Are third parties allowed to fund litigation? If so, are there any restrictions on this and can third party funders be made liable for the costs incurred by the other side?
Litigation (2nd edition)
Third-party funding is getting more common and has been explicitly approved by the Austrian Supreme Court. There are, however, no statutory rules governing third-party funding. Therefore, there are no restrictions as to arrangements between funders and litigants and there is no obligation to disclose a funding arrangement. Certain restrictions might apply if lawyers act as third-party funders since contingency and conditional fee arrangements (pactum de quota litis), which give a part of the proceeds to the lawyer, are prohibited between lawyers and clients under Austrian law.
There are no rules for funding litigations. Parties can fund litigations and a third party funder is not liable for the costs incurred by the other side. Third party funding is not widely used in Japan.
Although theoretically there are no limitations on third party funding, it should be noted that it is illegal for a person who is not a licensed lawyer or a legal professional corporation to intermediate between a client and a lawyer in relation to any lawsuit in exchange for compensation (Attorney Act, Articles 72 and 77(3)).
Third party litigation funding is neither provided for nor forbidden by Monegasque law. It seems unlikely that a third-party funder could be made liable for costs incurred by the other side.
China has no rules yet for funding litigations. However, funding a litigation is not otherwise prohibited. Since there is no compulsory requirement on disclosing of third party funding, no funder is publicly known to be liable for the costs incurred by the other side.
Litigation funding by a third party is not officially provided for within the Civil Procedure Code, therefore, third-party funding of the proceedings is permitted. The third-party funding will be governed by the agreement concluded between the funder and the beneficiary. It is debatable if the third party will be able to recover his expenses, unless he has a convention in that respect. However, third-party funding is not frequently used in Romania.
It is unclear whether third party funding is permitted in Cyprus as this matter has not yet been determined or considered by the Cypriot courts. Given that, as a rule, a costs order cannot be issued against a person who is not a party to the proceedings, even if third party funding is held to be permitted, it is unlikely that a Cypriot court would make a third party funder liable for the costs incurred by the other side.
It is possible for both the plaintiff and the defendant to use third-party funding. The phenomenon of equity fonds and insurance companies funding litigation against a share of the possible outcome of the case is still rare in Denmark, but there are on-going examples of such proceedings.
Although no legislation and precedent exists, we find it unlikely that third-party funders would be held liable for the costs as long as the arrangement has not been made with the purpose of avoiding adverse litigation costs.
While there are no regulations preventing third parties from funding the litigation, it is very rare for third parties to fund litigation in Egypt. Third parties are not liable for any costs incurred by the other side.
At this moment, there is no regulation in regard to litigation funding. Therefore, third parties are allowed to fund litigation, however due to the absence of any regulation, they are not legally recognized as funders. That being said, there are no restrictions and liabilities for the costs incurred by the other side.
Under the Mexican Law, third party funding litigation is not prohibited nor expressly allowed. Each party normally funds its own litigation, but side agreements governing litigation funding can certainly exist. There is no precedent of third party funders being made liable for costs incurred.
In principle, third-party funding is permitted. Since third party funders are not characterised as banks or insurers, the respective legislative or regulatory frameworks for financial institutions do not apply.
The agreement between the litigation party and the third-party funder is usually considered as a partnership. There is no legal statute that would require the third-party funders to reimburse the other party in case the funded party loses the trial. However, the funding agreement typically obliges the third-party funder to cover the party’s litigation costs to the extent that the court has imposed them upon that party.
In recent years, funders have also started to use separate legal entities as a “litigation vehicle” that files the complaint in its own name, whereas the persons that suffered damages assign their claims to that entity (typically at a considerable discount). However, such a scheme could be declared null and void under sec. 138 BGB if the assignments are contrary to German public policy. This is usually the case if the litigation vehicle has considerable less financial means than the assignors since the prevailing defendant might then not be able to recover its litigation costs from the litigation vehicle.
Generally, third-party funding of litigation is prohibited under Hong Kong law. There are, however, three limited exceptions:
- where a person may have a legitimate common interest in the outcome of the litigation sufficient to justify him or her supporting the litigation;
- an individual may be permitted to fund litigation of a claimant who would otherwise be unable to pursue litigation owing to a lack of funds (this is because of the public interest in promoting access to justice); and
- third-party funding may be permitted by the courts in order to allow a liquidator to pursue litigation that may improve the return to creditors (as confirmed by a decision of in the CFI in 2010).
However, outside these situations, the Hong Kong courts take a firm approach against third parties who aid litigation in return for a share of the profits.
In terms of alternative forms of dispute resolution, it is noted that amendments to the Arbitration Ordinance (Cap. 609) came into effect in 2019 to provide that the doctrines of maintenance and champerty no longer prohibit third-party funding of parties in arbitration or mediation in Hong Kong.
Third party litigation is permitted in Guernsey proceedings if the arrangement does not conflict with the principles of champerty and unlawful maintenance. The court can make an adverse costs order against the third party funder in the event that the financed party is unsuccessful in the litigation and potential funders should be alive to this risk.
Both “before the event” and “after the event” (ATE) insurance may be used to fund Guernsey proceedings, although the premium for ATE insurance is not normally recoverable from the other party.
While there is no definite statute providing for litigation funding in India, it is relevant to consider a constitutional bench decision of the Supreme Court in In the matter of Mr. G, a Senior Advocate of the Supreme Court [AIR 1954 SC 557], where it was noted that a ‘champerty’ contract in which returns were contingent on the success of the case was not per se illegal, except in cases where an advocate might be a party.
Moreover, as recently as in 2018, the issue of third-party funding was considered by the Supreme Court in Bar Council of India v. A.K. Balaji [(2018) 5 SCC 379] and it was held that there was no restriction on third parties funding the litigation and getting repaid after the outcome of the litigation.
Further, in India, third-party funding has also been expressly recognised in the context of civil suits in states such as Maharashtra, Gujarat, Madhya Pradesh and Uttar Pradesh. This consent to third-party funding can be adduced from the Code which governs civil court procedure in India. Order XXV Rule 1 of the Code (as amended by Maharashtra, Gujarat, Madhya Pradesh and Uttar Pradesh) provides that the courts have the power to secure costs for litigation by asking the financier to become a party and depositing the costs in court.
However, if a third-party funding agreement contains an extortionate or unconscionable objective or consideration (e.g. recovery of a gambling debt), the agreement would be rendered unenforceable under the Indian Contract Act, 1872.
Isle of Man
Deemster Corlett (the Island’s First Deemster) in a lecture “Ten Years a Deemster” given in Jersey on 5 October 2017 stated: “The rules relating to champerty and maintenance still apply (so far as I am aware)”.
Rule 8 of the Advocates’ Practice Rules 2001 in effect prohibits an advocate from sharing his professional fees with a person who is not a lawyer or an employee.
Rule 9 in effect prohibits contingency fees.
The High Court in Tomlinson 2005-06 N13 concluded that it did have jurisdiction to compel a party or his advocate to disclose the identity of the funder of the legal proceedings.
Third party funders can be made liable for the costs incurred by the other side.
According to Italian Law the client, i.e. the party obliged to pay the attorney’s fees within the private professional relationship with his or her counsel, is not necessarily the party that issues the POA required to represent the party at court, but the person who hired the lawyer asking for his or her assistance. As a consequence, third parties are allowed to fund litigation.
Since only parties may be ordered by judges to bear the costs of litigation, a client who is not also a party to the proceedings cannot be made liable by the judge for the relevant costs.
There is no prohibition against third parties funding litigation. In fact, third-party funding is generally not relevant in commercial litigation, so long as the party filing the case is a real party in interest, i.e., a party who may benefit or be injured by the judgment in the case.
Third parties funding is not allowed under Portuguese law.
Although Slovak civil procedural law does not recognize a third-party funding procedure, according to the substantive principle of autonomous will, a party to proceedings may agree with a third party on dispute funding at its own discretion.
Third-party funding is allowed. A third party funding a trial is not a party and has no formal role in the proceedings. Normally, any third-party funding is kept secret from the court or the other party. As a third party funder is not a party, it may under no circumstances assume control of the litigation or otherwise participate therein unless the provisions regarding intervention as mentioned above apply. However, a third-party funder is likely to require extensive contractual obligations from the funded party to act in accordance with the funder’s wishes. There is no legislation or case law stating that third party funders can be made liable for the costs incurred by the other side. However, there is some case law stating that an owner of a company can be liable to pay the costs of the other party, if the company has been used only as a vehicle to circumvent the liability to pay the counter party’s costs.
Historically, the common law rule against ‘maintenance and champerty’ largely prevented third party litigation funding in English courts. Today, these restrictions are much narrower and third party funding has become a widely accepted feature of English commercial litigation. Accordingly, the courts tend to uphold third party litigation arrangements provided that they do not contain any element of impropriety. In deciding whether there is any impropriety in the arrangement the courts look, among other things, at the extent to which the funder controls the litigation, the nature of the relationship between the funded party and the solicitor and the amount of profit the funder stands to make. Litigation funders should generally subscribe to the “Code of Conduct for Litigation Funders”, a voluntary code of conduct launched in November 2011. Litigation funding is becoming increasingly common in multi-claimant disputes, such as cartel damages claims and securities litigation.
Bahraini law does not regulate this mechanism, yet, we see no prohibition in funding litigation. However, given that we do not have a third part funding system established in Bahrain, we are of the view that litigants will be the only visible parties in the case and the funders may not be made liable for costs incurred by the other side.
Third party funding is not regulated nor common. What is indeed customary (and not necessarily completely ethical) is that in tort claims (such as the ones concerning car accidents) lawyers usually disinterest their clients for the purposes of the claim and continue with litigation on their own so that they receive all proceeds.
Indonesian law does not recognize third-party funders.
In Malaysia, litigation funding by third parties is not a common practice and is not allowed in common law.
If a party to a proceeding enters into a contract with a third party financier in which a financial funding is promised in consideration of receiving a share of the award, Justice Ravinthran in the case of Mastika Jaya Timber Sdn Bhd v Shankar a/l Ram Pohumall  5 MLJ 707 has held that such an agreement is deemed a champertous agreement and is illegal and against public policy.
The Chilean legislation does not explicitly regulate the financing of disputes by third parties outside the conflict.
At first glance, there seems to be no objection to this figure, and there is no rule prohibiting or restricting it. The foregoing is without prejudice to any ethical questions regarding the lack of direct relationship between the client and his lawyer. Also there are some issues of conflict of interest between the financing party and the attorneys that might create some difficulties.
On the other hand, it can be said that there is no risk that the financiers will be responsible for the costs of the trial, because in our legal system only the name parties are responsible for the payment of the costs. There is no possibility that non-participating third parties will be responsible for the payment of costs; This would require a legal change.
Parties bringing or defending a claim before the Maltese Courts can obtain third party funding to pay for their legal costs. This is permitted by article 1148(2) of the Maltese Civil Code, Chapter 16 of the Laws of Malta which states that: “An obligation may also be extinguished by payment made by a third party not concerned in the obligation, provided such third party acts in the name and for the discharge of the debtor ...”. However, lawyers are prohibited from entering into funding arrangements with their clients or third parties.
Unless the parties have insurance coverage for legal expenses, the parties must generally fund the litigation by themselves (as regards the allocation of costs between the parties, see question 19). In Switzerland, the lawyers' fees are governed by the individual engagement agreement be-tween the attorney and its client. The lawyers' fees may not, however, be entirely based on a contingency fee.
If a party does not have sufficient financial resources to afford the costs of the proceedings or for its legal representation in such proceedings, it may apply for legal aid. If legal aid is granted, the party may be exempted from court costs and the costs of its representation may be covered by the state. However, the party must reimburse the legal aid received as soon as it is in a position to do so.
Pursuant to the case law of the Swiss Federal Tribunal, litigation funding by third parties is admissible in principle. However, the Swiss Federal Tribunal has also developed certain restrictive criteria that must be observed when entering into a funding agreement. Thus, the contractual terms of a funding agreement must be in line with Swiss mores and must in particular not constitute profiteering in the sense of Article 157 of the Swiss Criminal Code (sanctioning, inter alia, the exploitation of a person in need). Moreover, the funding by a third party must not cause any conflict of interest with regard to the attorney–client relationship. Therefore, the attorney handling the case may not be an employee of the third party funder. Moreover, the attorney must still be instructed by the litigating party and owes its contractual duties, including its duty of care, to the litigant only.
Not under the Greek procedural system.
Third parties can fund litigation, but unless they have declared a third-party intervention before the court, they cannot be held liable for the legal costs of action according to the procedural legislation. However, a third party may be obliged to compensate for some costs according to general tort law or according to a private agreement.
In Luxembourg, there are currently no specific rules concerning the financing of a dispute by a third party. Consequently, the financing of a dispute by a third party is available to the parties to the proceedings, subject to compliance with the lawyer's ethical or legal obligations.
There is no federal prohibition on third parties funding litigation, but certain states outlaw the practice. In federal court, third-party funders may potentially be made liable for the costs incurred by the opposing party if the costs are imposed as a sanction for misconduct under FRCP 11 and if the funder is found to have substantially controlled the litigation.
There is an ongoing debate as to whether courts should require parties to disclose third-party funders. The Northern District of California recently adopted a rule mandating parties to disclose the identity of third-party funders in proposed class actions, making it the first federal district to do so.
There is nothing in the law that prevents financing litigation by a non-party; and litigation may be funded based on contractual arrangements between a third party and a disputing party. There is no statutory requirement that such third party must reimburse the other disputing party if the funded party loses the trial. However, litigation financing agreements typically oblige the third-party financier to cover all the disputing party’s litigation costs that may be imposed by the court.
Litigation funding by third parties is permitted in the Netherlands, whereas litigation funding by law firms is not. Common law obstacles such as ‘maintenance’ and ‘champerty’ do not arise. Third-party litigation funding is gaining in popularity in the Netherlands. Litigation funding is becoming increasingly common in multi-claimant disputes, such as class actions, cartel damages claims and securities litigation, commercial claims and bankruptcy claims from receivers.
In the Netherlands, third party-funding is in essence not regulated as of yet. In view of increasing collective or multi-claimant disputes, instigated with use of funding, it may be expected the courts will look at and demand transparency as to, among other things, the nature of the underlying funding relationship and the amount of profit the funder stands to make. Therefore, the way in which a litigation is funded, may affect whether the claim is admissible or whether a settlement is enforceable.
There is no legal statute that would require the third-party funders to reimburse the other party in case the funded party loses the trial. However, the funding agreement typically obliges the funder to cover the party’s litigation costs to the extent that the court has imposed them upon that party (including fixed amounts for lawyers' fees; bailiff fees; court fees; costs of expert witnesses; and possible orders for costs). The actual costs and attorney fees incurred by the prevailing party are seldom covered by the amount awarded, and recovery of the remaining costs of the losing party is not usually possible.
There are no regulations pertaining to the financing of judicial proceedings by third parties unrelated to the litigation. Therefore, under the principle that no one may be barred from engaging in any act not prohibited by law, the financing of judicial proceedings is possible. Ultimately, the relationship between the plaintiff and the financing party is reflected in a private contract that establishes the conditions and agreements between them. A judge may not order a financing third party to pay costs inasmuch as the latter is not a party to the proceedings and, therefore, cannot be liable to the opposing party for costs. This is without prejudice of the party ordered to pay costs being able to recover those costs under the financing contract.
Our legal system does contemplate, however, the assignment of litigation rights. In this case, the third party does not finance the cause but rather acquires it, thus becoming the holder of the right being claimed, as often occurs in cases involving the payment of insured losses.
There are no rules which govern third party funding, and the law did not address this issue.
No regulations on third party funding do exist in Armenian legislation, which means the funding is not prohibited. There is little practice (mostly benchmark cases on human rights issues are funded, or law firms agree on success fee arrangements as such) and there is no practice on holding the funder liable for judicial costs. There are no legislative or practical bases for this as well.