The End of the Regulatory Vacuum in Europe and a New Era for International Arbitration In Ireland? Developments in Third-Party Funding Regulation
13 min read
As the appetite for third-party funding ("TPF") continues to grow globally, lawmakers at both the supranational and national level are actively considering the need for proper supervision of TPF in commercial and civil cases. In light of the current regulatory vacuum, the European Parliament has called on the European Commission to monitor TPF developments across all Member States, with greater regulation now high on the European legislative agenda. Contemporaneously, in an effort to improve the country’s competitive edge as an arbitral seat, the Irish government has signalled that it will soon legislate to permit TPF for international arbitration.
Introduction
On 13 September 2022, the European Parliament voted overwhelmingly in favour of adopting a report by its committee on legal affairs entitled ‘recommendations to the Commission on responsible private funding of litigation’ (the "Voss Report"). This report, authored by German MEP Axel Voss, seeks to harmonise Member States rules concerning TPF by addressing what it identifies as a "regulatory vacuum" when it comes to third-party funders (the "Funders") and the funding industry. The Voss Report therefore seeks to introduce a new regulatory framework for TPF to ensure that Member State’s justice systems are "not exploited by profit-seeking actors". While the European Commission has yet to submit any legislative proposal in respect of the Voss Report, by adopting the recommendations, the European Parliament has called for a directive in order to establish "common minimum standards" for TPF in the European Union (the "EU").
At the same time that the EU was signalling that wider TPF regulation was on the horizon, the Republic of Ireland announced that TPF in relation to international arbitration was to be legalised, likely by way of an amendment to the Courts and Civil Law (Miscellaneous Provisions) Bill 2022 (the "Bill").1 The proposed amendment will permit TPF in all international arbitration proceedings either seated in Ireland or subject to Irish law and sat in another EU Member State. With the Bill currently in front of the lower house of the Irish Parliament, it is anticipated that this amendment will enter into law in due course.
We address some of the most interesting developments arising out of both the Voss Report and the Bill below.
Third-Party Funding in the European Union
TPF is a non-recourse arrangement where a third-party, typically an independent commercial fund with no prior connection to or legitimate interest in a dispute, agrees to finance all or part of the legal costs of a party engaged in legal proceedings, in return for a share of any potential damages awarded. The TPF market has expanded significantly in recent years to become a global industry worth an estimated €40 – €80 billion. In the EU alone, over 100 commercial funds are now active in this space, with more sophisticated players entering the TPF market than ever before. This vast expansion has not gone unnoticed, with corresponding legislative changes being introduced to address this phenomenon in Singapore, Hong Kong2 and, most recently, Nigeria.3
The debate over the extent to which TPF regulation is required in the EU has been gathering pace during the past year. Unlike other financial and legal commercial activities, TPF has, to date, been left largely unregulated in the EU, resulting in each Member State adopting different stances regarding the role TPF is permitted to play in their respective legal systems. In an effort to address this, the Voss Report proposes the introduction of a TPF regulatory regime focused on transparency, fairness, and proportionality.4
The Voss Report's Recommendations
In summary, the Voss Report seeks to address a wide range of concerns commonly levelled at TPF, each of which the Voss Report deems to be a material risk to the administration of justice in the European Union. From the ability of the Funder to operate in the EU, to a cap on the share of any reward to which a Funder would be entitled, the recommendations contained in the Voss Report are potentially far-reaching.5 It remains to be seen the extent to which the recommendations will be taken forward however, with the European Commission under no obligation to propose any corresponding legislation.6 The main recommendations contained in the Voss Report are as follows:
System of Authorisation
The establishment of a system of authorisation for Funders, aimed at ensuring that when TPF is an option, adequate safeguards accompany it. Proposed safeguards include corporate governance and capital adequacy requirements to which each Funder must adhere. In essence, this recommendation seeks to ensure all Funders comply with minimum standards of confidentiality, transparency, independence, governance and capital adequacy.
Independent Administrative Bodies
To ensure compliance with the suggested minimum standards, the Voss Report advocates for the creation of an independent administrative body in each Member State, who would provide "oversight in a manner similar to that of the existing prudential supervision system applicable to financial services providers". These supervisory authorities would be empowered to make any necessary orders, including the power to determine applications for authorisation by Funders and to withdraw such authorisation for non-compliance with the expected standards.
Fiduciary Duties
Funders would also be subject to a fiduciary duty owed to claimants, providing that Funders must act in the claimants' best interest. In particular, the Voss Report concludes that Funders should be prevented from having undue control over the legal proceedings they fund, with it remaining the responsibility of the claimant and their legal representatives to run cases as they see fit. The Voss Report also proposes that Funders must not have the ability to unduly influence the decisions of claimants. In the event of a conflict, the Funder should place the interests of the claimants above their own.
In circumstances where a funding agreement provides explicit powers for the Funder to take or influence decisions, for example in respect of the specific claims pursued, settlement of the case, management of expenses or provision of capital, the Voss Report provides that Member States should also ensure that such agreements have no legal effect.
Award Cap
A major concern for the Voss Report was the amount that Funders receive in return for providing funding. It therefore proposes a 40% cap on the share of the award or settlement to which Funders would be entitled, other than in exceptional and strictly regulated circumstances. The Voss Report stipulates that Member States should ensure that funding agreements which provide for greater than 40% of the award or settlement being received by the Funder have no legal effect.
Joint Liability for Adverse Costs
Funders would be jointly liable with the claimant for any adverse costs award. This recommendation is closely connected to the proposed authorisation requirements, where Funders would be required to maintain sufficient capital to satisfy any and all financial liabilities arising from the cases they fund, including any adverse cost award. The Voss Report also concludes that funding agreements should not contain any limit on Funder's liability in relation to adverse costs.
Disclosure Requirements
Claimants and their legal representatives would be obliged, where applicable, to inform the relevant court or administrative authority of the existence of a TPF arrangement. More controversially, in addition to disclosing the identity of the Funder, the court, administrative body or defendant could compel claimants to provide a complete and unredacted copy of the funding agreement to the court at an early stage of proceedings. This would mean that the commercial terms of the funding agreement would be available for the court to review in order to ensure its compliance with the applicable legislation; a development that would go far beyond the current position adopted by most national laws and the vast majority of institutional arbitration rules.
Drafting of Funding Agreements
Funding agreements should also be drafted in clear, intelligible terms. Such agreements should plainly set out the range of possible outcomes for the claimant, as well as any relevant risks and limitations associated with the funding arrangement.
Ireland's New Competitive Edge in International Arbitration
TPF is a topic that has been the subject of considerable judicial consideration in Ireland of late, with several superior court decisions seeking to provide guidance on the type of TPF permissible under Irish law. Despite such attention however, the continuing prohibition on the common law torts of maintenance and champerty has prevented TPF's emergence in Ireland, with both torts still carrying criminal and civil liability.7 Under the Bill however, TPF will now be permitted in relation to international arbitration, allowing Funders who have no prior connection to or legitimate interest in the proceedings to provide funding.8 It is anticipated that this will allow claimants to have a wider variety of funding options.9
As Ireland's Justice Minister explained, by permitting more sophisticated funding models to be adopted in international arbitration, the Bill would be a significant first step in improving Ireland's "competitive edge in a global battle to secure [international arbitrations]". Specific details regarding the Bill have yet to be revealed; however, it is anticipated that TPF will be permitted in all international arbitration proceedings either seated in Ireland or subject to Irish law and sat in another EU Member State.
Major Arbitral Developments?
Both the Voss Report and the Bill are significant in their own right. For Ireland, the potential of the Bill is considerable and demonstrates its commitment to react to the latest global arbitral trends.
The Voss Report's recommendations are remarkable for a number of reasons. Principally, the sheer scope of the proposed recommendations go further than any TPF regulation to date. While recognising certain advantages commonly associated with TPF, the Voss Report evidently perceives TPF as an inherent threat to the administration of justice. Consequently, the Voss Report contains recommendations that seek to address these apparent risks.10
It is due to these extensive proposals that the Voss Report has been met with such a mixed response. While EU-lawmakers have recognised the efforts of MEP Axel Voss and the European Parliament's committee on legal affairs, Funders have called for caution, stressing that any future TPF regulation should avoid unnecessarily interfering with basic market principles and that a one-size-fits-all regulatory approach would be inappropriate. They highlight the lack of empirical data used in the report and the limited engagement with Funders regarding the proposed recommendations.
Interestingly, the recommendations contained in the Voss Report are also far-removed from the Law Commission of England and Wales' current approach to TPF. At present, TPF is permitted in England and Wales and the TPF market remains largely unregulated.11 In its recent consultation paper setting out provisional proposals on potential areas of reform to the Arbitration Act 1996, the Law Commission failed to reach a final decision on the issue of TPF and instead deemed it a topic that required further review by the relevant stakeholders. The Law Commission's decision to refrain from acting may result in London becoming an even more popular centre for international dispute resolution. This is especially true in light of the fact that the laws of England and Wales would not require amending in order to adhere to any future EU-wide TPF regulation.
To conclude, it is noteworthy that an earlier draft of the Voss Report contained a request for the European Commission to submit a full proposal to regulate TPF. In lieu of this, the Voss Report calls on the European Commission "to closely monitor and analyse" TPF in the EU and submit a proposal for a directive to establish "common minimum standards" for TPF. Whatever course of action the European Commission adopts, the international arbitration community will await the outcome with interest.
1 Following this announcement, Ireland's Justice Minister, in response to a parliamentary question on 20 September 2022, has since confirmed that the Department of Justice is "considering recommending to Government that third party funding be permitted in a limited way, specifically in relation to commercial arbitration".
2 See further our previous alert, "A changing landscape: third-party arbitration funding in Singapore and Hong Kong".
3 See further our previous alerts "Third Party Funding in Arbitration: Reforms in Nigeria" and "Recent Arbitration Reforms in Nigeria".
4 The Voss Report, published on 14 July 2022, can be found here. Following its publication, the European Parliament has voted in favour of adopting the Voss Report, empowering the European Commission to introduce formal legislative proposals concerning TPF.
5 The recommendations included in the Voss Report apply equally to both litigation and arbitration with "proceedings" under the Voss Report being defined as "any domestic or cross border civil or commercial litigation, or 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". Similarly, "court or administrative authority" is defined as "a competent court, administrative authority, arbitral body or other body tasked with adjudicating on proceedings, in accordance with national law".
6 While under no strict obligation to propose any corresponding legislation, the Voss Report calls on the European Commission to put forward a directive that, if advanced and subsequently adopted by the Council of the European Union and the European Parliament, would set out a common goal that all EU Member States must achieve. Member States would have to adopt a national law in order for the directive to take effect within their individual country.
7 The torts of maintenance and champerty hark back to when TPF was disapproved of, with many jurisdictions refusing to recognise and enforce arrangements under which third-parties funded litigation. 'Maintenance' is the improper support of litigation in which the supporter has no legitimate concern without just cause or excuse. 'Champerty' is an aggravated form of maintenance and occurs when the maintaining party pays some or all of the costs of a party in return for a share of the proceeds of the action or suit.
8 Despite this positive development for international arbitration, as of yet, there has been no indication that the restriction on TPF in relation to litigation will be lifted.
9 Prior to the Bill, only two types of TPF were permitted in Ireland: funding from a third-party with a legitimate interest in the proceedings, such as a creditor or shareholder of a company that is a party to the proceedings (see Thema International Fund v HSBC International Trust Services (Ireland) Ltd. [2011] IEHC 357) and funding through "after the event" insurance (see Greenclean Waste Management v Leahy [2014] IEHC 314).
10 While any such proposed directive would not directly affect proceedings in England and Wales, it would apply to Funders based in the UK and funding cases in the European Union.
11 As of 2017, the Ministry of Justice confirmed that the government was happy with the current status-quo regarding TPF regulation and was not minded to formally regulate the market. At present therefore, TPF in England and Wales remains self-regulated by the Association of Litigation Funders ("ALF"). All Funders who are members of ALF must abide by a voluntary code of conduct that sets out certain standards of best practice and behaviour that Funders must follow. Interestingly, both ALF and the voluntary code have not been regarded as terribly valuable by English courts (see Rowe & Ors v Ingenious Media Holdings PLC & Ors [2021] EWCA Civ 29).
Jere Agbaje (White & Case, Trainee Solicitor, London) contributed to the development of this publication.
White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.
This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
