European Regulation of Litigation Funding

October 24, 2022

European Regulation of Litigation Funding

On September 13, 2022, the European Parliament passed a resolution that supports the establishment of a comprehensive framework for the commercial financing of litigation. It also urged the Commission to develop a Directive on this subject.

The resolution acknowledges that third-party litigation funding (“TPLF”) can provide various advantages to both the public and corporate sectors. It can help support the availability of justice, ensure that citizens have access to justice, and reduce economic imbalances between the private and public sectors.

Regarding the different jurisdictions’ experiences with third-party litigation funding, the resolution noted that certain types of funding can operate in an economic interest rather than that of claimants. It also noted that returns to the funders can be disproportionate.

Despite the limited position of third-party litigation funding in the European Union, it is expected that it will play a growing role in the future. Unfortunately, it is still unregulated in the continent. Moreover, according to the resolution, most of the funders have not adopted voluntary codes of conduct and regulatory mechanisms, leaving the claimants exposed.

Parliament believes that this regulatory vacuum needs to be addressed. It also points to the lack of common minimum standards at Union level, which risks fragmentation and regulatory imbalance in this area.

However, it adds that any regulation should go hand in hand with other measures that improve access to justice for claimants, such as legal aid or crowdfunding.

Main Principles
Parliament also highlights a number of specific ethical concerns that may arise with TPLF. For example, litigation funders should not have undue control over the legal proceedings, whether formally through contractual agreements or informally through threats to withdraw funding.

It pointed out that conflicts of interest can arise when there are inappropriate relationships between litigation funders, representative bodies, law firms, aggregators, including claim collection and award distribution platforms, and other entities that have a stake in claims and an interest in the outcome of a court case.

It notes that there is an increasing trend towards litigation funders agreeing to fund law firms over a number of future cases (portfolio funding). It recommends that safeguards be put in place to prevent potential conflicts of interest, to establish the rights of claimants and to require disclosure of details of relationships between litigation funders and the other parties involved.

Parliament considers that, except in exceptional and strictly regulated cases, litigation funders should not be allowed to abandon funded parties at any stage of the litigation, leaving claimants solely responsible for any costs of the litigation that may have been incurred solely as a result of the funder’s involvement. It stresses that contractual agreements based on conditional funding should be considered void.

It also believes that litigation funders should be responsible as claimants for defendants’ costs arising from unsuccessful litigation (adverse costs). Regulation should prevent litigation funders from limiting their liability for costs in the event of unsuccessful litigation.

Parliament’s Recommendations
The Parliament has proposed the establishment of a system for regulating and monitoring the activities of litigation funders. It would also require the establishment of a complaints system and enforcement measures. These should be similar to the supervision procedures that are used for financial services providers.

Although the goal of the legislation is to ensure that the use of the TPLF is protected, it also requires that certain safeguards are in place to ensure that the funds are operated in a proper manner. These include the establishment of a robust corporate governance framework and the monitoring of the funding operations.

In addition, claimants who are involved in the operations of the litigation fund should be indemnified in the event of any harm caused by the fund’s failure to have the necessary authorization. However, the Parliament noted that the system should not be overly burdensome on Member States and the litigation funders.

The Parliament also noted that the public should be informed about the existence of third-party funding arrangements for transparency reasons. This should be done through the disclosure of the identity of the litigation funder. The court should additionally be able to inspect the documents related to the funding agreement and review them for compliance with the relevant legislation.

Limits On Litigation Funders
Parliament also believes that legislation should limit the share of the award that litigation funders can receive in the event of a successful trial or settlement and on the basis of a contractual agreement. Only in exceptional circumstances should there be a deviation from the general rule that at least 60% of the gross amount of the settlement or damages be paid to the claimant. Otherwise, such agreements should be considered unfair and invalid. Furthermore, litigation funders should not be allowed to demand priority payment of their own compensation.

Next Steps
Parliament called on the Commission to monitor and analyse the development of third-party litigation funding in the Member States, both in terms of the legal framework and practice, with particular attention given to the implementation of Directive.

It called for the Commission to present, after the deadline for the application of this Directive (25 June 2023), a proposal for a Directive establishing common minimum standards at Union level for commercial third-party litigation funding, following the recommendations of the Parliament. This proposal should take into account the impact of Directive (EU) 2020/1828.

Will Member States Be Obliged To Implement These Measures?
At EU level, it is left to each Member State to decide whether and to what extent to allow litigation funding in its own legal system. If Member States choose to allow it, any new Directive will set minimum standards for the protection of funded claimants.

Link to the European Parliament resolution of 13 September 2022 with recommendations to the Commission on Responsible private funding of litigation:

October 24, 2022