This article seeks to address the different principles that apply to the payment of a party's legal fees depending upon the outcome of the action under the common and civil law system. It also seeks to provide a brief overview of the main rules of litigation funding and recovery of costs currently in force under the Portuguese civil procedure rules.

Litigation funding and associated costs

The general rule in the English legal system is that the unsuccessful party to a court action will be ordered to pay the costs of the successful party; in other words, costs follow the event. Costs do not currently follow the event under the Portuguese civil procedure rules; however, new legislation to bring in a 'costs follow the event' rule was introduced in February 2008. The position in relation to funding and associated costs under the Portuguese legal system can be viewed from three main perspectives: firstly, the lawyer's fees; secondly, court fees; and thirdly, legal aid and litigation insurance.

Lawyers' fees

Lawyers are under an obligation to provide their clients with information on costs, including their minimum and maximum chargeable hourly rates, as well as, where possible, an estimate of the likely fees for the whole case or transaction, as the case may be.

Under the terms of the Bar Association Act, legal fees should be defined according to the following criteria:

• importance of the services rendered;
• difficulty and urgency of the matter;
• the degree of complexity or difficulty involved;
• the result achieved for the client;
• the time taken to complete the work;
• the responsibilities assumed by the lawyer; and
• professional custom and practices.

Court fees

According to the Portuguese Costs Code, court fees ordinarily vary and are determined by reference to (1) the value of the claim; or (2) the service which the courts are required to provide.

Where the value of the claim is between A500 (£395) and A1,000 (£789), court fees can vary from A89 (£70) to A15.49 (£12.20) and, where the value exceeds A1,000, the court fees will be A15.49 plus A445 (£351) for each additional amount of A25 (£20) constituting the total value claimed.

At the time of writing, the position is that the parties to a court action have no procedural right (save for in limited and exceptional circumstances) to recover the fees incurred with their legal advisors – i.e. costs do not follow the event. However, they can recover the court costs paid and where, for example, both parties partially succeed in their claims, the court costs are split pro rata according to the outcome.

Legal aid and litigation insurance

A state-funded legal aid scheme exists and not only assists in providing legal representation but also in paying the court fees due, available for and intended to meet necessary legal expenses in accordance with an applicant's financial needs and means.

Finally, litigation insurance is widely available in Portugal in the form of 'legal expenses protection', which is often offered in addition or as a supplement to another form of insurance, such as car or home insurance. This form of insurance generally covers legal claims arising out of or related to the object of the insurance and is funded by the insurance company.

The Portuguese court system has traditionally experienced and continues to face a vast backlog of cases: courts are notoriously slow and backed up with dormant actions.

Despite past amendments to the civil procedure rules awarding more case management powers to judges, the courts and parties continue to be overwhelmed by inordinate delays in determining actions. It should be noted, however, that public statistics suggest that in 2006 the judicial backlog of cases fell by 4.4% (for the first time in the last decade) and that the corresponding number of court actions reaching and being determined at trial was at its highest in the last 10 years (14.3%).

This decrease results from the difference between the number of proceedings actually commenced (790,453) and the number of actions concluded (797,128). In other words, the number of concluded court actions was higher than the number of proceedings commenced.

The Portuguese courts of first instance are divided into four main areas – civil (covering the great majority of all cases including the commercial court), criminal, labour and family courts – which are, of course, subdivided into further specialist sections. The official figures released show that in 2006 the volume of pending cases per first instance court were as follows: civil court cases made up 59.8%, while criminal, labour and family actions represented, respectively, 26.9%, 7.8% and 5.5% of all pending proceedings.

As of 31 December, 2006, the number of pending actions in courts of first instance totalled 1,591,781.

The above-mentioned problems have been a cause of intense public debate over the last few years in Portugal and have led to the Government proposing and considering a number of possible solutions in an attempt to alleviate the problem.

One of the consequences we have seen of this is a concerted effort by both private parties and the Portuguese Government to develop alternative dispute resolution procedures and practice. This has resulted in specific dispute resolution institutions being established as well as the Justice of the Peace being able to resolve not only general commercial disputes, which are capable of being referred to arbitration, but also specialised arbitrations relating to, for example, consumer issues and road accidents. Accordingly, in Portugal, institutional arbitration, particularly for low-value claims, is being increasingly promoted by the Government.

In addition, the Ministry for Justice published on 26 February, 2008, preliminary legislation on the introduction of a similar rule to the common law principle of 'costs follow the event', the purpose of which would be to discourage potential litigants from commencing actions or at least undertaking a cost/benefit analysis before proceeding.

Overwhelming arguments support the application of the principle that costs follow the event, but significant issues of culture and uncertainty on how historic principles enshrined in the Portuguese Constitution will be affected by such a change. Other questions have been raised on the need to establish a branch of the judiciary to review and assess costs' proportionality and reasonableness and on the fact that judges would need training.

Many understand and agree on the advantages of introducing a rule that the unsuccessful party be responsible for the costs of the action, including in particular that this would:

• help prevent vexatious litigants from commencing actions;
• encourage a more thorough review of a case on its merits before proceedings;
• compensate an opponent obliged to incur costs in defending poorly-founded actions;
• act as a deterrent to proceedings commenced or continued for tactical reasons; and
• motivate parties to consider and reach reasonable settlements.

The number of unreasonable refusals to accept settlement offers made by one party both before and during the proceedings is considered to be very high in Portugal. The introduction of mediation as a credible alternative to litigation, while institutionally already established, still requires much work to be done in changing a cultural attitude, that has traditionally considered attempts to settle as a sign that a party may have a weak case or as an admission of liability.

The principle that 'costs follow the event' would assist in concentrating the minds of litigants and require them to act less on principle and more on a commercial basis. Clearly such a move would need to be backed up by other reforms of the civil procedure code and, indeed, the role of the court. For instance, greater sanctions would need to be introduced to ensure parties progress cases expeditiously. Judges would need to become more proactive managing the progress of cases as this would assist in reducing the number of actions commenced and concluding dormant cases.

The application of the 'costs follow the event' rule is a far-reaching reform to Portuguese civil procedure and such a step is not without serious critics. As outlined, the preliminary legislation foresees that the rule will be introduced by 1 September, 2008; however, we await further legislation providing detail on the backup and complementary systems needed to ensure the rule is applied equitably and efficiently. The rule will not be applied retrospectively; accordingly, it only covers court actions initiated on or after 1 September, 2008. The introduction of the rule, given its nature, is likely to be followed by a corresponding transitional period of opposition and uncertainty as well as a period where two distinct cost recovery systems are in place depending upon whether the case was commenced before or after 1 September, 2008.

Manuel Barrocas and Claudia Santos Cruz are partners at Barrocas Sarmento Neves in Lisbon.