ELI Third Party Funding of Litigation

Background

The third party funding industry has grown substantially. The June 2021 draft report of the Committee on Legal Affairs of the European Parliament (‘the Voss Report’) began by observing this; Voss has cited industry analyst Slingshot Capital, reporting that the global TPLF market is now worth between €40bn and €80bn. To similar effect are UK reports: the value of cash and court cases directly held by UK litigation funders hit a record high of £1.9 billion in 2019.

TPLF has developed differently in different jurisdictions. For example, in some jurisdictions big group actions dominate whereas such litigation barely registers in others. In some jurisdictions (but not others) there is a growing market for litigation funding of insolvency estates in actions for which they lack funds.

The topic is of significant importance for three reasons (of different degrees of significance in different jurisdictions). First, third party funding of litigation offers a means of access to justice for persons/qualified entities/NGOs unable to fund their own claims. Second, third party funding of litigation aids the growth of group actions and thus goes hand in hand with the development of collective redress in the EU following the Directive on Representative Actions for the Protection of the Collective Interests of Consumers in 2020 (see also the comments to Rule 210 of the ELI-UNIDROIT Model European Rules of Civil Procedure which note the likelihood that collective redress proceedings will involve the use of TPLF). Third, the amount of money now involved in litigation funding and the number of cases where it is involved (as well as the increasing numbers of areas where it is in use, including crowdfunding of litigation and LegalTech) means that some form of regulation or control is now widely perceived as of considerable importance.

One approach is regulation: there is the Voss Report’s call for action and Rule 237 of the ELI-UNIDROIT Model European Rules of Civil Procedure (which permits third party litigation funding for a qualified claimant). Elsewhere, the ELI-UNIDROIT Rules note that the regulation of third-party funding is outside their scope but that it ‘may … be necessary for European jurisdictions to regulate it.’ The Directive on Representative Actions already contains provisions limiting the use of TPLF in order to protect the interests of consumers. In Australia, the Victorian Law Reform Commission produced a consultation paper in 2017 on Litigation Funding and Group Proceedings. This resulted in a report recommending the regulation of litigation funding at national level. UNCITRAL is also currently working on proposals for the regulation of third-party funding in investor-state disputes and has produced an initial report. But the route to regulation is complicated by the range of areas where litigation funding is in play and the different concerns which arise in those areas.

A complementary approach is the provision of guidance on issues which need to be taken into account before entering into a TPLF agreement. Increasing transparency and understanding the advantages and disadvantages of TPLF may facilitate a situation where regulation can be targeted only at specific areas, allowing the introduction of regulation which is effective without hampering the provision of funding in areas where it is needed and desirable.

The project aims at the development of principles containing safeguards in order to provide an environment in which TPLF is allowed but balances the availability of the tool with the interests of claimants and defendants and a healthy litigation market. The principles may also serve as a ‘check-list’ for courts when regarding the validity of a TPLF agreement as well as providing inspiration for national legislators.

The principles will be derived from a thorough analyses of the differing contexts for and approaches to the use of third party funding of litigation. This will cover inter alia matters such as: (i) the question of when and to whom (courts/administrative authorities or also other parties) the fact of funding and/or details of the funding agreements should be disclosed (as well as the tension between confidentiality of the agreement and the need for information by courts/administrative authorities); (ii) the responsibility and practice for assessing the capital adequacy of funders and the disclosure to a prospective litigant of that funding; (iii) the issue of who controls the case and what happens in the event of a conflict of interest; (iv) the capping of funders fees.

Aim

The Project will look at: (i) the different factual contexts in which litigation funding takes place (for example group litigation both in the context of competition cases and other disputes like consumer cases as compared to funding of discrete pieces of commercial litigation); (ii) the different interests at play in different contexts and stages of the funding process; and (iii) the different developments of litigation funding in countries in which the field of litigation funding is well developed (eg Australia) and (iv) developing areas such as crowdfunding of litigation and LegalTech. Comparative research will take into account the existing or developing rules in such jurisdictions, the Representative Actions Directive, the ELI-UNIDROIT (the International Institute for the Unification of Private Law) Model European Rules of Civil Procedure and the developing work of the Standing International Forum of Commercial Courts (SIFoCC).

Outcome

The target output is a set of principles (potentially supplemented by checklists) identifying issues that need to be taken into account when entering into a third party funding of litigation agreement. They are designed to

- assist the parties to a TPLF arrangement in drafting agreements that are sufficiently complete and that will stand applicable fairness tests;

- guide potential litigants and beneficiaries in assessing the fairness of TPLF regimes offered to them and in negotiating their terms;

- support courts, administrative authorities and arbitration bodies by suggesting a set of default rules for incomplete agreements or that may serve as a benchmark in unfairness control;

- serve as a source of inspiration for legislators considering regulation of TPLF arrangements;