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The Evolution of Third-Party Funding in EU Arbitration: A New Era of Regulation
The Evolution of Third-Party Funding in EU Arbitration: A New Era of Regulation
Legalisation of Third-Party Funding in Ireland:
In a landmark move, Ireland has recently amended its Arbitration Act 2010 to permit third-party funding in international commercial arbitration. Historically, Ireland stood as an outlier among common law jurisdictions by prohibiting third-party funding for both litigation and arbitration under the doctrines of maintenance and champerty. These archaic principles prevented third parties from funding litigation in exchange for a share of the proceeds. However, the Courts and Civil Law (Miscellaneous Provisions) Act 2023, signed into law on July 5, 2023, has overturned this prohibition for arbitration-related dispute resolution proceedings. This amendment is a significant first step towards modernizing Ireland's arbitration framework, aligning it with other common law jurisdictions, and promoting Ireland as an arbitration-friendly venue. The amendment’s definition of "dispute resolution proceedings" is broad, encompassing international commercial arbitrations and related mediation or conciliation processes. Nonetheless, it stops short of extending third-party funding to litigation, leaving open questions about the potential for success fees by law firms and other funding arrangements.
Proposed EU Directive on Third-Party Funding:
Ireland's move comes at a time when the European Union is contemplating comprehensive regulation of third-party funding. On September 13, 2022, the European Parliament passed a Resolution recommending a Directive on Responsible Private Funding of Litigation. This proposed Directive aims to establish the first EU-wide regulatory framework for third-party funding, responding to its increasing prevalence and importance in the justice systems of several Member States. The proposed Directive introduces an authorization system for funders, setting minimum standards for independence, transparency, governance, and capital adequacy. It mandates a fiduciary duty for funders to act in claimants' best interests and avoid conflicts of interest. Additionally, it bans funders from withdrawing support during proceedings except under specified circumstances and empowers courts to impose adverse cost orders on funders following unsuccessful outcomes. A notable provision caps the funders' share of settlements or damages at less than 40%.
Despite its comprehensive nature, the Directive raises concerns within the third-party funding industry. Critics argue that the proposed regulation lacks adequate engagement with stakeholders and fails to address arbitration-specific issues, such as funders' liability for adverse cost awards where they are not parties to the arbitration.
Diverse Approaches Across EU Member States:
The landscape of third-party funding in the EU is diverse. Countries like France and Spain have embraced third-party funding and success fee arrangements, promoting a thriving dispute resolution market. France permits third-party funding and reasonable success fees, while Spain allows both without restrictions. Germany, on the other hand, permits third-party funding but prohibits success fees except for low-value claims. Other Member States have no specific legal frameworks for third-party funding, reflecting varied levels of acceptance and regulation.
The Path Forward:
The proposed EU Directive and Ireland's legislative change signify a pivotal shift towards more regulated third-party funding in Europe. While self-regulation through voluntary codes has sufficed in jurisdictions like the UK, the EU’s push for formal regulation could herald a new era of oversight and consistency in third-party funding practices across Member States. The European Commission’s ongoing independent mapping study will further inform the Directive’s development, ensuring a balanced approach to regulation that addresses industry concerns.
As third-party funding becomes more prevalent, its regulation will likely evolve, impacting arbitration and broader dispute resolution markets. Ireland’s legalisation of third-party funding for arbitration is a forward-thinking move, potentially setting a precedent for other jurisdictions within the EU and beyond. Whether the EU’s regulatory ambitions materialize and influence other countries remains to be seen, but the trajectory towards increased regulation is clear, marking a significant transformation in the arbitration funding landscape.
- This amendment is a significant first step towards modernizing Ireland's arbitration framework, aligning it with other common law jurisdictions, and promoting Ireland as an arbitration-friendly venue.
- This proposed Directive aims to establish the first EU-wide regulatory framework for third-party funding.
- Critics argue that the proposed regulation lacks adequate engagement with stakeholders and fails to address arbitration-specific issues.
