Responsible private funding of litigation, article published on Legal Today

Comments to the European Parliament Resolution of 13 September 2022

 Under the ordinary legislative procedure of the European Union, the European Parliament adopted on 13 September 2022 the Resolution “Responsible private funding of Litigation” (the “Resolution“).

The resolution requests the Commission, pursuant to Rule 47 of the European Parliament’s Rules of Procedure and Article 225 of the Treaty on the Functioning of the European Union, to submit a proposal for a directive laying down minimum common standards at Union level for third-party litigation funding, in accordance with the recommendations set out in the Annex (to which is attached the text of what the European Parliament considers should be the future proposal for a directive).

 In our opinion, the Resolution shows a general lack of knowledge of the reality of the practice of litigation and arbitration funding, or at least only a partial knowledge that does not adequately assess the issue from the perspective of the funders. Some of the main shortcomings of the proposed regulation are highlighted below.

Fiduciary duty and overriding interests 

One of the biggest surprises of the Resolution is that it purports to require funders to observe a fiduciary duty to claimants, always acting in their best interests. Not only that, but it also intends that in the event of a conflict of interest between a funder and a claimant, the funder should commit to placing the interests of the claimant or intended beneficiary above its own interests.

Clearly, in any litigation there will always be an alignment of interests between the claimant and the funder. But this is not always the case with regard to the rights and obligations assumed by each party in the funding agreement.

In this area, the claimant and the funder are parties with different, and sometimes conflicting, interests. It is illogical and unreasonable – and very difficult to enforce in practice – to expect the funder to put the claimant’s interests before its own.

Review of third-party funding agreements

The Resolution proposes that judicial or administrative courts control third-party funding agreements to ensure that they comply with the requirements of the directive, with the courts having disproportionate powers including the possibility to require litigation funders to make changes to the agreements, to control the remuneration of the funders, to declare contractual clauses null and void, to authorise the funder to terminate the agreements, and to impose penalties.

Third-party funding agreement agreements should also be provided in full and complete form, with no redactions of confidential or commercially sensitive data allowed.

The intended control over third-party funding agreement is completely excessive, being an unprecedented novelty in our legal system. Despite the fact that these are mostly agreements signed between professionals, the intention is to go even further than the judicial control established for contracts signed with consumers.

Is it really necessary? Do judicial or administrative courts have the power to make such value judgements during the course of some proceedings, and would the benefits of it outweigh the harm it will cause? Would the funders’ rights of defence be respected? In our view, the answers to these questions are clear: no.

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