EU Parliament Voted To Regulate Third-Party Funding
On September 13, 2022, the European Parliament approved a report by its committee on legal affairs that calls for the introduction of a new regulatory framework to prevent abuses that may be caused by third-party-funded lawsuits.
Third-party funding (TPF) has dramatically changed the landscape of international arbitration over the past decade. At its most basic, TPF involves a third party providing funding to support a party’s (typically the claimant’s) costs of arbitration. Some have praised TPF for enhancing access to justice, while others have criticized the industry for encouraging vexatious litigation and creating conflicts of interest. As a result, there have been increasing calls for heightened transparency and regulation of TPF.
In reaction, some institutions have amended their rules to require the disclosure of any TPF. For example, the ICC 2021 Arbitration Rules provide that “each party must promptly inform the Secretariat, the arbitral tribunal and the other parties, of the existence and identity of any non-party which has entered into an arrangement for the funding of claims or defenses and under which it has an economic interest in the outcome of the arbitration.” The ICSID Amended 2022 Rules contain similar provisions. Finally, UNCITRAL’s Working Group III released an Initial Draft on the regulation of TPF in 2021, in which it considered, in part, issuing a complete ban on TPF.
Recently, European lawmakers have advanced their consideration of new regulation on TPF. On September 13, 2022, they adopted a resolution that seeks to protect EU Member States against the “growing practice” of third-party litigation funding. The resolution broadly applies to “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.” As a result, the resolution could have far reaching impacts on not only domestic arbitration but also any domestic litigation linked to international arbitration, such as discovery or award enforcement proceedings. Most notably, the resolution calls for including a potential 40% cap on the funder’s share of the recovery, an obligation to pay adverse costs, and disclosure of funding agreements.
In the initial report published on June 17, 2021, from which the resolution stemmed, the EU Parliament criticized the TPF industry as being a “profit-making enterprise, in which justice for the claimant may or may not be a by-product,” resulting in the potential “financial exploitation” of European citizens. While the resolution is only a preliminary step toward the enactment of an EU Directive on TPF, it has possible wide-ranging implications for disputing parties in funded international arbitration with a connection to the EU.