Litigation Funding: What’s coming down the tracks in Ireland and Europe?

Minister for Justice, Helen McEntee recently announced that the current restriction on third party funding will be removed in respect of international arbitrations through a Government amendment to the Courts and Civil Law (Miscellaneous Provisions) Bill 2022 which is currently before the Dáil. Separately, the European Parliament’s Committee on Legal Affairs has recommended the introduction of an EU-wide legislative framework for third party litigation funding. In time, this could require Ireland to create provision for such funding mechanisms.

In Ireland, unlike in many other jurisdictions, the continuing prohibition on maintenance and champerty has meant an effective prohibition on third party funding of litigation save in limited circumstances. Increasingly, the issue of litigation funding is being raised before the Irish courts with recent decisions confirming the continuing prohibition. The judiciary have indicated that litigation funding is a complex multifaceted issue requiring a full legislative analysis rather than piecemeal development before the courts. On a recent U.S. trip to promote Ireland as legal hub for doing business in Europe, Minister for Justice Helen McEntee outlined her intention to introduce third-party funding. This type of funding enables a party with no connection to a case to cover the cost of a lawsuit, typically in exchange for a share of any pay-out if the case is successful. The Minister was visiting the U.S. as part of a three-day promotional visit with Ireland for Law, a government-wide marketing strategy that sets out to encourage companies to look to the Republic for litigation, arbitration and general legal advice.

It is timely that the Irish legislature is considering a change of approach regarding third party funding as it now appears that developments at E.U. 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 being cognisant of developments at the European level.

On 13^th September, the European Parliament published a proposed Directive by way of a resolution to regulate commercial third party funding within the E.U.  The draft proposal can be found here.

The proposed Directive appears intended to apply to litigation funders and their funding agreements no matter where the litigation funder is based, provided the proceedings are in the E.U. The resolution begins by acknowledging that there are certain advantages associated with third party litigation funding, if properly regulated. 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.

The proposed Directive obliges Member States where third party funding activities are permitted to create a system for monitoring and authorising the activities of funders, led by an independent supervisory authority. A key requirement for authorisation will be a capital adequacy requirement to ensure that the funders have adequate financial resources to meet their potential funding liabilities.

Amongst others, the key recommendations in respect of third-party funding agreements are as follows:

• That Member States should empower their courts to make adverse costs orders against litigation funders, whether jointly or severally, following an unsuccessful outcome.
• There must be a clause in funding agreements specifying that any awards from which the fees of the funder are deductible will be paid in full to the claimants first, who may then pay the agreed sums to the funder.
• There must be defined circumstances in which the funder can terminate the agreement rather than allowing the funder to terminate at will.
• The agreement must contain a declaration that the funder has no conflict of interest.

The proposed Directive also provides that funding agreements will be invalid if:

• They grant explicit power to a funder to influence decisions or take control of the proceedings (including settlement and the management of expenses).
• They entitle the funder to more than 40% of the total award “absent exceptional circumstances” (which are not defined). In other words, a cap on funders’ recovery of 40%.

The Parliament resolution notes that third party litigation funding has been limited in the E.U. to date but is expected to play a growing role in the coming years. However, it remains largely unregulated in the E.U. with existing voluntary regulatory mechanisms and codes of conduct not being subscribed to by the majority of funders, leaving claimants significantly exposed.

Importantly, the Parliament resolution also states that any regulation should go hand in hand with other policies enhancing access to justice for claimants, such as legal aid or crowdfunding.

The European 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.

It remains to be seen how far the Irish legislature will go in terms of legislating for third party litigation funding and any steps taken will be with one eye looking to Europe.