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.
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