On 13 September, the European Parliament approved a decision on third-party funding, which is one of the methods used, as it provides the right of access to the court, including its recommendations on the subject. In this article, we examined the decision approved by the European Parliament and its possible effects on third-party funding.
What is Third Party Funding?
Third-party Funding is a structure that envisages covering the costs that may arise in filing a lawsuit, whether before the court or not and providing legal and financial advice when necessary. If the case is won by the funded party because it is an investment, a certain part of the compensation will be received by the funding party in return for its investment.
Especially in investment arbitration, third-party funding, which is gaining popularity day by day, has been and continues to be the subject of discussion due to the burden of costs in decisions and a number of ethical problems.
There are regulations on this subject in Hong Kong, Singapore, and the UK, but mostly there are no regulations due to the fact that it is relatively new.
The European Parliament ("Parliament") has prepared a draft directive, including its recommendations to the European Commission, in the past months, due to both the allocation of justice and ethical issues regarding the absence of regulation and an issue where there is no regulation. The draft was approved by Parliament in November 2022.
Resolution of the European Parliament on Third-Party Funding
In the resolution adopted on 13 September ("Decision"), in addition to its recommendations to the Commission, it also provided suggestions for possible arrangements, solutions to ethical problems, possible provisions regarding funding agreements, third-party funding ("Funding"), and complaints of the funder, and upon a complaint or ex officio, to initiate an investigation and finally to possible administrative fines.
Regulation
It is envisaged that the regulation of third-party funding will be carried out at the national level. Since the draft regulation of the European Parliament is a directive, it is foreseen that the directive will be harmonized with the national law of the member states and legislative work will be done for the directive.
In the said decision, it was left to the member states how to set up the administrative fines and the complaint process.
It has been stated that third-party funding, which has been on the rise for a while, is almost not regulated in the member states, and it is a method used not only before the court but also in alternative dispute resolution methods. By making use of non-existent regulations, the Funder may take a large part of the compensation won by the claimant in the case in return for the investment made, which is not a proportionate practice, and therefore it is aimed to prevent its abuse.
Ethical Concerns
It emphasized that the Funder should not have improper control over the process, regardless of whether it is related to the arbitration, that it should act in the best interest of the funded party, that funding should be avoided where there is a potential for a conflict of interest, and that the situation should be disclosed to the court or arbitral tribunal when necessary.
The Parliament also noted that in some cases there were cases where the Funder had terminated the relationship with the claimant while litigation, without giving any reasonable explanation. Therefore, the Parliament emphasized that, given that the case in question could only be brought due to the existence of the Funder, the termination of the relationship should not be possible except in exceptional and strictly regulated circumstances. At the same time, it was stated that conditional funding agreements should be deemed invalid.
Finally, in terms of the funding relationship, it has been stated that if the plaintiff fails, the Funder must also be responsible for the defendant's litigation expenses and that in the case of failure of the funded party, the provisions on reducing the Funder's financial liability should be avoided.
Regarding Funding Agreements
The Parliament touched upon a few points regarding the contract in the decision, as it does not mention the existence of funding agreements in most of the litigation processes today.
Approving a regulation regarding the content of the contract, the European Parliament also included in the Decision some arrangements regarding the transparency of the contract, avoidance of conflict of interest, invalid contracts and clauses, and finally the termination of the contract.
First of all, it is essential to notify the court or arbitral tribunal of the existence and content of funding agreements in order to prevent transparency and conflict of interest. The provisions that the contract should contain are as follows:
List of court costs and expenses to be covered
The benefit of the Funder, directly or indirectly
Notice that the Funder may be liable in case of failure
A statement that the compensation to be obtained as a result of the lawsuit will be paid first to the claimant and then the agreed amount can be given to the Funder
Statements regarding the risks assumed by both the Plaintiff and the Funder of the Litigation
Disclaimer prepared by the Funder stating that the contract is unconditional
A statement that the Funder has no conflict of interest
On the other hand, the regulation emphasizes that the Funder should inform the claimant about possible conflicts of interest and that the member states should have an internal audit mechanism to prevent conflicts of interest.
Operating Permit of the Fund Company
In the said regulation, Fund Provider companies envisaged a regulation in which they can provide funds by obtaining an operating permit. An arrangement similar to the Association for Litigation Funders ("ALF") in England and Wales has actually been implemented.
In this context, it is stated that within the scope of the internal audit mechanism of the member states, the company, the capital and the regulations regarding the limited liability conditions in the funding agreements to be formed should be included. The scope and content of the regulations are left to the member states in parallel with the Decision.
Complaints and Investigations
Parliament has proposed to establish a mechanism that allows Funders to complain or initiate an ex officio investigation if they violate member states' legislation on third-party funding.
Sanction
Due to the legal nature of the Directive in the EU, the European Parliament emphasized that the sanctions in question should be effective, proportionate, and dissuasive in the national legal regulations of the member states.
As a recommendation in the sanctions, the Funder stated that administrative fines calculated according to the turnover of the company may be envisaged, the authorization to operate may be withdrawn temporarily or indefinitely, or there may be different administrative sanctions that may be deemed appropriate in terms of legislation.
Source:
European Parliament. (2022, September 13). European Parliament Resolution of Responsible Private Funding of Litigation . europarl.europa.eu. Retrieved
December 20, 2022, from https://www.europarl.europa.eu/doceo/document/TA-9-2022-0308_EN.html
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