Recommendations for responsible private funding of Litigation: European Parliament resolution 2022/2130(INL)
On June 17, 2021, the European Parliament’s Committee on Legal Affairs, along with its rapporteur Axel Voss, presented a draft report with recommendations to the Commission on responsible private funding of litigation, also known as the Voss Report. The European legislature’s interest in the financing of private legal actions by third-party funders has been demonstrated not only by the growth of the practice in civil, commercial, or collective action cases but also in the areas of anti-trust claims, arbitration and insolvency proceedings. On 13 September 2022, the European Parliament voted in favour of adopting the Voss Report which seeks to harmonise Member States’ rules concerning third-party funding in commercial and civil cases.
The Voss Report’s recommendations and proposals
The Committee observed that third-party funders mainly “act in their own economic interest, rather than in the interest of claimants” and “can seek to control the litigation and demand an outcome that pays them the greatest return“. Litigation funders are heavily criticised for their selective approach in which they prioritize cases with the greatest potential for returns while refraining from investing in cases deemed too risky or unprofitable. While noting that “litigation funding is so far largely unregulated at Union level”, the European Parliament’s Committee consider that regulations are needed to ensure access to justice to claimants by inter alia lowering legal costs and by, at the same time, prioritizing redress for injured parties and not the interests of private investors who might only seek commercial opportunities from legal disputes. Hence, the committee believes that establishing Union common minimum standards for third-party litigation funding would “allow legislators to exercise effective oversight and adequately ensure that the interests of claimants are protected”.
I. Introduction of a system of authorisation and permanent supervision by an independent supervision administrative body
In 2021, the Committee recommended that a system of authorization be established for litigation funders. This would allow the introduction of corporate governance requirements and supervisory powers to safeguard claimants and ensure that only entities that adhere to minimum standards of transparency, governance, and capital adequacy, as well as uphold a fiduciary relationship with claimants and intended beneficiaries, would be permitted to provide funding. The licensed litigation funders would be under the ongoing and permanent supervision of an independent administrative body.
II. Obliging the litigation funders to fiduciary duties
The litigation funders would be subject to a fiduciary duty of care and would then be obliged to always act in the best interest of their clients.
III. Introducing a set of rules preventing the conflict of interest
The Voss Report recommended the adoption of a minimum set of rules be adopted to prevent potential conflicts of interest or abandonment of funded parties in litigation at any stage of the dispute.
IV. Capping the litigation funders’ entitlements
The Committee also considered that only under exceptional circumstances arrangements between litigation funders and claimants should vary from the rule that a minimum of 60% of the gross settlement or damages is paid to the claimants and that regulation should prevent litigation funders from limiting their liability to costs in the event of an unsuccessful outcome. The draft directive would impose limits on the proportion of the award that litigation funders are entitled to receive in the event of successful litigation or a settlement and based on a contractual arrangement
V. Providing transparency and disclosure requirements
The Committee also sought to include obligations for claimants and their lawyers to disclose funding agreements to courts and defendants. Currently, courts or administrative authorities and defendants are often not aware that a claim is funded by a third party.
In conclusion, while the potential new directive on third-party litigation funding within the European Union would be a welcome development, there are risks associated with excessive regulation. On one hand, carefully crafted rules could provide greater clarity and stability, which could encourage investment and promote access to justice for litigants. Such regulation could also help to curtail disproportionate returns for funders and limit cost exposure for parties facing funding claims. On the other hand, excessive regulation that delves too deeply into the specifics of third-party funding agreements could create a burdensome regulatory environment that deters investors and reduces the competitiveness of the European Union. Therefore, any new regulation must strike the right balance between providing sufficient legal clarity and avoiding the risks associated with excessive regulation.
Get in touch with our Litigation, arbitration and dispute resolution team for an in-depth discussion about the above! Our experts are here to help and provide you with the information you need to make informed decisions.
Reform of arbitration law in Luxembourg
On September 15, 2020, the Luxembourg government addressed the modernisation of the country’s arbitration law by tabling bill No. 7671 to the Chamber of Deputies. Since their incorporation in France’s Napoleonic-era Code of Civil Procedure of 1806, the rules relating to arbitration procedures have been modified only occasionally, with a major change in 1981 that notably updated the regime for appeals against awards. The current reform comes at the right time because the grand duchy has manifest advantages as a hub for arbitration, in particular the favourable attitude of judges toward international law.
The modernisation of arbitration has multiple goals, not only to relieve the national courts of some cross-border disputes but also to make Luxembourg more attractive as a jurisdiction by providing parties to a dispute access to the legal expertise. Many operating companies and holding entities have their headquarters in Luxembourg and incur additional costs when their disputes are heard in arbitration forums abroad. Additional risks arise when the legal advisers and judges in annulment proceedings are not specialists in Luxembourg law.
The draft legislation is inspired by French law and the model law of the United Nations Commission on International Trade Law, and seeks to provide liberal and arbitration-friendly provisions. Within the seven new chapters that will be integrated into Luxembourg’s New Code of Civil Procedure (NCPC), the draft does not make a distinction between national and international arbitration.
Its principles are widely accepted in comparative law: they notably include a broad scope of whether disputes can be settled by arbitration, the absence of formalism for the arbitration agreement, the principle of autonomy of the arbitration clause, the positive and negative effect of the principle of competence-competence – whether a legal body has jurisdiction to rule on its own competence in matters before it – as well as the obligation of disclosure on the arbitrator (economic links with companies, former mandates, appointments as arbitrator or as lawyer of a party involved) in order to minimise the risk of conflicts of interest.
Nevertheless, the draft legislation innovates on certain points by comparison with French law, notably by introducing an obligation of confidentiality, sanctioned by the award of damages. It also strengthens the powers of the support judge and requires collaboration between the state judge and the arbitral tribunal to maximise the effectiveness of the arbitration proceedings.
The legislation also aims to extend the international jurisdiction of Luxembourg judges by giving him or her a jurisdictional head in the name of denial of justice. The arbitration award has the force of res judicata – a settled matter that may not be relitigated – regarding the dispute it resolves and must include its reasoning.
Regarding recourse against the award, the proposal distinguishes between awards made in Luxembourg and those made abroad:
• Awards handed down in Luxembourg may be subject to an action for annulment on the basis of the new article 1238 of the NCPC, which lists seven grounds for annulment. Article 1243 adopts the revision system in French law, and article 1244 deals with third-party opposition.
• For awards delivered abroad, it is impossible to initiate annulment proceedings, but revision of the award is permissible. The innovation of the Luxembourg law is the introduction of a preventive action for unenforceability (recours préventif en inopposabilité), as required by French doctrine. It allows a party to an award to oppose the exequatur – recognition and enforcement of a foreign judgment – procedure at an early stage, provided it can demonstrate a sufficient interest.
Scope of eligibility for arbitration
Art. 1224. (1) All persons may compromise on rights which they freely dispose of.
(2) Compromises may not be made in matters concerning the status and capacity of persons, marital relations, the representation of incapable persons, the causes of incapable persons and those of absent or presumed absent persons.
(3) The arbitral tribunal shall apply the rules of public policy.
Art. 1225. The following may not be submitted to arbitration: 1° disputes between professionals and consumers; 2° disputes between employers and employees; 3° disputes relating to residential leases. This prohibition remains applicable even after the end of the contractual relations referred to above.
The new article 1224 of the NCPC refers to the nature of the disputes that can be settled by arbitration, which excludes weaker parties who must be protected, as in consumer law. In labour law, the question of whether disputes relating to an employment contract may be settled by arbitration is not resolved and is still the subject of parliamentary debate. Finally, disputes arising from bankruptcy proceedings cannot be adjudicated by an arbitral tribunal. However, the receiver of a company may, for example, conclude an arbitration agreement to settle a dispute with a debtor. Similarly, an arbitral tribunal may hear a dispute covered by an arbitration agreement stipulated in a contract that was to be performed before the initiation of bankruptcy proceedings.
Arbitration agreement
Art. 1227. (1) An arbitration agreement is an agreement by which the parties decide to submit to arbitration all or some of the disputes which have arisen or may arise between them in respect of a particular legal relationship, whether contractual or not. It is not subject to any formality requirements.
(2) It may be concluded in the form of an arbitration clause or a settlement agreement. An arbitration clause is an agreement by which the parties to one or more contracts undertake to submit to arbitration any disputes which may arise in connection with that contract or those contracts. An arbitration agreement is an agreement by which the parties to a dispute submit it to arbitration.
The arbitration clause or arbitration agreement is not subject to any requirement regarding form; it can be concluded orally.
Art. 1227-2. The arbitral tribunal may rule on its own jurisdiction, including any objection to the existence or validity of the arbitration agreement. For this purpose, an arbitration clause which forms part of a contract shall be treated as an agreement separate from the other terms of the contract. It is not affected by the nullity, lapse or termination of the contract. Where it is null and void, the arbitration clause shall be deemed not to have been written.
The Luxembourg legislation enshrines the principle of competence-competence, which is universally accepted in comparative law. It also refers to the principles of severability and autonomy of the arbitration clause, by which the dispute resolution clause is independent of the main contract and is not affected by the defects of the latter or its possible nullity. The effect of such a provision is to protect the power of arbitrators to rule on their own jurisdiction in a matter to override delaying tactics.
Art. 1227-3. Where a dispute arising out of an arbitration agreement is brought before a state court, the latter shall declare that it lacks jurisdiction, unless the arbitration agreement is unlawful because of the non-applicability of arbitration the case, or if it is void or unenforceable for any other reason. The state court may not declare at its own initiative that it lacks jurisdiction. If the arbitral tribunal declares itself incompetent, or if the arbitration award is set aside for a reason that excludes resubmission of the case to an arbitral tribunal, the case shall be continued before the court to which it was originally submitted as soon as one or more of the parties has notified the registry and the other parties of the relevant event.
The legislation enshrines the positive effect of the jurisdictional principle, which prevents the judge from reviewing the applicability of an arbitration agreement. The second element of the jurisdictional principle is the negative effect, under which the arbitrators must be the first (but not the only) judges of their own jurisdiction; the oversight of the Luxembourg judge is postponed to the stage of any action involving enforcement or annulment of the arbitration award made on the basis of the arbitration agreement.
When a dispute to be resolved by arbitration is addressed to a national court, it will decline jurisdiction only if one of the respondents invokes this exception, unless the arbitration agreement is manifestly null and void or unenforceable. The wording of Article 1227 (3) of the draft legislation nevertheless appears confusing and could jeopardise the arbitration process. The first paragraph of article 1227-3 of the bill misleadingly extends this exception with the clause “if for any other reason it is void or unenforceable”, which could undermine the effectiveness of the arbitration procedure.
It is not yet certain whether the Chamber of Deputies will correct this article or take inspiration from French law and the opinion of the Association Luxembourgeoise d’Arbitrage, which in its opinion of July 27, 2021 recommended enshrining in law the negative effect of the jurisdictional principle to the maximum extent.
Art. 1227-4. As long as the arbitral tribunal has not yet been constituted or once it appears that the arbitral tribunal cannot grant the relief sought, the existence of an arbitration agreement shall not prevent a party from bringing an action before a court or tribunal with jurisdictional competence for the purpose of obtaining a measure of inquiry or an interim measure of protection.
Before the constitution of the arbitral tribunal, only the state court may order urgent measures. Certain measures, such as garnishments, cannot be granted by an arbitral tribunal because of its lack of enforcement powers, in particular against third parties.
The arbitral tribunal
Art. 1228. The parties are free to determine the seat of the arbitration or to delegate this determination to the person entrusted with the organisation of the arbitration. In the absence of such determination, the seat shall be determined by the arbitral tribunal, taking into account the circumstances of the case, including the convenience of the parties. The arbitration shall be deemed to be legally conducted at the seat of the arbitration. Unless otherwise agreed, the arbitral tribunal may hold hearings, take evidence, certify its decisions and meet at any place it considers appropriate. Arbitration decisions shall be deemed to have been handed down at the seat of the arbitration.
This article echoes the practice of delocalisation of arbitration: fixing the seat of the proceedings in Luxembourg does not necessarily require holding the hearings in Luxembourg. But by determining the seat of the arbitration, the parties agree on the place where the award is deemed to be made, which has a direct impact on remedies and review of the award.
Art. 1228-3. Any dispute relating to the constitution of the arbitral tribunal shall be settled, in the absence of agreement of the parties, by the person responsible for organising the arbitration or, failing that, by the support judge.
Art. 1228-4. In the absence of an agreement of the parties on the modalities for the appointment of an arbitrator, the following procedure shall apply:
1. In the case of arbitration by a sole arbitrator, if the parties do not agree on the choice of the arbitrator, the arbitrator shall be appointed by the person in charge of organising the arbitration or, failing that, by the support judge.
2. In the case of arbitration by three arbitrators, each party shall choose one arbitrator and the two arbitrators so chosen shall appoint the third arbitrator; if a party fails to choose an arbitrator within one month of receipt of the request by the other party or if the two arbitrators fail to agree on the choice of the third arbitrator within one month of acceptance by the last arbitrator of their appointment, the person responsible for organising the arbitration or, failing that, the support judge shall make the appointment.
3. Where the dispute is between more than two parties and they do not agree on the modalities of constitution of the arbitral tribunal, the person responsible for organising the arbitration or, failing that, the support judge, shall appoint the arbitrator(s).
4. All other disagreements concerning the appointment of arbitrators shall likewise be settled by the person responsible for organising the arbitration or, failing that, the support judge.
As noted during the preparatory work on the draft legislation, the one-month period stipulated for a party to choose an arbitrator, after which the support judge may proceed to appoint them, seems more appropriate than the eight-day period provided for in the current Luxembourg law.
Art. 1228-7. An arbitrator may be challenged only if there are circumstances likely to raise legitimate doubts as to their impartiality or independence, or if they do not possess the qualifications required by the parties. In the event of a dispute over a challenge to an arbitrator, this shall be resolved by the person responsible for organising the arbitration or, failing that, decided by the support judge, who shall refer the matter to the court within a month of the disclosure or discovery of the contentious information.
This article imposes a disclosure obligation on arbitrators. This is a welcome provision in order to prevent potential conflicts of interest.
Art. 1228-8. An arbitrator may be dismissed only with the unanimous consent of the parties. In the absence of unanimity, the decision shall be taken by the person in charge of organising the arbitration or, failing that, by the support judge, who shall refer the matter to the court within a month of the disclosure or discovery of the contentious information.
As regards the time limit for lodging an objection, the Luxembourg draft law takes its inspiration from the French model by extending the period to one month, contrary to the United Nations Commission on International Trade Law model legislation, which provides for a time limit of 15 days.
The support judge
Art. 1229. The support judge of the arbitration proceedings is the Luxembourg judge when the seat of the arbitration has been fixed in Luxembourg, or, if the seat has not been fixed, when:
1. The parties have agreed to submit the arbitration to Luxembourg procedural law;
2. The parties have expressly given jurisdiction to the Luxembourg courts to hear disputes relating to the arbitral proceedings; or
3. There is a significant link between the dispute and Luxembourg. The Luxembourg support judge always has jurisdiction if one of the parties is exposed to a risk of denial of justice.
Article 1229 sets out four connecting factors and grounds for international jurisdiction of the Luxembourg judge in arbitration, primarily when the seat is located in Luxembourg. The other three criteria are alternative: by the will of the parties in choosing Luxembourg law as procedural law for the arbitration (lex curia; where there is a significant link between the dispute and Luxembourg, such as the place of performance of a disputed contract or the domicile of a defendant; or in the event of the risk of denial of justice.
The arbitration proceedings
Art. 1231. The arbitral tribunal shall decide the dispute in accordance with the applicable rules of law. In the case of an international dispute, the applicable rules are those chosen by the parties or, failing that, those which the tribunal considers appropriate. The tribunal shall decide the dispute as an ‘amiable composition’ if the parties have entrusted it with this task.
According to the preparatory work on the legislation, “international matters” should be understood not with reference to the French definition of international arbitration, but the ordinary rules of private international law. The arbitrator(s) will be able to rule as in the capacity of amiable compositeur – with the power to seek an equitable solution to the dispute, by setting aside if necessary the legal rules otherwise be applicable or the strict application of a contract – offering an opportunities for the renegotiation of contracts, for example.
Art. 1231-3. The arbitral tribunal shall always guarantee equality of the parties and respect of the adversarial principle.
This enshrines in Luxembourg arbitration law the principle of equality of opportunity to present one’s case and respect for the adversarial process. This principle must be applied in the light of Article 6 § 1 of the European Convention on Human Rights and may be applicable in particular in matters of clandestine evidence.
Art. 1231-5. In the absence of legal obligations to the contrary or unless otherwise agreed by the parties, the arbitration proceedings shall be confidential.
This is one of the main advantages of the reform, which addresses the preference of economic players regarding business secrets or banking and financial transactions. It is specified in the preparatory work that this obligation will not invalidate the procedure and that breaches may be sanctioned by damages.
Art. 1231-6. If the arbitration agreement does not set a time limit, the duration of the mission of the arbitral tribunal shall be limited to six months from acceptance of the mission by the final arbitrator to do so. The legal or contractual time limit may be extended by agreement of the parties or by the person in charge of organising the arbitration if they have been authorised to do so by the parties, or, failing that, by the support judge.
Once the arbitrators accept their mission, the time limit for rendering an arbitration award is six months, as in France; Belgian law does not impose a time limit.
The arbitration award
Article 1232 establishes the principle that the deliberations of arbitration tribunals are secret and may be accompanied by a separate or dissenting opinion.
Art. 1232-2. The arbitration award shall state the reasons on which it is based, unless the parties have given the arbitral tribunal a dispensation from stating the reasons.
Unless the parties have agreed otherwise, the failure to state reasons for an arbitration award shall result in the award being null and void.
Art. 1232-3. The arbitration award shall have the force of res judicata as soon as it is made. The arbitral tribunal shall deliver a signed copy of the award to each party. The award may be served by a party. Such service shall start the time limits provided for in the following articles. The parties may, however, agree that this effect shall be attached to another method of service designated by themselves.
As soon as it is made, the arbitral award is res judicata in relation to the dispute that it settles.
Enforcement of the award and remedies
Arbitration awards handed down in Luxembourg
Art. 1233. An arbitration award may be enforced only through an enforcement order issued by the president of the district court in whose jurisdiction the award was made. The procedure relating to application for enforcement is not adversarial. The application must be filed by the earliest party at the registry of the competent court together with the original or a copy of the award and the arbitration agreement. The claimant must elect domicile in the district of the court addressed. Service on the claimant relating to enforcement of the award or recourse may be carried out at the address elected. A copy of the award shall be attached to the enforcement order.
Under the new article 1233 of the NCPC, the judge of exequatur for awards made in Luxembourg is the president of the district court in whose jurisdiction the award was handed down, of Luxembourg or Diekirch. The exequatur order must state the court’s reasoning and may be appealed against under the new article 1235 of the code.
Art. 1234. Enforceability may not be granted if the award is manifestly contrary to public policy. No appeal may be accepted to an order granting enforcement.
A clear violation of public policy is the only ground for refusing enforcement. However, there are seven grounds for annulment of the award under article 1238, which must be examined in the annulment appeal. The procedure for appeal to the Court of Appeal against the award has been abolished, leaving as the only recourse against the award an annulment appeal to the Court of Appeal.
Art. 1238. An action for annulment is only available if:
1. The arbitral tribunal has wrongly declared itself competent or incompetent.
2. The arbitral tribunal has been improperly constituted.
3. The arbitral tribunal has ruled without compliance with its terms of reference.
4. The principle of adversarial proceedings has not been respected.
5. The award is contrary to public policy.
6. The award does not state its reasoning, unless the parties have dispensed with the need for the reasoning of the arbitrators.
7. There has been a violation of the rights of defence.
Article 1238 lists the seven grounds for annulment through an action for annulment (lack of jurisdiction of the court, the court was improperly constituted, the court ruled without complying with the terms of reference given by the parties, non-compliance with the adversarial process, infringement of public policy, failure to state reasons unless otherwise agreed by the parties, and violation of the rights of the defence).
The ground of failure to state reasons is expressed in a more flexible manner than in French law. Article 1241 provides that this recourse is not suspensive, but that the enforcement of the award may be adjusted by the Court of Appeal. Article 1243 adopts the revision system from French law and Article 1244 enshrines the third-party objection.
Arbitration awards handed down abroad
Art. 1246. A decision on an application for enforcement of an arbitration award made abroad may be appealed. The appeal must be lodged within one month of the service of the decision; the time limit may not be extended because of distance. The Court of Appeal may refuse to enforce the arbitration award only in cases provided for under article 1238, subject to the provisions of international conventions.
Only courts of the territory where the foreign award was made can rule on an appeal for annulment. However, if the award is the subject of an exequatur ruling in Luxembourg, it can be reviewed by the Luxembourg appeal court through an appeal against the exequatur decision. The exequatur ruling of an arbitration award handed down abroad can be refused on the same seven grounds that apply to the annulment of awards delivered in Luxembourg as set out in the new article 1238. Moreover, article 1247 opens up the right to apply for revision of arbitration awards made abroad.
Art. 1248. Provided that it can demonstrate a sufficient interest, each party to an award made abroad may request, as a precautionary measure, that the Court of Appeal declare the award unenforceable against it for one of the reasons for refusing enforcement cited in article 1246 or for revising the enforcement order cited in article 1247, paragraph 1. An appeal for non-enforceability is lodged, investigated and judged according to the rules relating to the procedure of common law before the Court of Appeal sitting in accordance with the civil procedure.
The final innovation of the new Luxembourg arbitration law is the introduction of a preventive action for unenforceability, which allows a party to an award to take preventive action before the courts to avoid the award being granted exequatur, provided a sufficient interest is demonstrated.
Art. 1251. The enforcement order is subject to third-party proceedings under the conditions set out in article 1244, before the Luxembourg court having jurisdiction under article 613 of this code. An arbitration award made abroad cannot itself be subject to third-party proceedings before a Luxembourg court. However, provided they can demonstrate a sufficient interest, a third party against whom the award is likely to be opposed may argue, before the competent Luxembourg court, that the award is ill-founded and cannot be invoked against them.
Third-party proceedings remain available to protect the rights of third parties affected by an arbitral award.
Conclusion
The wide-ranging reform undertaken by the Luxembourg law-maker proposes a coherent regime of rules designed to promote efficient arbitration proceedings in Luxembourg that respect the fundamental rights of the parties choosing this mode of dispute resolution. It should be noted that the issue of the negative effect of the jurisdictional principle needs to be resolved. By introducing more flexibility and balancing the rules on arbitration agreements and proceedings, the objective remains to promote the integrity of the Luxembourg marketplace while ensuring the full effectiveness of awards.
European Court of Justice issues clarification on Luxembourg Business Registers and fundamental rights of beneficial owners
The EU’s fourth Anti-Money Laundering Directive established a new regime for public access to registers of beneficial owners of companies and other legal entities incorporated in member states, requiring their governments to obtain and maintain adequate, accurate and up-to-date information on beneficial owners. In Luxembourg, the directive was transposed by the law of January 13, 2019 establishing a register of beneficial owners.
Any member of the public has access to the information on beneficial owners contained in the registers without the requirement to prove a personal interest. Until this year, the validity of this regime in the light of the fundamental right of respect for privacy and family life and the protection of personal data, enshrined in articles 7 and 8 respectively of the EU Charter of Fundamental Rights of the European had never been examined.
However, Luxembourg’s district court (Tribunal d’arrondissement de et à Luxembourg) submitted two references for a preliminary ruling to the European Court of Justice questioning whether access to personal data complied with the principles of the European legislation and whether access provided sufficient protection for economic beneficiaries without representing illegal intrusion. The decision in these linked cases is of significant importance regarding potential restrictions applicable to information in the Register of Beneficial Owners.
Challenge to Luxembourg’s beneficial ownership register regime
Case C-37/20
In case C-37/20, an individual brought an action against Luxembourg Business Registers, the economic interest group that has been managing the country’s Register of Beneficial Owners (Registre des bénéficiaires effectifs or RBE) since March 1, 2019. The proceedings before the Luxembourg court were to limit access to information about the plaintiff, a corporate officer of an entity listed in the register. The applicant argued that publication of this information would expose him and his family to “a disproportionate risk of fraud, kidnapping, blackmail, extortion, harassment, violence or intimidation”.
The legal ground for this action was article 15 of the 2019 law, which states that a registered entity or beneficial owner may request, on a case by case basis with appropriate justification, that the manager limit access to the information referred to in article 3 to national authorities, credit and financial institutions, and court bailiffs and notaries acting in their capacity as public officers, in exceptional circumstances where access would expose the beneficial owner to a disproportionate risk of fraud, abduction, blackmail, extortion, harassment, violence or intimidation, or where the beneficial owner is a minor or is otherwise incapacitated.
The applicant argued that disclosure of the economic beneficiary information would place him in a dangerous position. He could become subject to the pressure of an economic struggle for control of his companies and endanger his safety due to his travels in hostile territories. However, the LBR rejected the application on the grounds that article 15 should be interpreted narrowly and that the applicant’s activities were in the public domain. The plaintiff appealed the decision before the Luxembourg district court.
Case C-601/20
In a parallel procedure, the alleged insufficient protection of information available at the register was also challenged by a Luxembourg company, SOVIM SA, which criticised the Luxembourg legislature for failing to incorporate adequate security measures to establish the identity of persons accessing the information in the register.
According to the claimant, Luxembourg’s beneficial ownership register regime would infringe the right to protection of the beneficial owner’s private and family life, as provided for in article 8 of the European Convention on Human Rights on protection of private and family life, home and correspondence, article 7 of the EU’s Charter of Fundamental Rights and article 11(3) of the Luxembourg Constitution.
SOVIM also asserted that public access to personal data contained in the register is a breach of various fundamental principles set out in the EU’s General Data Protection Regulation of April 27, regarding the processing and free movement of personal data.
Interpreting ‘exceptional circumstances’, ‘risk’, ‘data protection’ and ‘private family life’
Issues at stake
In case C-37/20, the Luxembourg judge, responding to the application for annulment of the decision not to restrict access to information regarding the claimant in the RBE, noted a divergence in interpretation of the scope of the exception provided for in article 15 of the 2019 law. Noting that the preparatory work of the EU directive did not allow exceptions to the publication of beneficial ownership information, in particular with regard to the concepts of exceptional circumstances and risk, the judge concluded it was necessary to refer the question to the ECJ for a preliminary ruling.
Furthermore, it was unclear whether publication of the information solely involved beneficial owners, or whether it also applied to the corporate officers of an entity, as in the C-37/20 case. The question at issue is therefor whether a corporate officer is entitled to invoke a derogation not to be listed in the register.
In case C-601/20, the issue concerned public access to the RBE and the claimants’ argument that open access is not necessary to achieve the goal of combating money laundering and financing of terrorism. They say the existing requirements entail a serious and disproportionate interference in the private lives of beneficial owners, criticising the Luxembourg law for not creating security measures to establish the identity of persons seeking access to the information in the register, for example by requiring them to create an account on its website.
They argued that any person could obtain access to the register in total anonymity with prejudice to the claimant, raising the risk of economic profiling – that the Register of Beneficial Owners could be exploited by private economic intelligence or strategy firms to conduct data mining, for example in view of a possible hostile takeover bid.
The position of the court’s advocate-general
The court’s advocate-general, Giovanni Pitruzzella, noted in his opinion that the principle of transparency, as enshrined in European primary law, can lead to a delicate balancing act. He also recalled that the philosophy of the EU directive was to “set out a comprehensive and effective legal framework to combat the collection of property or money for terrorist purposes, requiring member states to identify, understand and mitigate the risks of money laundering and financing of terrorism”.
The advocate-general concluded that the actions to identify beneficial owners do constitute an infringement of the fundamental rights guaranteed in articles 7 and 8 of the Charter of Fundamental Rights. However, he pointed out that the data available in register is linked to the civil (date of birth, name) and economic (interest shares) status of the beneficial owner and therefore appears less sensitive than other categories of personal data.
Although access to such data may provide a limited view of a person’s wealth, it does not generally allow accurate conclusions to be drawn regarding the individual’s total wealth nor to draw precise conclusions about their investment profile. Therefore, according to the advocate-general, the potentially harm to persons affected by such infringement may be regarded as moderate.
Nonetheless, Mr Pitruzzella pointed out that member states may, under certain conditions determined by national law, give access to additional information allowing the identification of the beneficial owner (at least, date of birth or contact details, depending on data protection rules). This ability to extend the amount of data concerning beneficial owners that is accessible to the public could potentially give rise to additional infringement of the fundamental rights guaranteed in articles 7 and 8 of the charter.
He concluded that the provision under which member states may make additional data available to the general public, which is not precisely defined or determinable, does not satisfy the requirement that the information is sufficiently precise, as laid down by the directive itself. As a result, his opinion was that the fourth Anti-Money Laundering Directive is invalid in this respect.
Turning to the data protection issue, the advocate-general concluded that the GDPR does not object as such to the creation of a register containing personal data that is accessible to the general public, therefore to an unlimited and indeterminate number of persons, without control and justification, and without the subject of the data being able to know who has access to it.
On the question of the proportionality of disclosure of data on beneficial owners, Mr Pitruzzella referred to the principle of data minimisation. He considered that indicating the name, month and year of birth can be considered a minimum and sufficient set of data to precisely identify the beneficial owner, while nationality appears relevant and necessary information for determining potential money laundering or financing of terrorism risks.
Regarding the indication of the nature and extent of beneficial interests held, these constitute a minimum and sufficient set of data to identify the scope of the investment or participation, which is also relevant for the assessment of the risk of misuse of companies and other legal entities for money laundering or financing of terrorism. In the advocate-general’s view, this regime does not result in disproportionate interference with the fundamental rights of the subjects of the data, in particular their right to respect for private life and the protection of personal data, as guaranteed by articles 7 and 8 of the charter.
The provisions of the GDPR must also be interpreted as not precluding a register from being partially accessible to the public, without any requirement to demonstrate a legitimate interest or limitation as to the location of those accessing data, he concluded. However, according to Mr Pitruzzella, the transfer of data from a register may be carried out only in accordance with article 49(1)(g) of the GDPR, if the conditions for consultation of the register provided for by law are fulfilled and provided that the consultation does not involve the entire register.
On interpretation of the notion of exceptional circumstances, the advocate-general advised that the Luxembourg judge is required to interpret the AML directive in a manner consistent with the fundamental rights guaranteed by the charter, specifying that the derogations are of strict interpretation.
Potential consequences for Luxembourg’s RBE regime
The advocate-general concludes, first, that article 30(5a) of the fourth Anti-Money Laundering Directive, read in the light of articles 7, 8 and 52(1) of the Charter of Fundamental Rights, must be interpreted as meaning it is incumbent on member states to ensure that the national bodies or authorities responsible for keeping registers of beneficial owners are aware of the identity of individuals or entities that access the register. The open data system of the Luxembourg register could be illegal in this respect.
Secondly, the existence and disproportionate or otherwise nature of such a risk may be determined by considering links between the beneficial owner in question with companies and other legal entities, as well as with trusts and legal arrangements with a similar structure or functions, in their capacity as beneficial owner of such entities, other than the one for which an exemption from public access to information concerning them is requested.
It is for the beneficiary or entity requesting an exemption from public access to information to demonstrate that these links constitute a factor that justifies or supports the existence of a disproportionate risk of harm to the fundamental rights of the beneficial owner. Article 30(9) excludes the granting of an exemption from public access to information concerning a beneficial owner where that information is easily accessible to third parties through other information channels.
To conclude, if the European Court of Justice follows the reasoning of the advocate-general, it is likely that new identification measures will be required to obtain access to the Luxembourg Register of Beneficial Owners. The derogation provided for in article 30(9) will not be granted if the economic links and interests of the beneficial owners are accessible to third parties through other information sources such as newspaper articles or online news.
A final decision from the European Court of Justice is expected shortly.
Examining the effects of the Law of 15 July 2021 on Luxembourg's new Code of Civil Procedure
The New Code of Civil Procedure in Luxembourg has undergone a substantial transformation owing to the enactment of the Law of 15 July 2021. The objective of these changes is to streamline and modernize the country’s civil and commercial justice system, curtail the expenses and duration of legal proceedings, and enhance access to justice. This article scrutinizes the principal changes that the Law of 15 July 2021 has introduced to the New Code of Civil Procedure in Luxembourg, while also contemplating their plausible impact on the efficiency and accessibility of the civil and commercial justice system.
Improving access to justice: simplifying procedures before the District Courts and increasing the thresholds of the Peace Courts
The Law of 15 July 2021 in Luxembourg introduces three important measures aimed at simplifying and improving access to justice.
Firstly, it institutes a simplified procedure in front of the district court for disputes implying a monetary value of €100,000 or less, with only one claimant and one defendant involved. This method enforces rigorous time limits, with foreclosure as a possible consequence, and confines exchanges between parties to two written submissions. The fundamental aim of this measure is to curtail the duration and expenses of legal proceedings, particularly for cases that are less intricate in nature.
Secondly, it is mandated by law that parties submit “conclusions de synthèse” or memorandum summaries, which serve to streamline the legal process by consolidating all arguments into a single document filed by each party before the District Courts. This amendment is anticipated to alleviate the burden on the judges and enhance the efficiency of the legal process, thereby ensuring that all arguments are presented in a unified and comprehensive manner.
Thirdly, the Law of 15 July 2021 pertains to the increase in the threshold of competence of the peace courts in Luxembourg. As per Article 2 of the NCPC, the jurisdictional competence of the justice of the peace has been elevated from €10,000 to €15,000. This enhancement in the jurisdictional competence of the peace courts provides a more accessible and cost-effective avenue for the resolution of disputes for litigants with lower-value claims. It should be noted that the representation and assistance of a lawyer is not obligatory for any litigant, including individuals, companies, and other entities, in all disputes and proceedings before the peace courts.
These measures significantly improve access to justice by reducing the complexity and cost of legal proceedings, especially for individuals and small businesses. The simplified procedure allows parties to resolve disputes more efficiently, while the requirement for memorandum summaries provides a clear overview of the parties’ arguments, making the legal process more transparent and accessible to non-legal professionals. By streamlining legal proceedings and reducing the barriers to access justice, the Law of 15 July 2021 in Luxembourg ensures that all parties have equal access to legal remedies, regardless of their financial means or legal expertise.
Strengthening the efficiency of justice
The Law of 15 July 2021 in Luxembourg introduces three important measures to strengthen the efficiency of justice.
The effectiveness of the justice system has been significantly reinforced by the recent law passed on July 15, 2021 in Luxembourg. In particular, the role and authority of the ‘juge de la mise en état’ or ‘case management judge’ have been augmented, granting them exclusive jurisdiction over a range of legal matters until such time as they are replaced. Under the new law, the case management judge will possess exclusive jurisdiction to adjudicate on issues of nullity arising from procedural defects, as well as any dilatory objections that may be raised. In addition, they will also have the authority to rule on objections of lack of jurisdiction and pleas of public order, thereby streamlining the legal process and reducing the workload of other judicial bodies. The objective of this legal reform is to strengthen the efficiency and effectiveness of the Luxembourgish justice system by empowering the case management judge to resolve a broader range of legal disputes that were used to delaying the outcome of a dispute.
Furthermore, the new law introduced in July 2021 requires litigants to obtain authorization from the court to appeal an intermediary judgment. To obtain authorization, the litigant must file a request with the court within 30 days of the decision being issued. The decision on the request for authorization to appeal is considered final and binding, and therefore, is res judicata.
Lastly, one such modification relates to the formalization of appeals against decisions rendered by the peace courts. Under the new rules, such appeals will be governed by the oral procedure, thereby rendering it non-obligatory for appellants to retain the services of an attorney in all instances of appeal (as provided in Articles 114 and 547 of the NCPC).
Miscellaneous
One important change made by the law of 15 July 2021 is that decisions involving a monetary value of less than € 2,000 can no longer be appealed. This means that if a decision is made in a legal case that involves a monetary value of less than € 2,000, the decision is considered final and cannot be challenged or appealed to a higher court of final instance.
The law now mandates that lawyers be sent a copy of the court calendar by email. This is intended to help lawyers keep track of upcoming court dates and deadlines. This change is part of a broader effort to modernize the legal system and make it more efficient and accessible to all.
Another important change introduced by the law of 15 July 2021 is the new written procedure for requesting an interpretation of a court decision. Under the new rules, parties can request an interpretation if they find a court decision unclear or ambiguous. This new set of rules aims to improve the clarity of court decisions and to reduce disputes that may arise from unclear language in court orders.
Conclusion
The Law of July 15, 2021, has enacted significant modifications to Luxembourg’s New Code of Civil Procedure. The purpose of these changes is to modernize and streamline the civil and commercial justice system, minimize the expense and duration of legal proceedings, and enhance access to justice. The revisions include the option of electronic transmission of legal documents, an increase in the jurisdictional threshold of the justice of the peace, the establishment of a simplified procedure before the district court, and alterations to appeals against judgments.
Overall, the changes are anticipated to augment the efficiency and accessibility of the civil and commercial justice system, particularly for less intricate cases. The introduction of electronic transmission of legal documents and the rise in the jurisdictional threshold of the justice of the peace are expected to improve the speed and efficiency of the legal process. The simplified procedure before the district court is anticipated to lessen the cost and duration of legal proceedings, while the modifications to appeals against judgments are expected to enhance the efficiency of the appeals process and reduce the backlog of cases. Nevertheless, it remains to be seen how these changes will function in practice and whether they will accomplish the desired objectives. The implementation of the Law of July 15, 2021, will be closely monitored to assess its impact on the civil and commercial justice system in Luxembourg.
