Class action court proceedings can be lengthy and costly precisely because law firms or specialised legal services companies base their portfolios on long-term litigation and therefore do not generate short-term profits.
This is why litigation funding is a key tool, especially in the management of collective claims, a booming market in Spain and currently led by ESKARIAM. Litigation finance, a widespread practice in other countries, is becoming increasingly popular in the Spanish legal sector and is one of the best solutions for financing class action cases.
Litigation funding is a service in which a third party (a fund, in most cases) provides financial resources to the law firm or legal services company that is handling a lawsuit, thus covering the costs related to the case.
If we go back to the beginnings of litigation funding, Australia and the United Kingdom were the first countries to implement this type of practice. In the 1990s, these territories were pioneers in initiating actions in which third parties funded law firms’ litigation. Although both were the first to develop these practices, it was in the United States that the seed of large-scale litigation funding was sown.
Due to this Anglo-Saxon influence, the term ‘third party funding’ has become popular, which refers precisely to funding by a third party, providing funds to one of the parties involved in the lawsuit in exchange for a previously agreed return. Currently, in the EU, countries such as Germany and the Netherlands make use of this practice to finance long-term litigation. This is why the European Parliament has decided to take a step forward by proposing a regulation on third-party litigation funding in the EU.
Litigation funding has a more or less established procedure in most cases. A firm or entity involved in litigation must assure its clients that the case is in the hands of the best possible professionals, guaranteeing the capacity to cover possible anomalies that may arise during the course of the proceedings. This is when litigation funds are called upon to provide the financial muscle that contributes to the stability and security of the case and, sometimes, of the firm itself.
The first step in the litigation negotiation process is to sign a Non-Disclosure Agreement (NDA), thus preserving the confidentiality of the information shared between the fund and the law firm. Secondly, due diligence, i.e. a preliminary investigation, is initiated.
Several aspects are taken into account at this stage:
The funding proposal will go through the Investment Committee, which will decide whether or not to fund the case. Once funding is accepted, certain conditions will have to be set by both the fund and the firm, such as the remuneration of the funder, the level of its participation in the case and the corresponding termination clause. In the case of the remuneration of the funder, this will depend mainly on the type of claim, as well as the chances of winning the litigation, the jurisdiction and the legal budget. There are cases where the funder only partially covers the costs, e.g. equipment costs.
In this Aranzadi legal training, sponsored by ESKARIAM and moderated by our CEO David Fernández, Mick Smith of Burford Capital, Lianne Craig of Hausfeld and Chris Garvey of Sachenga&Co. explain in depth how litigation funding works and the types of schemes available. You can watch the video here, under free registration.
In Spain, litigation funding is still in its infancy. The first cases date back to the second half of the 2010s, when funds such as Therium carried out their first operation. Currently, there are two types of litigation funding: on the one hand, covering the direct costs of a case, thus defraying the costs that the client might have; on the other hand, funding a specific portfolio, with the firm receiving the money and not the end client.
With regard to existing legislation, the European Commission in 2013 commented in its point 16 that it was necessary to establish certain prohibitions for litigation funds on the control of litigation, as well as the percentage that they should receive as consideration. The European Parliament returned to this issue in 2021 with a study entitled ‘Responsible private funding of litigation’ which addresses the need for regulation in order to create a more ethical and fairer litigation landscape.
In September 2022, the European Parliament signed a resolution setting out recommendations to the Commission on private litigation funding. This resolution focused on four aspects: the system of authorisation of the activities of litigation funders in the European Union; the powers of and coordination between supervisory bodies; the possible actions of courts; and third party funding arrangements and activities of litigation funders.
In Spain, we are already beginning to see a number of specialised operators supporting practices related to litigation funding. The development of this sector will have a lot to do with the transposition of the Class Actions Directive 2020/1828 in Spain, which will mark the way to proceed in these cases.
There is no doubt that litigation funding has benefits for both the funder and the firm receiving the funding:
On the downside, litigation funding may also present certain risks:
The Spanish legal sector is experiencing a moment of change: new legal players have emerged to encourage collective claims against abuses by large corporations, resulting in favour of consumer rights. Litigation funding is here to stay and there are already collective claims that are supported by funds to meet the costs of litigation. ESKARIAM hopes that the transposition of the European Directive will facilitate consumers’ access to quality and efficient justice.
ESKARIAM participates and proposes changes to the new Draft Law on Representation Actions for the protection of consumers’ collective interests
19 de January de 2023