How should third-party litigation funding be regulated?

At this webinar LPI discussed how Third-Party Litigation Funding (TPLF) should be regulated. TPLF means that someone who is not involved in a claim provides funds to a party to that proceeding in exchange for an agreed return. Typically, the funding will cover the funded party’s legal fees and expenses incurred in the proceeding. The funder may also agree to pay the other side’s costs and provide security for the opponent’s costs if the funded party is so ordered.

Both, legal protection insurance and private litigation funding, are tools to facilitate access to justice for claimants as well as defendants. Ultimately, in order to defend or pursue a right, insurers and funders transfer risks associated with civil litigation, provide parties with funds they would otherwise lack and sometimes constitute the only chance for claimants to access justice in the first place.

While insurers have assumed these kinds of risks for over a century, third-party litigation funders are fairly new. Their products and business models are still evolving while working around and arranging with legal and factual impediments. Its potential for conflicts between or among claimants, funders, and claimants’ attorneys as well as its capacity to enforce claims that would otherwise not have been tried, must be admitted. But similar conflict-related concerns exist on the insurance side and the legality of shifting the financial responsibility is broadly accepted while it warrants prudent regulation to ensure the functioning of either tool. Accordingly, there have been calls for regulation and in June 2021 the Committee on Legal Affairs of the European Parliament (EP) asked the EU Commission for legislation and recommended a content for a directive.

Dr Herbert Woopen, Director of Legal Policy at the European Justice Forum, explained during the webinar the content of the EP’s proposed directive and underlined why, in his view, restrictive legislation is necessary. However, the subsequent discussion with the participation of Thomas Kohlmeier, CEO and Partner at Nivalion, one of the leading European Litigation Funders, touched upon many different aspects and revealed the need that overly strict regulation does not stop this innovation and its positive effects in its track.