Responsible private funding of litigation

In March 2021 the think tank of the European Parliament published a study on third party litigation funding (‘TPLF’).
In June of the same year a draft report for the Committee on Legal Affairs (JURI) with recommendations to the Commission on Responsible private funding of litigation was made public. The report contains a a motion for a European Parliament resolution, stating that TPLF may cause problems and that further regulation through a directive is necessary. From the draft motion:

Introduction
1. Observes that third party litigation funding is a rapidly expanding commercial practice in the Union, which has a significant impact on justice systems as well as on European citizens. Notes that litigation funding is so far largely unregulated in the Union;
2. Firmly believes that in order to ensure that justice systems prioritise redress for victims of injustice, and not the interests of investors who may seek commercial opportunity from disputes, a regulatory regime addressing key issues relevant to litigation funding, including transparency, fairness, and proportionality, is necessary;
3. Strongly believes that only the regulation of litigation funders will allow regulators to exercise effective oversight and adequately ensure that the interests of claimants are protected. Points out that voluntary regulatory mechanisms and codes of conduct have not been subscribed to by the large majority of funders, leaving claimants significantly exposed;

Regulation and supervision of litigation funders
4. Recommends the establishment of a system of authorisation for litigation funders, permitting the introduction of corporate governance requirements and supervisory powers to protect claimants, and to ensure that funding is only provided by entities that are committed to complying with minimum standards in terms of transparency, governance and capital adequacy, and observing a fiduciary relationship vis-à-vis claimants and intended beneficiaries;

Ethical issues
5. Recommends that litigation funders be obliged to respect a fiduciary duty of care requiring them to act in the best interests of a claimant. Believes that litigation funders should be prevented from exercising control over the legal proceedings they fund, which should be the sole responsibility of the claimant and their legal representatives. Points out that such control over the legal proceedings they fund can consist both of formal control, such as a contractual power to make decisions, and informal control, such as the threat to withdraw the funding;
6. Underlines that conflicts of interest may arise where there are relationships between litigation funders, qualified entities, law firms, aggregators, including claims-collection and award-distribution-platforms, and other actors who may be involved in claims. Notes that there is a trend of an increasingly close cooperation, with, for example, litigation funders agreeing to finance law firms across a series of future cases (portfolio funding) [7]. Recommends that safeguards are adopted to prevent such conflicts, set out claimants’ rights and to require that details of relationships between litigation funders and the other involved parties are disclosed;
7. Believes that litigation funders should not be permitted to abandon funded parties in litigation, except in restricted and well-defined circumstances, leaving claimants solely responsible for all costs of the litigation, which may have only been pursued due to the involvement of the funder;
8. Believes that, just like claimants, litigation funders should be responsible for the defendants’ costs arising from unsuccessful litigation (such as an adverse cost award). Is of the opinion that regulation should prevent litigation funders from limiting their liability to costs in the event of an unsuccessful outcome;

Incentives and limits on recovery
9. Considers that legislation should impose limits on the proportion of the award that litigation funders are entitled to by virtue of a funding agreement. Believes that only under exceptional circumstances arrangements between litigation funders and claimants should vary from the rule that a minimum of 60% of the gross settlement or damages is paid to the claimants;

Disclosure and transparency
10. Considers that there should be transparency regarding the involvement of litigation funding in legal proceedings, including obligations for claimants and their lawyers to disclose funding agreements to courts and defendants. Notes that, currently, courts or administrative authorities and defendants are often not aware that a claim is funded by a commercial actor. Points out that this can also hinder a court or administrative authority in properly considering costs issues and in ensuring that awards compensate claimants adequately;

Powers of supervisory authorities and review by courts and administrative authorities
11. Is of the opinion that supervisory authorities, and courts and administrative authorities were appropriate in accordance with national procedural law, should have the powers to facilitate the enforcement of legislation adopted to achieve the goals set out above; recommends the establishment of a complaints system. Considers that supervisory authorities, and courts and administrative authorities where appropriate in accordance with national procedural law, should have the powers to address abusive practices by authorised litigation funders;

Final aspects
12. Requests the Commission to submit a proposal for a directive to regulate third party litigation funding, following the recommendations set out in the Annex hereto;
13. Considers that the requested proposal will not have financial implications;
14. Instructs its President to forward this resolution and the accompanying recommendations to the Commission and the Council;

[7] EPRS Study (2021): Responsible litigation funding. State of play on the EU private litigation funding landscape and on the current EU rules applicable to private litigation funding, p. 28 -29.

In an annex to the draft-report there is a proposal for a directive. According to article 4 Member States may determine in accordance with national law whether third party funding agreements can be offered in relation to proceedings within their Member State, or for the benefit of claimants or intended beneficiaries resident within their Member State. Where such activities are permitted, Member States shall create a system for the authorisation of the activities of litigation funders.

I do not know whether there has been a European consultation, but I see that a number of parties have responded to the draft report. Among them are the Council of Bars and Law Societies of Europe (CCBE) and a group of representatives of large companies, including the European Banking Federation (EBF).

The large companies are worried, read the article on the EBF-site:

The introduction of a profit-motivated third party into the traditional attorney-client relationship presents a host of ethical issues and other public policy considerations. Funders may prioritize their bottom-line interests over the interests of the claimants and can unduly influence the decisions in a case. Funders can also arrange to be paid first and take a disproportionate share of any award, leaving claimants who suffered harm with little or no redress. (…)
We are therefore supportive of the European Parliament’s legislative own-initiative report on responsible private funding of litigation, which calls on the European Commission to propose sensible safeguards for effective oversight of TPLF in all areas of law and types of litigation.

It is interesting to see that JURI proposes to regulate this economic activity and that there is no European activity regarding data brokers providing services to financial institutions and obliged entities under AML/CFT rules.

 

More information:

Europe:

Comments:

Over Ellen Timmer, advocaat ondernemingsrecht @Pellicaan

Verbonden aan Pellicaan Advocaten, http://www.pellicaan.nl/, kantoor Rotterdam, telefoon 088-6272287, fax 088-6272280, e-mail ellen.timmer@pellicaan.nl ||| Weblogs: algemeen: https://ellentimmer.com/ || modernisering ondernemingsrecht: http://flexbv.wordpress.com/ ||| Motto: goede bedoelingen rechtvaardigen geen slechte regels
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