Third-party litigation funding principles set out for EU member states

The set of 12 principles is the final outcome of the ELI’s project on third-party funding (TPF) of litigation. They were developed to give guidance to litigants, funders, legal advisers, courts, arbitration institutions and regulatory bodies involved in the fast-growing TPF market. The project is also intended to provide a “blueprint” for light-touch regulation of the expanding sector across the EU.

The principles are aimed at addressing points of common concern around TPF. They also set out the suggested minimum content and sample wording of a TPF agreement and consider the application of TPF in different types of proceedings, including arbitration and insolvency proceedings.

Gemma Erskine of Pinsent Masons said that one of the main concerns surrounding TPF is the lack of transparency, so the principles seek to encourage the funded party to disclose, at a minimum level, the fact of funding by a third party, the identity of the funder and the funder’s registered office to the court and other parties involved in the litigation. The identity of the funder is to be disclosed once the funded litigation has commenced, or within 14 days of the execution of the funding agreement if this is entered into after the litigation has started.

“It is noteworthy that the principles do not mandate the disclosure to other parties in the litigation of the funding arrangements themselves, or even an indication of how much the funder is receiving, such as the percentage of damages they may be entitled to under the funding agreement,” said Erskine. “The ELI report notes that disclosure of the agreement itself to the defendant is more hotly contested due to the alleged risk of strategic benefit to the defendant and the costs of disclosure which, it is said, could potentially be very large.”

Funders’ fees, according to the report, present a particularly “contentious and intractable” issue and this is an area of “significant controversy”. The ELI’s principle on funders’ fees places obligations on funders to inform funded parties prior to signing a funding agreement about the nature and likelihood of the fees that the funded parties will be charged.

As best practice, the funder should seek to explain the nature of the funding provided, expenditures that the funder agrees to cover, whether there is any cap on total financial contribution, whether the funder will make any payment in respect of security for costs, what is excluded from the funded sum, and the fee that the funder will charge upon success such as any proportion or percentage of funding that is tied to damages.

The overall return that funders receive has become a highly polarised matter of debate. The main concern is that some funders are receiving a very high return, and very little is passed on to claimants or, in the context of mass actions, the wider class. Some jurisdictions have started to set a specific percentage cap on the total amount funders may receive. Germany, for example, has introduced legislation, to implement the EU Representative Actions Directive, under which an action funded by TPF is inadmissible if the funder is promised more than 10% of the award payable by the defendant.

However, the ELI noted in its report that pricing is a complicated and sophisticated tool that involves various factors including, importantly, risk. It has also taken note of the feedback from funders that capping returns will disincentivise investment in novel or high-risk disputes.

“The big take-away from the report is that the ELI has been swayed by funder arguments on the risks of imposing funding caps and declined to articulate any percentage figure, on the basis that national context and case-specific risk profiles will be key to determining whether the level of funder’s fee is justifiable,” said Emily Cox, litigation expert at Pinsent Masons.

Principle 10 deals with concerns around the level of control retained by the litigant or beneficiary in the context of litigation funded by a third-party, in terms of case management or settlement. The report considers it best practice for the funded party to be the primary decision maker in the funded proceedings. The funding agreement should clearly outline the funder’s role in decision-making throughout the litigation process, including any influence or control they may have regarding settlement decisions.

The ELI report describes the funder’s role in settlement decisions as the “most vibrant debate” in litigation funding. Many commentators argue that the funder should participate in evaluating the settlement, as their insights can be valuable. However, it is widely agreed that the final decision-making authority should remain with the funded party. The ELI’s approach is set to ensure that the funded party retains control over the proceedings while benefiting from the funder's expertise and perspective.

“The principle set out by the ELI aims to clarify the control and decision-making authority of the funder during the proceedings. It also recognises that funders can provide valuable insights, and that the involvement of an experienced funder can positively contribute to the management of the proceedings,” said Erskine.

Capital adequacy of the funder is another area of concern the principles look to address. Under principle 7, third-party funders have a responsibility to plan and manage their finances effectively to ensure they can meet their financial commitments when they become due and payable. The ELI’s report has provided draft wording that funders may consider using in their funding agreements to assure funded parties that sufficient capital is being held in reserve.

Erskine said that the principles are not mandatory and do not carry any sanctions for non-compliance, while the report allows individual jurisdictions to decide whether to incorporate the principles into legislation.

“It is perhaps surprising that there has been no explicit call for greater regulation of TPF, which many established funders and defendants alike would have likely welcomed. While the report did recognise the importance of a degree of continued self-regulation, it also recognised that there was a limit to the utility of this approach,” she said.

The ELI’s report suggested that, given the potential effects of comprehensive regulation on the risk/reward balance for funders and therefore the availability of TPF to parties, regulation is “only appropriate where there is an identifiable problem or market failure”.

The ELI project on TPF of litigation is co-chaired by Mrs Justice Sara Cockerill, a judge of the English Commercial Court, and Professor Dr Susanne Augenhofer of Universität Innsbruck. In the UK, the Civil Justice Council is currently conducting a similar review on litigation funding. Mrs Justice Cockerill is also a member of the working group on the CJC’s review.

The UK government has said it will wait for the outcome of the CJC review before deciding whether to reintroduce draft new legislation on litigation funding that was introduced by the previous Conservative government and fell before the recent UK general election.