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Litigation funding: Tipping the scales of Lady Justice?

AmCham EU

23 Nov 2021
Consumer affairs

In a union built on the principles of the rule of law, recourse to litigation in the event of disputes is an essential ingredient of the justice system. However, access to the justice system is not always equitable: all too often, the (in)ability to bear the costs of legal action is a determinant factor of disputes.

Think of the plucky, if underfunded, consumer claimant, confronted by multinationals and their armies of expensive lawyers. Lady Justice’s scales might seem inherently tilted against the little guy.

What if outside funders could swoop in and tip the balance?

By offering to take on the upfront costs of legal action in exchange for a share in any financial awards in favor of the claimant, that is exactly what a growing number of private entities operational in the EU are doing. And the rewards can be handsome – with rates of returns on investment for funders reaching the hundreds of percent. This is the practice of third-party litigation funding (TPLF), and it is growing rapidly in the EU. From a €1bn-a-year industry today, current trends of growth would see an additional €600 million of market revenues in the EU by 2027.

But is this practice of litigation funding by private entities really the remedy to make European justice systems more equitable? Should regulators not be concerned about the ulterior motives of these third parties?

While the appeal to a claimant of being bankrolled upfront by a private entity might seem obvious, there are some potentially severe consequences of allowing such practice to fester unregulated in the European Union.

One such problem is the lack of protection for claimants: in the event of loss, liability for adverse costs could fall squarely on the claimant’s shoulders, depending on the nature of the agreement struck with the third-party funder.

Thus, it is key to ensure that recourse to TPLF does not lead to claimants purchasing litigation funding services – as the weaker party in such a transaction –ill-suited to their needs.

A second problem is the proliferation of opportunistic, excessive and frivolous claims in the pursuit of high financial returns as the market for litigation funding grows. This could disturb the effective and efficient functioning of the judicial system, as well as diminishing the performance of businesses in the EU.

Thirdly, the current lack of consistent regulation of TPLF across Member States puts at risk the integrity of the EU’s Single Market, as corporate standards, capital requirements and rules on fiduciary duty, etc will determine where funding entities establish themselves, allowing them to ‘forum shop’ for the most favourable laws in Member States.

The case for regulation

In order to ensure access to justice for claimants, while also allowing businesses to continue to thrive and innovate in the EU, the EU regulatory framework needs upgrading. It is important that both costs of access to justice and costs of liability for businesses remain reasonable.

AmCham EU advocates for a harmonised regulatory approach to third-party litigation funding. To maximise the potential benefit of such practice, while minimising potential harms, we call for a regulatory framework that incorporates a number of important principles, including:

Licensing and authorisation of funders

As in finance, service providers of litigation funding should be subject to authorisation by supervisory authorities, who would be empowered to issue operating licenses. As part of the supervisory authorities’ mandate for authorisation of funders, they could require funders to demonstrate sufficient capital to satisfy financial obligations and cover liabilities.

Transparency of litigation funding agreements

EU-wide regulation of TPLF should require the claimant to disclose any litigation funding agreements to the courts as well as the defendant in any action.

Claimant control and conflicts of interest

Given that funding by TPLF may lead to the claimant surrendering control over the procedural strategy of proceedings (especially potential settlements) to the funder, any EU regulatory framework of TPLF must ensure the freedom of the claimant to select such a strategy, without undue interference from the funder. Furthermore, safeguards against conflicts of interest between the claimant and the funder, and/or the claimant’s legal counsel and the funder must be put in place.

Fiduciary duty

In financial services, service providers are expected to act in the best interest of their clients, as part of their ‘fiduciary duty’. This should also apply for litigation funders.

Caps on funders’ share in awards and responsibility for adverse costs

An EU regulatory framework should seek to guarantee reasonability, fairness and proportionality of awards going to litigation funders. In the case that the defendant is successful against a funded claimant, the framework should ensure that the liability for the costs due as part of the ‘loser pays principle’ fall on the litigation funder, including damages from counter claims.

Conclusion: protect businesses, consumers and the European economy

Access to justice is a key tenet of a rules-based market such as the EU. The consistent application of common rules is also an essential element of the EU Single Market – which forms the basis of the bloc’s economic success. By introducing a more coherent regulatory framework for third-party litigation funding, the EU can protect its businesses, consumers, prosperity and competitiveness – and Lady Justice’s scales can remain in equilibrium.


About AmCham EU's Consumer Affairs Committee

The Consumer Affairs Committee takes the lead in monitoring and influencing several consumer-related issues on the EU’s agenda. All initiatives share the goal of creating effective and expedient measures to defend and promote the interests of consumers and to address the fundamental issue of consumer confidence. The committee aims to create a harmonised balance between industry and the consumer to achieve shared goals. Learn more about the committee's work

Interested to learn more about AmCham EU's perspectives on Third-Party Litigation Funding? Read our full position paper