JDSupra | 3 April 2023
EU plans to regulate third-party funding in litigation and international arbitration
by Juan Nascimbene and Olivia Anderson
On 13th September 2022, the EU Parliament voted to approve a resolution proposing a directive (the “Directive”) on the regulation of third-party funding entitled “Responsible private funding of litigation”. If adopted in its current state, the proposal would regulate Third-Party Funders (“TPFs”) funding proceedings in the European Union.
What is third-party funding?
Third-party funding involves a non-party, typically a private commercial fund with no prior connection to a dispute, agreeing to finance all or part of the costs of the proceedings in exchange for an agreed share of any damages awarded (and/or a multiplier of costs paid) in the event of a successful outcome.
The Directive incorporates a very broad definition of a third-party funder (TPF) as ‘‘any commercial undertaking that enters into a third-party funding agreement[1] in relation to proceedings […] and which has the primary aim of receiving a return on an investment it makes by providing funding in relation to those proceedings or of obtaining a competitive advantage in a specific market”.[2]
Currently, commercial litigation third-party funding is seldomly used in Court proceedings in EU Member States, but its use is growing and it will likely be used to fund most class actions under the new EU Representative Actions Directive[3]. Funding is more common in EU-based international arbitrations. In its resolution, the European Parliament also noted the prevalence of third-party funding as a “booming phenomenon in investment arbitration that multiplies the number and the volume of claims of private investors against states”[4].
The EU proposal
The Directive seeks to establish common minimum standards for TPFs across the EU. According to the EU Parliament, the proposed measures focus on promoting greater transparency, fairness, and regulatory oversight. The Directive would also apply to arbitration and other ADR mechanisms where the proceedings are seated in the EU, regardless of where the litigation funder is based. [5]
The draft resolution proposes to:
Next Steps
The Commission has yet to adopt any proposal incorporating the above recommendations. If and when the Commission does submit a proposal, the final text of the Directive will need to be agreed by the European Parliament and the European Council and then implemented at the national level by each Member State before becoming mandatory.
Takeaway
Although the European Commission has yet to submit any legislative proposal, this draft Directive marks the first step towards the introduction of a new regulatory framework for third-party funding in the EU with potentially far-reaching implications for third-party funded international arbitrations with an EU connection. Cooley will continue to closely monitor the progress of this proposal.
[1] Article 3(h) of the Directive, a “third-party funding agreement” means “an agreement in which a litigation funder agrees to fund all or part of the costs of proceedings in exchange for receiving a share of the monetary amount awarded to the claimant or a success fee […] based wholly or partially on the outcome of the proceedings”.
[2] Article 3(a) of the Directive, definition of “litigation funder”.
[3] The Representative Actions Directive contains some provisions on the use of the third-party funding, aimed at ensuring that actions are not diverted “from the protection of the collective interests of consumers”.
[4] Paragraph F of the recitals of the European Parliament resolution of 13 September 2022.
[5] Per Article 3(e) of the Directive, the definition of “proceedings” includes “any voluntary arbitration procedure or alternative dispute resolution mechanism, through which redress before a court or administrative authority in the Union is sought concerning a dispute”.