knowledge 21 September 2022 |

Litigation funding - new rules on the way?

The continuing prohibition on maintenance and champerty in Ireland has meant an effective prohibition on third party funding of litigation in this jurisdiction save in limited circumstances.¹

Over the last number of years, the issue of litigation funding has increasingly been raised before the Irish courts. Recent decisions have confirmed the continuing prohibition generally, with the judiciary expressing the view that litigation funding is a complex multifaceted issue, more suited to a full legislative analysis rather than piecemeal development before the courts.²

The legislature has now decided to intervene in a limited way to allow third party funding of international arbitration proceedings. It has been reported in the media in recent days that this will be by way of amendment to the Courts and Civil Law (Miscellaneous Provisions) Bill 2022, which is currently before the Dáil.

Might the legislature ultimately go further? It now appears that developments at EU level may provide a path though not an obligation to do so. However, at a minimum, any new domestic legislation will have to be prepared with an eye to Europe.

What has happened in Europe?

On 13 September 2022, the European Parliament adopted a resolution on the responsible commercial private funding of litigation³  with recommendations to the Commission for a Directive in the area.

The resolution begins by acknowledging that there are certain advantages associated with third party litigation funding (“TPLF”), if properly regulated. For example, it can be used as a tool to support access to justice; to ensure that public interest cases are brought to court; and can reduce significant economic imbalances that exist between corporate entitles and citizens seeking redress, thereby ensuring appropriate corporate accountability.

On the other hand, having regard to experience in other jurisdictions, the resolution points out that certain litigation funders may conduct litigation in their own economic interest, rather than that of claimants and that returns to funders can be disproportionate. There can also be a lack of transparency around these arrangements.

The resolution notes that TPLF has been limited in the EU to date but is expected to play a growing role in the coming years. However, it remains largely unregulated in the Union.⁴ Voluntary regulatory mechanisms and codes of conduct have not been subscribed to by the large majority of funders, leaving claimants significantly exposed. In the Parliament’s view, this regulatory vacuum needs to be addressed. It also points to an absence of common minimum standards at Union level with an accompanying risk of fragmentation and regulatory imbalance in the area.

However, it adds that any regulation should go hand in hand with other policies enhancing access to justice for claimants, such as legal aid or crowdfunding.

Ethical issues highlighted

The Parliament went on to highlight a number of specific ethical concerns that can arise with TPLF. For example, litigation funders should not have undue control over the legal proceedings, whether this is formally by way of contractual arrangement or informally through threats to withdraw funding.

It pointed out that conflicts of interest may arise where there are inappropriate relationships between litigation funders, representative entities, law firms, aggregators, including claims-collection and award-distribution platforms, and other entities who may be involved in claims and have an interest in the outcome of a court case. It notes that there is an increasing trend of litigation funders agreeing to finance law firms across a series of future cases (portfolio funding). It recommends that safeguards be adopted to prevent potential conflicts of interest, to lay down claimants’ rights and require disclosure of details of relationships between litigation funders and the other parties involved.

The Parliament believes that, except in exceptional and strictly regulated circumstances, litigation funders should not be permitted to abandon funded parties in litigation at any stage in the litigation process, leaving claimants solely responsible for all costs of the litigation, which may have only been pursued due to the involvement of the funder. It stresses that contractual arrangements based on conditional funding should be considered void.

It also believes that, just like claimants, litigation funders should be responsible for defendants’ costs arising from unsuccessful litigation, such as due to an adverse cost award. Regulation should prevent litigation funders from limiting their liability to costs in the event of an unsuccessful outcome.

How should these issues be addressed?

The Parliament recommends the establishment of a system of authorisation for litigation funders. Enforcement measures and a complaints system should established at national level. Litigation funders should be subject to oversight in a manner similar to that of the existing prudential supervision system applicable to financial services providers.

This will ensure that claimants can use TPLF but that adequate safeguards are in place to protect them. These safeguards will include certain corporate governance requirements and supervisory powers. This will ensure that funding is only provided by entities that are committed to complying with minimum standards in terms of transparency, independence, governance and capital adequacy, and to observing a fiduciary relationship vis-à-vis claimants and intended beneficiaries. These persons should also be indemnified in respect of any harm caused by a litigation funder not having the necessary authorisation. However, the Parliament adds that this new system should not create an excessive administrative burden for Member States or for litigation funders.

Limits on recovery

The Parliament also considers that legislation should impose limits on the proportion of the award that litigation funders can receive in the event of successful litigation or settlement and on the basis of a contractual arrangement. Only under exceptional circumstances should arrangements depart from the general rule that a minimum of 60% of the gross settlement or damages is paid to the claimant. Otherwise, such arrangements should be presumed unfair and deemed invalid. In addition, litigation funders should not be permitted to require the prioritisation of their own reward.

Disclosure and transparency

The Parliament also highlighted the need for transparency around TPLF in legal proceedings so that the court and the defendant are aware of any such arrangement. The existence of a third-party funding agreement and the identity of the litigation funder should be disclosed to the court who will inform the defendant. The court will also be able to request sight of a complete and unredacted copy of the funding agreement and to review it for compliance with applicable legislation.

What happens next?

The Parliament has requested the Commission to monitor and analyse the development of third party litigation funding in the Member States, both in terms of the legal framework and practice, with particular attention given to the implementation of Directive (EU) 2020/1828.

It requests that after the expiry of the deadline for the application of that Directive (25 June 2023) that the Commission submit a proposal for a Directive to establish common minimum standards at Union level on commercial third party litigation funding, following the Parliament’s recommendations. This proposal should take the effects of Directive (EU) 2020/1828 into account.

Will Ireland be obliged to implement these measures?

At EU level, Ireland has certain flexibility in the area of justice so it may be that Ireland will need to opt-in to this legislation. Even if this is the case, under the Parliament’s recommendations, it will still remain for each Member State to determine whether, and to what extent, litigation funding should be permitted within its own legal system. Where Member States choose to permit this, any new Directive will set out minimum standards for the protection of funded claimants.