a lawyer in consideration of a share in the proceeds or property to be recovered, Philippine jurisprudence characterises such an arrangement as a champerty, which has been defined by the Philippine Supreme Court as “a contract between a stranger and a party to a lawsuit, whereby the stranger pursues the party’s claim in consideration of receiving part or any of the proceeds recovered under the judgment” (see Nocom v Camerino, et al., G.R. No. 182984 (10 February 2009)).

Absent any reimbursement agreement for the funds advanced by the lawyer-funder (see Baltazar, et al. v Bañez, A.C. No. 9091 (08 September 2014) citing Bautista v Gonzales, A.M. No. 1625 (12 February 1990)), champertous contracts are prohibited under the Code of Professional Responsibility and Accountability (CPRA) and are treated as void ab initio for running contrary to public policy, as they pose a “conflict-of-interest situation” between the lawyer-funders and their clients which undermines the fiduciary nature of their relationship (see Sections 3, 43, 44 and 52, Canon III of the CPRA; and Roxas v Republic Real Estate Corporation, G.R. No. 208205 (1 June 2016)).

Note that the case of RODCO Consultancy and Maritime Services Corporation v Ross, G.R. No. 259832 (6 November 2023) seems to allow a form of non-counsel third-party funding for as long as the arrangement is not “grossly disadvantageous to the party-litigant”. Should it be deemed as grossly disadvantageous, the non-counsel third-party funding arrangement becomes “akin to” a champertous contract, which is treated as void ab initio for running contrary to public policy.

In RODCO Consultancy and Maritime Services Corporation v Ross, supra, a company, under the guise of providing consultancy services, funded a labour case that an individual filed against his former employer and procured legal representation on his behalf in exchange for reimbursement of expenses and an unspecified portion of the proceeds of the claim. The Supreme Court ruled that the participation of the company, despite the lack of interest in the claim, was akin to a litigation financing arrangement. Further, the Supreme Court ruled that the ambiguity as to the stipulated portion of the proceeds to be given to the company made the arrangement grossly disadvantageous to the individual, in the event of a successful claim against his employer.

Counsel-funding is deemed as “champertous contracts” which are prohibited under Sections 3, 43, 44 and 52, Canon III of the CPRA (see Roxas v Republic Real Estate Corporation, G.R. No. 208205 (1 June 2016)). However, “lawyers may advance the necessary expenses in a legal matter they are handling in order to safeguard their client’s rights”, but, “it is imperative that the advances be subject to reimbursement” (see Baltazar, et al. v Bañez, A.C. No. 9091 (8 September 2014) citing Bautista v Gonzales, A.M. No. 1625 (12 February 1990)).

For non-counsel third-party funders, there are no set rules and regulations on litigation funding. Parties generally have the freedom to stipulate such terms and conditions in their third-party financing arrangement (see Article 1306 of the Civil Code) except under the circumstance that the “arrangement [is] grossly disadvantageous to the litigants”, such as when there is ambiguity as to the proceeds to be given to the non-counsel third-party funder (see RODCO Consultancy and Maritime Services Corporation v Ross, G.R. No. 259832 (6 November 2023)).

There are no specific rules that apply only to collective actions or specific types of cases.

There are no set non-legal-body rules and regulations on litigation funding. However, Philippine courts review cases that may include third-party fundings.

There are no set rules and regulations on litigation funding as to a specific type of counterparty.

As to the stipulations regarding the portions to be given to the non-counsel third-party funder, there are no specific legal provisions as to what constitutes “grossly advantageous” to a party-litigant. However, in RODCO Consultancy and Maritime Services Corporation v Ross, supra, the Supreme Court determined the following stipulation as ambiguous with respect to the proceeds to be given to the non-counsel third-party funder, to wit:

“That I hereby obligate, without any need of demand, to turn over [a] portion of proceeds of money claims in favor of [the company] pursuant to my commitment and obligation embodied in the said contract in full good faith.”

The said stipulation’s ambiguity rendered the arrangement grossly disadvantageous to the party-litigant and therefore void ab initio. In the same case, the Supreme Court ruled that, in view of the ambiguity of the arrangement, it could not “determine and calibrate the reasonableness of the arrangement.” Thus, the “reasonableness” of the arrangement may be taken as a standard to ascertain whether or not an arrangement is “grossly advantageous” to a party-litigant.

In general, there are no rules and regulations particularly mandating party-litigants’ disclosure of litigation funding. However, the Philippines’ Rules of Court have discovery measures which may be utilised to compel disclosure of facts that are relevant to a dispute (see Rules 21, 23, 24, 25, 26, and 27 of the Rules of Court). If party litigation is an issue relevant to the dispute, disclosure may be compelled.

In practice, Philippine banks generally inquire on the source of funds and/or purpose of transfer, in cases of bank transfer which may fall under a covered and/or suspicious transaction as defined by the Anti-Money Laundering Act (AMLA) for regulatory compliance purposes. In case the third-party funder routes its funds through a covered entity as defined by the AMLA, the purpose of the transaction may thus be inquired, which may expose the funder’s transparency (see Republic Act No 9160 as amended by Republic Act Nos 9194, 10167, 10365, 10927 and 11521).

Portfolio funding, which is regarded as an “arrangement [that] allows for the funding of cases which might not have been accepted on their own, since cases which operate below budget may be offset by those which have earned overruns” (Gabriela Victoria A. Timbancaya, Third-Party Arbitration Funding in the Philippines: Evolving A Local Framework From Global Perspectives, 93 Phil. L.J. 221, p. 225), has not yet been expressly recognised or developed in Philippine jurisprudence or legislation.

The same is true for monetisation arrangements, which refer to an arrangement by which pending legal claims are converted into cash for immediate liquidity.

These arrangements remain as the subject of scrutiny under the general prohibition on champertous contracts (see Sections 3, 43, 44 and 52, Canon III of the CPRA; Roxas v Republic Real Estate Corporation, G.R. No. 208205 (1 June 2016)) and those similar thereto (RODCO Consultancy and Maritime Services Corporation v Ross, G.R. No. 259832 (6 November 2023)). In case the arrangement is valid, the same remains to be the subject of evaluation under the general principles of the civil law, such as the rules on assignment (see Articles 1624 to 1635 of the Civil Code), and the general elements for the imposition of income tax – ie, (i) there must be gain; (ii) the gain must be realised or received; and (iii) the gain must not be excluded by law or treaty from taxation (see Commissioner of Internal Revenue v Shinko Electric Industries Co. Ltd., G.R. No. 226287 (6 July 2021)), as there are no specific rules and regulations as to the taxability of portfolio funding and monetisation arrangements.

Under the Philippine jurisdiction, the court may only render judgment against parties within its jurisdiction relating to the proceeding held before it. Hence, a third-party funder (a non-party) cannot be held liable to pay any adverse costs upon judgment by a court. Case law provides that “a judgment cannot bind persons who are not parties to the action. A decision of a court will not operate to divest the rights of a person who has not and has never been a party to a litigation, either as plaintiff or as defendant.” (QBE Insurance Phils., Inc. v Judge Laviña, A.M. No. RTJ-06-1971 (17 October 2017).)

Under the Philippine rules of procedure, a court or tribunal may order the provision of a security for costs through preliminary attachment. In a preliminary attachment, a plaintiff or any proper party may have the property of the adverse party attached as security for the satisfaction of any judgment at the commencement of the action or at any time before entry of judgment.

Preliminary attachment may only be issued against the property of the adverse party to the proceedings before the court or tribunal. Further, under the Philippine rules of procedure (Rule 57, 2019 Revised Rules of Civil Procedure, A.M. No 19-10-20-SC), preliminary attachment may be issued upon the following cases.

• “(a) In an action for the recovery of a specified amount of money or damages, other than moral and exemplary, on a cause of action arising from law, contract, quasi-contract, delict or quasi delict against a party who is about to depart from the Philippines with intent to defraud his[/her] creditors.
• (b) In an action for money or property embezzled or fraudulently misapplied or converted to his[/her] own use by a public officer, or an officer of a corporation, or an attorney, factor, broker, agent, or clerk, in the course of his[/her] employment as such, or by any other person in a fiduciary capacity, or for a wilful violation of duty.
• (c) In an action to recover the possession of property unjustly or fraudulently taken, detained or converted, when the property, or any part thereof, has been concealed, removed, or disposed of to prevent it being found or taken by the applicant or an authorised person.
• (d) In an action against a party who has been guilty of a fraud in contracting the debt or incurring the obligation upon which the action is brought, or in the performance thereof.
• (e) In an action against a party who has removed or disposed of his[/her] property, or is about to do so, with intent to defraud his[/her] creditors.
• (f) In an action against a party who does not reside and is not found in the Philippines, or on whom summons may be served by publication.”

After-the-event insurance mitigating the risk of adverse costs is not widely used in the Philippine jurisdiction, as evidenced by the absence of rules or regulations governing such product. Some insurance providers may cover this under Comprehensive General Liability to answer for a covered person’s legal liability usually due to accidents or injuries or damage caused by third persons. It bears to note that there is no express prohibition on such product as, under the Philippine law on insurance (Insurance Code, Republic Act No 10607), “[a]ny contingent or unknown event, whether past or future, which may damnify a person having an insurable interest, or create a liability against him[/her], may be insured against”.

As further provided in the Philippine law on insurance, “[a]n insurable interest in property may consist [of]: (a) an existing interest; (b) an inchoate interest founded on an existing interest; or (c) an expectancy, coupled with an existing interest in that out of which the expectancy arises.”

Apart from the standard hourly billings, the following fee structures exist in the Philippines: (i) general retainer; (ii) special retainer; (iii) contingent fee; and (iv) capped time charges; or a combination of the foregoing.

A general retainer, or retaining fee, is the fee paid to a lawyer to secure his/her future services as general counsel for any ordinary legal problem that may arise in the routine business of the client being referred to him/her for legal action. The future services of the lawyer are secured and committed to the retaining client. For this, the client pays the lawyer a fixed retainer fee which could be monthly or otherwise, depending upon their arrangement. (Trader Royal Bank Employee v NLRC, G.R. No. 120592 (14 March 1997).)

A special retainer is a fee for a specific case handled or special service rendered by the lawyer for a client. A client may have several cases demanding special or individual attention. If, for every case, there is a separate and independent contract for attorneys’ fees, each fee is considered a special retainer. (Trader Royal Bank Employee v NLRC, G.R. No. 120592 (14 March 1997).)

A contingent fee arrangement is valid in this jurisdiction and is generally recognised as valid and binding but must be laid down in an express contract. The amount of contingent fee agreed upon by the parties is subject to the stipulation that the counsel will be paid for his/her legal services only if the suit or litigation prospers. A much higher compensation is allowed as contingent fee in consideration of the risk that the lawyer may get nothing if the suit fails. (NPC v Court of Appeals, G.R. No. 206167 (19 March 2018).)

Contingent fee contracts are subject to the supervision and close scrutiny of the court in order that clients may be protected from unjust charges. Section 13 of the Canons of Professional Ethics states that “a contract for a contingent fee, where sanctioned by law, should be reasonable under all the circumstances of the case including the risk and uncertainty of the compensation, but should always be subject to the supervision of a court, as to its reasonableness.” (NPC v Court of Appeals, G.R. No. 206167 (19 March 2018).)

In all these fee structures, a lawyer is not entitled to unilaterally appropriate his/her client’s money for themselves by the mere fact alone that the client owes him/her attorney’s fees. The failure of an attorney to return the client’s money upon demand gives rise to the presumption that he/she has misappropriated it for his/her own use to the prejudice and violation of the general morality, as well as of professional ethics; it also impairs public confidence in the legal profession and deserves punishment. In short, a lawyer’s unjustified withholding of money belonging to his/her client, as in this case, warrants the imposition of disciplinary action. (Rayos v Hernandez, G.R. No. 169079 (12 February 2007).)

A lawyer shall not acquire, directly or indirectly, a proprietary interest in the property or rights, which is the object of any litigation or transaction in which the lawyer may take part by virtue of the profession (Section 51 of the CPRA).

A lawyer shall not share, split, or divide or stipulate to divide, directly or indirectly, a fee for legal services with persons or organisations not licensed or authorised to practice law (Section 43 of the CPRA).

Receipt of compensation from someone other than the client must not interfere with the lawyer’s independence, professional judgment, or the lawyer–client relationship. Neither should information relating to representation of a client be disclosed in violation of the rule on privileged communication (Section 44 of the CPRA).

A lawyer shall not share, split, or divide or stipulate to divide, directly or indirectly, a fee for legal services with persons or organisations not licensed or authorised to practice law (Section 43 of the CPRA).

In the Philippines, a law firm is “any private office, partnership, or association, exclusively comprised of a lawyer or lawyers engaged to practice law, and who hold themselves out as such to the public” (Section 26 of the CPRA).

While there is no direct provision on third parties funding law firm operations in the CPRA, Canon II, Section 26 of the same Code provides that only lawyers may be admitted into a law firm partnership.

Under the general principles of partnership in the Philippine Civil Code (New Civil Code of the Philippines, Republic Act No 386), the establishment of a partnership entails two or more persons binding themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves.

This can be understood as requiring that only lawyers may contribute to the partnership with the view of being engaged in such partnership. Otherwise, a non-lawyer/non-partner providing funding to the law partnership may be deemed prohibited from taking profit.

In a scenario where law firms take out loans to fund their operations and capital, the return to the creditor is simply that of loan repayment and not a share in the profits.

Under the Philippine tax code (National Internal Revenue Code of 1997), as amended, “gross income means all income derived from whatever source,” including, but not limited to, the enumeration provided therein (see Section 32 of the Philippine tax code, as amended). Accordingly, funders’ recoveries in excess of the initial investment or funding provided are subject to income tax. Any gain recognised by the third-party funder on top of their initial investment may be treated as taxable income, by virtue of its nature as a return on capital.

Case law relating to the Philippine law on taxation dictates that “income means all the wealth which flows into the taxpayer other than a mere return on capital. Capital is a fund or property existing at one distinct point in time while income denotes a flow of wealth during a definite period of time.” (Chamber of Real Estate and Builders’ Associations, Inc. v Romulo, et al., G.R. No. 160756 (9 March 2010).)

Income tax is computed on a graduated basis, with the income tax rates depending on the total taxable income for the applicable period, subject to exclusions and deductions recognised under the Philippine tax code, as amended.

Legal services rendered by lawyers practising the profession within the Philippines are subject to value-added tax (VAT), provided that the gross sales or receipts for the taxable year exceed the threshold amount of PHP3 million.

As provided under the Philippine tax code (National Internal Revenue Code of 1997), as amended, “[a]ny person who, in the course of trade or business, renders services, shall be subject to the value-added tax imposed in this Code.” Issuances from the central taxing authority of the Philippines include the practice of a profession by an individual or a general professional partnership as a service subject to VAT.

It bears emphasis, however, that the sale of services to which the gross annual sales do not exceed the amount of PHP3 million are exempt from VAT. In such case, the rendering of legal services is subject to a percentage tax of 3% on the gross receipts for the applicable taxable year.

Input VAT may be claimed on the purchase of services on which VAT has accrued, provided that the input VAT is evidenced by a VAT invoice.

Under the Philippine tax code (National Internal Revenue Code of 1997), as amended, the bodies corporate registered in the above-mentioned jurisdictions shall be classified as non-resident foreign corporations (NRFCs). Accordingly, payments to NRFCs that do not consist of the following are subject to a final withholding tax of 25%.

• Interest on foreign loans payable to NRFCs.
• Cash dividend payments by domestic corporations to NRFCs.
• Property dividend payments by domestic corporations to NRFCs.
• Cash and property dividend payments by domestic corporations to NRFCs whose countries allowed tax deemed paid credit (subject to the tax sparing rule).