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European Parliament Proposes to Regulate Private Funding of Litigation

In June 2021, the Committee on Legal Affairs of the European Parliament issued a Draft Report with recommendations to the Commission on Responsible private funding of litigation.

The Report was accompanied by a Study on Responsible private funding of litigation of the European Added Value Unit (authors: Jérôme Saulnier with Ivona Koronthalyova and Klaus Müller) of the European Parliament, issued in February 2021. Such studies are mandatory for proposals made by the European Parliament under Art. 225 TFEU.

The opinion of the Parliament is that, while Directive (EU) 2020/1828 on representative actions for the protection of the collective interests of consumers identifies certain safeguards relating to litigation funding, they are limited to representative actions on behalf of consumers taken under that Directive, and therefore exclude many other types of action or categories of claimants. The Parliament proposes to establish effective safeguards to all types of claims.

Regulatory Scheme

The Parliament proposes first to regulate the activities of litigation funders within the EU by establishing an authorisation system by supervisory autorities. Individual Member States could decide that funding litigation would be prohibited for proceedings in their Member State, or “for the benefit of claimants or intended beneficiaries resident within their Member State”.

Funders should conduct business from a registered office in a Member State, from which they would have to seek the authorisation.

Funding agreements entered into by unauthorised funders would be invalid.

Rules Governing Third Party Funding Agreements

The Parliament then proposes to adopt rules governing the content of third party agreements and disclosure obligations.

In particular, the following mandatory rules would apply:

  • Any clause in third party funding agreements granting a litigation funder the power to take or influence decisions in relation to proceedings would have no legal effect.
  • Agreements in which a litigation funder is guaranteed to receive a minimum return on its investment before a claimant or intended beneficiary can receive their share, would have no legal effect.
  • Absent exceptional circumstances, where a litigation funding agreement would entitle a litigation funder to a share of any award that would dilute the share available to the claimant and the intended beneficiaries to 60% or below of the total award (including all damages amounts, costs, fees and others expenses), such an agreement should have no legal effect.
  • Provisions that purport to limit a litigation funder’s liability for costs should have no legal effect.
Applicable Law

While the proposed directive does not include express choice of law rules, it provides that funders would commit to submit funding agreements to the law of the Member State of the intended proceedings “or , if different, of the Member State of the claimant or intended beneficiaries”.

Article 5(1) of the proposed Directive reads:

Member States shall ensure that supervisory authorities only grant or maintain authorisations, whether for domestic or cross-border litigation or other proceedings, to litigation funders who comply with the provisions of this Directive, and who meet, in addition to any suitability or other criteria as may be set out in national law, at least the following criteria: 

(b) they commit to concluding third-party funding agreements subject to the laws of
the Member State of any intended proceedings, or, if different, of the Member
State of the claimant or intended beneficiaries;

So, it seems that the law of the claimant (or intended beneficiaries) should always apply. Since the competence to allow the activity is attributed to the State where the claimant would be resident (see above), it seems that the intent of the drafters of Art. 5(1)(b) was to designate the law of the residence of the claimant (or intended beneficiaries).

The obvious problem with this rule is that there could be several claimants, and that the text expressly contemplates the possibility that there would be intended beneficiaries, who could also have their residence in a different State.

Another problem is that the rule seems to exclude claimants based outside of the EU (would at least a branch in the EU suffice?).

Finally, it would quite remarkable that a Member State prohibits third party funding, but then would have to accept it for claimant based in more permissive States, under the law of those other States.

Overall assessment on choice of law: peut mieux faire.

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