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?
Parties bringing or defending a claim before the Maltese Courts can obtain third party funding to pay for their legal costs although this is not expressly regulated. However, lawyers are prohibited from entering into funding arrangements with their clients or third parties.
Recent amendments to the Civil Law Act (the “CLA”) in 2017 have prescribed a framework for third-party funding in prescribed dispute resolution proceedings. Third parties are only allowed to fund international arbitration and related court and mediation proceedings.
The CLA and the Civil Law (Third-Party Funding) Regulations 2017 stipulate stringent requirements to be met for third-party funding arrangements. The Legal Profession (Professional Conduct) Rules 2015 have also been amended, imposing disclosure requirements on legal practitioners. Legal practitioners are also prohibited from holding any direct or indirect financial interest in a third-party funder which he has introduced to a client, or with which his client has a third-party funding contract.
A third-party funder may commit to undertake adverse costs liability under its contract with the funded party. Otherwise, it remains to be seen whether third-party funders may be made liable for adverse costs. It is probable that the Courts may exercise the discretion to do so, since third-party funders fund and control proceedings with the ultimate intention of yielding returns on their investments.
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.
Third-party funding is not covered by the Spanish Civil Procedure Act, nor by laws governing alternative dispute resolution. As it is not regulated at all, it is not forbidden either, and it is, principle, possible for a third party to fund a proceeding although there is no tradition.
Indonesian laws do not recognize third-party funders.
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.
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.
Not under the Greek procedural system.
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.
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 recently confirmed by a decision of in the CFI).
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 the Arbitration Ordinance (Cap. 609) was recently amended to provide that the doctrines of maintenance and champerty no longer prohibit third-party funding of parties in arbitration or mediation in Hong Kong.
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.
In general, a third party who has a legitimate interest in the litigation may provide funding for the proceedings. However, maintenance and champerty are prohibited in Ireland and therefore third parties with no interest in the litigation are prohibited from funding same (Personal Digital Telephony Ltd v the Minister for Public Enterprise ). It is however open to parties to take out After the Event insurance which does not fall foul of the rules against maintenance and champerty.
Separately, the Irish Courts have held that in certain circumstances costs may be awarded against a non-party to proceedings (Moorview Developments Limited v First Active plc ). The factors to be considered by the Court when making such an order include:
- the extent to which the unsuccessful party could meet an Order for costs;
- the degree of possible benefit to the non-party concerned; and
- whether the proceedings were conducted in a reasonable manner.
There is no restriction on the funding of litigation by third parties in Switzerland. Furthermore, legal protection insurances which cover court and lawyer's costs are quite common in Switzerland even though not in commercial litigation.
In Chile there are no particular rules about funding litigation.
Although, there is one rule related to assignment of litigious rights that limit the credit of the assignee to the amount paid in the assignment.
There are no restrictions to third party-funding with the exception that a counsel is in practice prohibited from funding a party’s litigation if the counsel is a member of the Swedish Bar Association. Third party-funding for court litigation is very rare in Sweden, although it is gaining increased attention in the wake of successful examples of third-party arbitration funding.
As for potential risks for a funder, the following deserves mentioning. Owners and board members of special purpose vehicles may be held liable for the counterparty’s litigation costs where the SPV arrangement is made solely for the purposes of circumventing the loser-pays principle established in the Code of Judicial Procedure. This is one of the rare situations under Swedish law where the corporate veil can be pierced. It is uncertain if this liability could apply for third party-funders as well.
Third parties funding is not allowed under Portuguese law.
There are no rules which govern third party funding, and the law does not address this issue.
There are no rules against third party funding.
There are no rules prohibiting third parties from funding litigation. Third party funders can not be held liable for the costs incurred by the other side, except based on general tort law
principles in exceptional circumstances. However, in certain cases and based on non-statutory law, the representative of a party may be hold personally liable for costs incurred by the other side if the case was manifestly ill-founded and the representative knew that the party would not be able to pay costs awarded to the opposing party.
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.
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 permitted, however it must not breach the rule against ‘maintenance and champerty’, meaning there must be no element of impropriety or corruption of justice. This is a complex and changing area. “Nuisance” claimants who “buy up” claims they have no legitimate interest in will be not permitted. Generally, litigation funders should follow the ‘Code of Conduct for Litigation Funders’ produced by the Association of Litigation Funders. Third party funders can be made liable for costs incurred by the other side. Litigation funding is becoming increasing common in class action disputes, such as cartel damages claims or securities litigation.
Third party funding is permitted but may have tax implications or be questionable if made with an illegal purpose. It is a possibility for both the plaintiff and the defendant. Lately foreign equity funds and insurance companies have been showing interest in funding litigation in Denmark - against a share of the possible outcome of the case. This is a rare phenomenon in Denmark, nevertheless not prevented by law. Consequently, there is no minimum or maximum amount as to how much a third party will fund.
We find it unlikely that third party funders would be held liable for the costs of the other party, but there are no legislation and no precedence.
In Denmark it is common to have an insurance covering legal expenses as part of a customary domestic insurance. Usually the insurance company requires that there is a reasonable cause and that an attorney will undertake the proceedings. The insurance will usually cover the expenses of the other party if the policyholder is ordered to bear these by the court. Often an insurance will have a limited sum covered but this is not governed by law.
In certain cases (not commercial litigations) if the person is meeting the economic conditions, he/she can be granted "free legal aid" meaning that the state covers the expenses.
There are no French rules governing third party funding. As a principle, however, a party to judicial proceedings is not allowed to act on behalf of an unidentified third party.
Two methods of third-party funding are admissible under French law:
- French civil courts have, on several occasions, held that the assignment of the right to bring a claim– as principal or as accessory of the assignment of the claim itself – is allowed under certain circumstances. By way of exception, claims which are exclusively ‘attached to the individual’ (e.g. the right to claim damages in the context of criminal proceedings) and claims based on a moral damage cannot be assigned.
- an agent may bring a legal action on behalf of a principal provided that (i) he is granted a special power of attorney identifying specifically the proceedings in the context of which he is appointed and (ii) the claimant (agent) expressly indicates in all procedural documents that he is acting on behalf of one or several constituents and provide their identity.
Further (opinion-based) questions on the litigation process
What, in your opinion…
- Is the main advantage and the main disadvantage of litigating international commercial disputes in your jurisdiction?
The main advantages of litigating international commercial disputes in France can be summarized as follows:
- an international chamber has recently been created within the Paris Commercial Court and the Paris Court of Appeal. The English language can be used during the proceedings. Even if pleadings are still drafted in French, documents in English may be filed without translation and judgments are translated under the responsibility of the court's registrar. In addition, if the proceedings are to be held in French, simultaneous translation by a translator appointed by the court may be arranged. Parties appearing before the court may speak English if they so wish;
- there is no disclosure process under French law, thereby avoiding a burdensome procedure;
- before the Commercial Court, the procedure is oral; this offers a certain flexibility;
- the hearings are quite short (they rarely exceed a couple of hours at most).
Disadvantages can be found in that there is usually no hearing of expert witnesses and no witness cross-examination.
A trend in recent years has been the increasing number of disputes in the context of follow-on actions.
Where regulators such as the French financial market authority (Autorité des Marchés Financiers), the French Competition Authority (Autorité de la Concurrence) or the European Commission find companies liable for their irregular behaviour, third parties which believe that they incurred harm as a result of this behaviour may take legal action.
A law dated 7 October 2016 provides that all court decisions will be made available to the public in the years to come. This law should now grant access to approximately 4 million decisions rendered each year.
Some ‘Legaltechs’ already intend to take advantage of this novelty to calculate – by using an algorithm – the prospects of success or the amount of compensation that can be expected in a particular court. Law firms and courts themselves have already started to use these new tools. This will probably lead to a change in the litigation strategy.
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.