JDSupra | 3 April 2023
EU plans to regulate third-party funding in litigation and international arbitration
by Juan Nascimbene and Olivia Anderson
On 13th September 2022, the EU Parliament voted to approve a resolution proposing a directive (the “Directive”) on the regulation of third-party funding entitled “Responsible private funding of litigation”. If adopted in its current state, the proposal would regulate Third-Party Funders (“TPFs”) funding proceedings in the European Union.
What is third-party funding?
Third-party funding involves a non-party, typically a private commercial fund with no prior connection to a dispute, agreeing to finance all or part of the costs of the proceedings in exchange for an agreed share of any damages awarded (and/or a multiplier of costs paid) in the event of a successful outcome.
The Directive incorporates a very broad definition of a third-party funder (TPF) as ‘‘any commercial undertaking that enters into a third-party funding agreement in relation to proceedings […] and which has the primary aim of receiving a return on an investment it makes by providing funding in relation to those proceedings or of obtaining a competitive advantage in a specific market”.
Currently, commercial litigation third-party funding is seldomly used in Court proceedings in EU Member States, but its use is growing and it will likely be used to fund most class actions under the new EU Representative Actions Directive. Funding is more common in EU-based international arbitrations. In its resolution, the European Parliament also noted the prevalence of third-party funding as a “booming phenomenon in investment arbitration that multiplies the number and the volume of claims of private investors against states”.
The EU proposal
The Directive seeks to establish common minimum standards for TPFs across the EU. According to the EU Parliament, the proposed measures focus on promoting greater transparency, fairness, and regulatory oversight. The Directive would also apply to arbitration and other ADR mechanisms where the proceedings are seated in the EU, regardless of where the litigation funder is based. 
The draft resolution proposes to:
- Create an independent public supervisory authoritywhich would be responsible for overseeing the authorisation of TPFs and for monitoring their activities;
- Hold TPFs jointly liable with claimants to pay any adverse costs that may be awarded in unsuccessful funded proceedings (it is unclear how this will apply to international arbitrations);
- Require TPFs to demonstrate on an annual basis that they possess adequate financial resources to pursue their activities;
- Impose a fiduciary duty of care on TPFs towards the claimant that they are funding;
- Establish specific disclosure and transparency obligations to inform the relevant judicial or administrative body of the existence of any third-party funding agreement;
- Require that any third-party funding agreement should be written in the official language of the Member State in which the claimant and intended beneficiaries are resident;
- Require that, on the request of the relevant judicial or administrative body, a complete and unredacted copy of the agreement be provided at the earliest stage of proceedings;
- Limit the TPFs’ share of recovery to a maximum of 40% of the amount of damages finally awarded, absent “exceptional circumstances”. Any percentage higher than that would be deemed null and void (which could even apply to the return of costs paid if an award was considerably lower than hoped);
- Render funding agreements 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); and
- Prohibit unilateral termination of the third-party funding agreement by TPFs without the claimant’s informed consent, save in defined circumstances.
The Commission has yet to adopt any proposal incorporating the above recommendations. If and when the Commission does submit a proposal, the final text of the Directive will need to be agreed by the European Parliament and the European Council and then implemented at the national level by each Member State before becoming mandatory.
Although the European Commission has yet to submit any legislative proposal, this draft Directive marks the first step towards the introduction of a new regulatory framework for third-party funding in the EU with potentially far-reaching implications for third-party funded international arbitrations with an EU connection. Cooley will continue to closely monitor the progress of this proposal.
 Article 3(h) of the Directive, a “third-party funding agreement” means “an agreement in which a litigation funder agrees to fund all or part of the costs of proceedings in exchange for receiving a share of the monetary amount awarded to the claimant or a success fee […] based wholly or partially on the outcome of the proceedings”.
 Article 3(a) of the Directive, definition of “litigation funder”.
 The Representative Actions Directive contains some provisions on the use of the third-party funding, aimed at ensuring that actions are not diverted “from the protection of the collective interests of consumers”.
 Paragraph F of the recitals of the European Parliament resolution of 13 September 2022.
 Per Article 3(e) of the Directive, the definition of “proceedings” includes “any voluntary arbitration procedure or alternative dispute resolution mechanism, through which redress before a court or administrative authority in the Union is sought concerning a dispute”.