Third Party Funding

A few months ago, the International Council for Commercial Arbitration (ICCA) and the Queen Mary University of London co-hosted a roundtable discussion focusing on the possible public policy implications of third-party funding in investor-State dispute settlement.

Third party’s litigation funding is a practice that enables the funded party to start judicial or arbitral proceedings without undertaking the related expenses: in other words, the funder pays some of, or all, the costs of the dispute in consideration of a share of the proceeds if the claim is successful. On the other hand, if the claim is not successful, the funder will bear all the costs.

Despite that, the here-analysed type of funding has not been specifically regulated by the Italian legal system yet. As far as regulation is concerned, the Italian scenario appears indeed to be ruled by a general sense of uncertainty. Moreover, literature and case-law are also lacking on the phenomenon and, to complete the framework, both professionals and legal experts are generally unaware of this opportunity.

Actually, such uncertainty may well depend on the fact that this practice of bargain arose in common law jurisdictions and so it is alien, at least for now, to civil law traditions.

Despite that, several professional litigation funders have recently shown they may have interest in the Italian Market. Because of this reason, the question is whether the practice of financing claims as above described could represent an available option in Italy.

The only provision of the Italian legal system entailing litigation funding relates to contingency fee arrangements between client and lawyer (the so-called champerty or pactum quota litis). Such clauses are traditionally forbidden by art. 13 l. 247/2012, which states that, although reaching an agreement on the lawyer’s fee is allowed, the counsel cannot accept a share of the assets that are brought before the court. Otherwise, the lawyer can be suspended from exercising the professional activity from two to six months.

The aim of this provision, heavily criticised and now considered anachronistic in its conception, traditionally originated from a need to safeguard the independence and impartiality of lawyers: the motivations behind this disposition were connected to the fact that legal practitioners would otherwise not have been able to maintain the required impartiality and objectivity in the fulfilment of their tasks.

In any case, it does not seem that the scope of the disposition can be broadened enough to include professional funders. Two types of observations appear to comply with this interpretation: on the one hand, the Italian Supreme Court has specified that the above-mentioned prohibition can be considered valid only in relation to jurisdictional activity carried out by lawyers who are authorised to practice before a court, not addressing, conversely, those professional figures that merely support the client, such as the labour consultant; on the other hand, the ban of contingency fee arrangements for lawyers is not a peculiarity of the sole Italian system, but it may be found in many other civil law countries like Germany and Austria, where, nevertheless, litigation funding is peacefully admitted.

At first sight, it seems therefore reasonable to think that this practice may be admitted also in Italy, however, this hypothesis imposes at the same time a certain amount of considerations of different nature.

Firstly, it is clear that, in the eyes of funders, the Italian jurisdiction seems to be less appealing than many others. In fact, it should be noted that the length of Italian court’s proceedings is a reality sadly known worldwide. For this reason, funders, who generally aim to maximize their investments in the fastest way possible, may be oriented to look elsewhere.

Secondly, allowing funding may easily determine an arise of conflicts of interest between funder and funded party. In particular, in order to reduce the uncertainty and the risk of losing the capital invested, the funder may well interfere in the decision making by forcing the funded party to cut a deal with the counterparty. Under this viewpoint, the outcome of litigation would certainly be of interest for funders and, therefore, funded party being the weaker party of the relationship, it is reasonable to believe that its freedom in managing the claim risks could be undermined.

Other concerns relate then to the relationship between funders and lawyers, whose duties shall be oriented to serve their clients’ reasons at their best. In other words, in this kind of professional relationships it does not seem to be any space for funders’ interests, even if the risk of funders’ interference cannot be a priori completely excluded.

Thirdly, it is to be noticed that allowing funding may well have effects on the right of access to justice. The aforementioned practice would indeed encourage high-value claims without sufficient resources, also on the grounds that a very low income is required to be admitted to legal aid (€ 11.369,24).

It is true that funding could contribute to guarantee the effectiveness of the right of defence – which is a constitutionally granted– and safeguard the right to a fair trial, pursuant to art. 6 of the European Human Rights Convention. However, it must be noticed that, extending the opportunities of access to justice could have the consequence of a significant increase in the number of claims brought before court, with a heavier burden of work for judges and increased public expenditures for Italy.  

Fourthly, it is worth emphasising that, beyond the above-mentioned observations, from the legal point of view, nothing prevents the third party funding (it is not forbidden) and, therefore, this practice might well be considered compatible with the Italian legal system, without conflicting with any of the general principles of the Italian law.

Nevertheless, the crux of the matter may well require further considerations on the law’s hypothetical base-situation: in this regard, the type of agreement referred to third-party funding may be identified in the typical contract “associazione in partecipazione” (art. 2549 of the Italian Civil Code), which is extremely close to the phenomenon in question. In the Italian legal framework, “associazione in partecipazione” is an agreement in which the associate attributes to the associating party the share of proceeds of its business or the proceeds from the conduct of one or more deals, in consideration for a specific contribution from the other associating party. At first glance, according to the aims pursued by the parties (funder and plaintiff), this contractual scheme seems to be the most suitable one, even if it would still be necessary to define the position of the lawyer.

It is eventually relevant to underline that, in the Italian legal system, collecting claims professionally must be regarded as a regulated profession and particularly as a “financial business”, thus falling within the meaning of art. 106 d. lgs. 385/1993 (the Italian Banking Act). Therefore, the transferee must be expressly authorized by the Bank of Italy through the enrolment in the financial intermediaries’ register, otherwise the assignment is null and void because of its contrariety to the Italian mandatory rules.

To conclude this first analysis, it seems reasonable to affirm that third party litigation funding might, in addition to improving the access to justice, play a fundamental role in mitigating the risks of litigation or arbitration and, above all, become an important economic opportunity for Italy. However, such practice may easily raise practical setbacks, which would require a legislative action aimed at incentivising funding, providing in any case the necessary corrections to the malfunctions that the application of market logic in legal matters may cause.