I MARKET OVERVIEW
The Italian legal system is still rather unfamiliar with litigation funding.
Currently, there are neither national rules nor standards in this respect. Likewise, no cases involving litigation funding in Italy have yet been published at the time of writing. As a result, legal scholars have not yet properly addressed this phenomenon. Therefore, proceedings supported by a funder in Italy are still extremely rare.
The absence of prior experience concerning litigation funding on the Italian market is mainly attributable to the origin of the third party funding practice, which lies in the common law system. Moreover, Italian court proceedings have traditionally been considered time-consuming, and therefore inconsistent with the evident goals sought by investors. Furthermore, contingency fee arrangements between client and lawyer have traditionally been forbidden under the Italian legal system.2 As the recently passed review of the Italian Code of Professional Conduct for Lawyers currently stands, Italian lawyers cannot accept a share of the asset that is challenged in the case (see Article 13, Italian Law No. 247/2012, pactum de quota litis or contingency fee). Finally, there is a general lack of awareness on the part of potential users (i.e., prospective claimants) of litigation funding and of the opportunities connected to it.
It flows from the above that over the past few years Italy has not provided the perfect environment to nurture litigation funding.
Against this background, the Italian legal system has, however, recently undergone a radical change.
Several initiatives have been implemented to increase the efficiency of the Italian legal system and speed up the average length of proceedings (see, for instance, Decree of the President of the Republic No. 123/2001 – Regulation regarding the use of IT and telematics instruments in civil proceedings, administrative proceedings and in proceedings before the Court of Audit, as amended by Law Decree No. 44/2011; Law No. 228/2012 (Budget 2013); and Decree No. 90/2014, which sets out, inter alia, that judicial proceedings shall be handled entirely electronically from the filing of pleadings and applications to the service and notification by the courts of hearings, documents and decisions).The result of all these changes is that the quality of Italian court proceedings is now closer to the EU average.
Other initiatives have enhanced access to justice in multiparty actions (see new Article 140 bis, Consumer Code, which contemplates an opting-in collective action for damages arising out of liability in connection with mass contracts, torts, unlawful commercial practice or non-competitive behaviour or antitrust infringements).
Other elements favourable to third party litigation funding in Italy may be:
- the Italian Legislative Decree No. 3/2017, which implements EU Directive 2014/104/EU and introduces a series of new procedural rules that considerably simplify the possibility of obtaining compensation for damages caused by infringements of EU or national competition laws, by addressing both private claims and class actions;
- the increasing number of Italian insolvency proceedings relating to high-value claims that do not have sufficient resources to start proceedings and to pursue such claims to an economically efficient conclusion;
- the fact that any judgment delivered by the lower courts is immediately enforceable in Italy, regardless of the fact that it has been appealed; and
- only a very small percentage of possible claims are eligible for financial assistance funded by the government (i.e., legal aid) under the Italian legal system. Currently, a legal aid applicant must have an annual gross taxable income, together with that of cohabiting dependant family members, lower than €11,528.41.3
All the above-mentioned circumstances are playing a role in making Italy more attractive and suitable for litigation funding, by de facto increasing the number of parties entitled to bring a high-value claim. It is therefore reasonable to conclude that third party funding may well find its market in Italy and several professional litigation funders have been reported to have shown interest in financing claims in Italy.
II LEGAL AND REGULATORY FRAMEWORK
Although Italy still lacks any specific procedural and substantive rules governing litigation funding, the Italian legal system does not forbid such practice. Funding solutions aimed at removing the financial risk associated with litigation are in principle consistent with the Italian legal system, and do not conflict with the body of principles that underpin the Italian legal systems (public policy, as identified over time by national case law, which encompasses, inter alia, Article 6 of the European Convention on Human Rights). It is therefore worth investigating how and to what extent this practice could be approached from the Italian standpoint.
Generally speaking, the Italian legal system expressly governs a number of contracts, and party autonomy is the cornerstone of this system. More precisely, under the first paragraph of Article 1322 of the Italian Civil Code, parties are allowed to create their own contractual framework, always within the limits imposed by the law. In other words, the Italian legal system entitles parties to create a bespoke contractual relationship for their commercial transaction, by adapting the 'typical' contracts ruled by Italian law to the interests at stake and the relevant circumstances.
According to the second paragraph of Article 1322, parties are free to enter into other kinds of agreement that differ from those provided by the Italian law, provided that such non-traditional relationships seek interests worthy of protection under Italian law ('atypical contract'). In other words, the parties are free to deviate from typical forms of contract specifically ruled by law and to validly enter into atypical contracts provided that the aims pursued by the parties deserve protection (see Articles 1322 and 1325 et seq., Italian Civil Code).
As is well known, third party litigation funding means that a funder – otherwise unconnected with a legal action – bears all or part of a claimant's legal costs (including those of lawyers and qualified experts). Traditionally, the costs and complexity of certain cases can discourage many meritorious claimants from seeking redress before the national courts. Instead, litigation funding aims at enabling claimants with an excellent claim to bring litigation that might otherwise stall as well as to avoid unfair settlements due to an intervening lack of funds. As such, the funder supports a party to be involved in litigation who wishes to remove any of the costs or risks associated with litigation, or both. If the case succeeds, the funder recovers the costs it has borne and takes an additional agreed success fee. If the case fails, the funder loses its investment and is not entitled to receive any payment. In essence, the aim of the litigation funding is twofold: on the one hand, moving the cost and (financial) risk involved in pursuing justice to the funder; on the other hand, enhancing access to justice for meritorious claimants.
It follows that a litigation funding agreement may comply with Article 1322 of the Italian Civil Code.
To the extent that a litigation funding relationship may turn out to be an effective means of easing the path to litigation, by both redressing the balance of legal claims between litigating parties in favour of disempowered parties and mitigating the detrimental effect of lengthy or complex claims on cash flow regardless of the financial position of the concerned claimant, this relationship can be all the more consistent with the Italian legal system.
As far as characterisation is concerned, a litigation funding agreement should be regarded as an atypical contract, because no rules are provided for by the Italian legal system in this respect. The authors believe that the relationship should be considered as synallagmatic, as the parties issue reciprocal undertakings, and aleatory, as one of the actions must be performed only on the occurrence of an uncertain event.
A relationship that is extremely close to the litigation funding is the 'association in participation' contract – which is similar to a joint venture – which is a contract whereby the associate attributes to the associating party the share of the proceeds of its business or the proceeds from the conduct of one of more deals in consideration for a specific contribution from the other associating party.4 Third parties acquire rights and obligations only towards the associating party.5 The management of the business is only carried out by the associating party and the contract must provide what type of rights of control are granted to the associate. Unless otherwise agreed, the associate shares in the losses to the same extent as its shares in the profits, but the losses that affect the associate cannot exceed the value of its initial contribution.6 By way of analogy, the funder could be considered as an associate and the claimant as the associating party.
A litigation funding agreement cannot be characterised as a loan agreement under the Italian legal system. According to Article 1813 of the Italian Civil Code, a loan agreement is the contract through which the lender delivers to the borrower a specific amount of money or other fungible assets and the borrower undertakes to return the same amount of money or the same amount of fungible assets of the same quality, plus interest (as consideration). In particular, in principle there has to be a qualitative and quantitative identity between the delivered assets and those that are returned. Moreover, according to Article 1814 of the Italian Civil Code, the borrower acquires the ownership of the assets given as a loan, although this is subject to the payment of interest arising during the period of the loan that he or she will be obliged to pay even when, due to force majeure, he or she cannot actually use the sum lent. The key aspects of third party funding that make it different to a loan are:
- the claimant is not obliged to pay anything if the case fails; and
- in case of success, the return will be a multiple or a percentage of the award or settlement (the return is never equal to the investment made by the fund).
Therefore, a funder is similar to an investor rather than a financing entity. In fact, the return on the investment is uncertain and is paid out of damages or out-of-court settlements.
All the foregoing considerations further plead for the admissibility of litigation funding in Italy.
A litigation funding agreement should be acceptable under the Italian legal system also from the contingency fee's standpoint. Paragraph 2(a) of Article 2 of Law Decree No. 233/2006 – according to which, only if the lawsuit is successful or is favourably settled out of court, the successful lawyer is paid a percentage of the damages recovered by its client instead of or as a discount on a traditional fee – overcame the former prohibition on contingency fee agreements set forth by the Italian law so as to safeguard the independence and the impartiality of the role of the lawyer. Therefore, from 2006 onwards, such agreements were allowed in Italy. As proof of this, in the context of bankruptcy proceedings, Italian lawyer were expressly allowed to be paid with a percentage of the recovery as an alternative to the application of the tariff system provided for by the law, provided that the claim aims at collecting sums or other assets.7 However, as mentioned above, Law No. 247/2012 changed the situation and forbade contingency fee arrangements while allowing success fees. Consequently, since 2012 counsel cannot accept for services a return share of the recovery or out-of-court settlement instead of fees should the action succeed, since such agreement could amount to a breach of professional duty or ethical rules of professional conduct. As a result, Italian counsel is expected to request fees to be calculated in relation to both the amount in dispute and the tariff system provided for by the law, though room is left in relation to success fees. However, third party funding is different from contingency fee arrangement, as the funder is not a lawyer. Moreover, the relevant contract is entered into directly by the funder with the disputant and not with the lawyers. This leads us to conclude that a funder is not affected by any limit set forth by Italian law in relation to contingency fees.
Finally, it is worth adding that, notwithstanding the above-mentioned Law No. 247/2012, the Italian practice allows contingency fees to be limited to bankruptcy proceedings,8 provided that the contingency fee agreement is entered into by and between the lawyer and the bankrupt entity that does have not have sufficient resources to start proceedings.
Nonetheless, other aspects may affect the admissibility of third party funding in Italy, such as the limits to the possibilities of a transfer of claim under the Italian legal system.
Notably, pursuant to Article 1260 of the Italian Civil Code, a creditor may assign any and all of its receivables without the debtor's consent, subject to certain limitations deriving from the specific characteristics of the receivables or depending on the fact that the assignment is banned by national law. More precisely, under Article 1261 of the Italian Civil Code, a lawyer cannot be assigned a legal claim so as to seek a judgment in court. The same is true for judges, bailiffs, court officers and notaries. Therefore, to the extent that it is a different entity from a lawyer or law firm, a funder may be assigned a legal claim under Italian law without being affected by the limits set out therein.
However, according to recent Italian case law concerning the exercise of an organised business of purchasing credits for damages correlated with the advancing of the costs of repair of vehicles damaged in road accidents, the professional collecting of claims must be regarded as 'a financial business', thus falling within the meaning of Article 106 of the single text of banking laws (Italian Legislative Decree No. 385 dated 1 September 1993). As a consequence, such an assignee – which is, on closer inspection, a profit-seeking financial entity that addresses legal claims – must be expressly authorised by the Bank of Italy. Otherwise, if the assignee is not registered in the relevant roll held by the Bank of Italy and does not hold the relevant authorisations, the assignment of the credit is null and void as it is contrary to Italian mandatory rules (under Article 1418 of the Italian Civil Code and Articles 106 and 132 of Italian Legislative Decree No. 385/1993). This leads us to conclude that the Italian legal system leaves room for a funder to be assigned a legal claim by the claimant, provided that it meets certain conditions.
For the sake of completeness, it is worth adding that the Italian legal system allows the parties to choose the law applicable to a cross-border contract. Both the 1980 Rome Convention and Regulation (EC) No. 593/2008 (Article 3) allow the freedom of choice of the law governing a contract, provided that certain safeguards concerning weak parties (consumers, assured, employees) are guaranteed and relevant overriding mandatory provisions (Article 9) are given effect. According to scholars, rules concerning financial activities can be regarded as overriding mandatory provisions. As a result, the principle of party autonomy is expected to foster access to the Italian market by foreign funders, by allowing them to choose a law applicable to the third party agreement that is most familiar to the funder, provided that certain conditions are met.
III STRUCTURING THE AGREEMENT
In the absence of any specific rules, no common practice has yet been developed in Italy.
Insofar as we are aware, the funder usually aims at entering into a litigation funding agreement directly with the claimant that is governed by the law and the jurisdiction of the funder state.
In cases where a litigation funding agreement is entered into before starting litigation, the effect of the contract (and therefore the undertaking to bear the costs and expenses of the proceedings) is subject to the conclusion of satisfactory due diligence. Generally speaking, the criteria for satisfactory due diligence are:
- legal merits of the claim;
- likelihood of success;
- quantum of damages likely to be awarded (higher than a certain threshold amount);
- accuracy of costs estimate;
- claimant's solvency; and
- defendant's solvency and prospects of recovering the damages awarded.
The main clauses of the contract relate to, inter alia:
- particulars of the parties, among which are a funder's financial ability to provide the pledged funding;
- scope of the agreement, in order to set out the boundaries of the funder's financial support;
- conditions and obligations of the parties as to payment of the claimant's legal costs;
- claimant's duties towards the conduct of proceedings, including the duty to conduct the proceedings on his or her own or to manage relations with the counsel;
- consequences in case of breach of the claimant's duties, for instance in cases where the claimant has a diminished interest in participating in the prosecution of the case;
- duty of confidentiality towards third parties and possible impact of the relevant (procedural) law;
- payment of the funder fee in the event of success in proceedings or in case of interim or partial recoveries (provision can also be made for the management of any settlement negotiations);
- obligations of the funder in case of counterclaims;
- amounts to be received by the claimant;
- regulation in case of no success in the proceedings;
- conditions for termination;
- accrual of interest;
- tax impact; and
- right to share (totally or partially) the risk with co-funders.
However, the final content of the contract will depend on the parties' position and their reciprocal interests or need for protection in the case in question. For instance, a third party agreement may involve a weaker party, such as a consumer, and the funding agreement should therefore be tailored accordingly.
To the extent that a litigation funding agreement implies the assignment (or transfer) of the intended claim from the possible claimant to the funder, thus enabling the latter to take an active role and bring a claim, it is the funder that has legal standing and its existence is by no means a secret for the counterparty.
Otherwise, if the litigation funding agreement does not imply a transfer in the ownership of a credit, with the role of the funder being relatively passive, there is no obligation to disclose the existence of the funder. Needless to say, in the absence of any obligation, funders prefer not to disclose to the market the existence of the funding agreement. Therefore, the existence and terms and conditions of a litigation funding agreement should be treated as confidential information by the parties and the appointed lawyers.
As the Italian procedural rules currently stand, there is no obligation to disclose the litigation funding agreement in order to file a claim or to appear before an Italian court. However, providing that certain requirements are met, an Italian judge can issue an order of disclosure of any such agreement.
Notably, under Article 210 of the Italian Code of Civil Procedure, which regulates orders for the production of evidence or documents in proceedings by mirroring Article 118 of the same Code, upon the request of a party, the production of a document may be ordered at the discretion of a judge, provided that:
- its production will not cause serious harm for the party or for the third party, without requiring them to violate any of the secrecy obligations provided in Articles 200 and 201 of the Italian Code of Civil Procedure (professional secrecy or official secrecy);
- the proof of the relevant fact cannot be obtained from any other source; and
- the order to produce relates to documents that are necessary or at least very important for the judge's ability to decide the case.
Since it is most unlikely that a third party agreement would constitute a 'necessary and essential' element in proceedings financed by the concerned fund, it is equally unlikely that the above conditions would be met. Therefore, in such circumstances it seems reasonable to conclude that an order for exhibition of the funding agreement pursuant to Article 210 of the Italian Code of Civil Procedure should not be issued.
Likewise, in relation to arbitration proceedings, there is no general duty to disclose the existence of any litigation funding agreement. It also seems possible to exclude the risk, at least in principle, that a funder may influence the choice of the arbitrators. Therefore any disclosure obligations in that sense seem unlikely.
However, in light of the arbitrators' obligations of impartiality and independence (both in national arbitration proceedings9 and international proceedings),10 the existence of a third party funding agreement might be relevant for the purpose of evaluating any possible conflicts of interest on the part of the arbitrators. Therefore, a duty to disclose may be raised in such a context.
The Italian procedural system is based on the 'loser pays' principle and according to Article 91 of the Italian Code of Civil Procedure (i.e., the judge orders the losing party to pay the legal fees and expenses of the successful party).
More precisely, these costs, which encompass court administrative expenses and lawyers' fees, are calculated on the basis of a scale that refers to the amount in dispute. It goes without saying that this system can provide a high level of predictability for all parties to litigation.
To calculate lawyers' fees, Ministerial Decree No. 55/2014 (the Ministerial Decree)11 applies. The Ministerial Decree sets out parameters and criteria for the calculation of fees based on, inter alia, the value of the proceedings, their complexity and the number of parties involved. For instance, by applying the scale contained in the Ministerial Decree, if the value of the case is €10 billion, the lawyers' fees are capped at €150,303. If the value of the case is €20 billion, the lawyers' fees are capped at €195,397.
This amount should be added to the court administrative costs and legal charges (VAT, which is currently 22 per cent), and a mandatory contribution to the lawyers' pension fund (CPA – currently 4 per cent).
As litigation funding in Italy is still underdeveloped, no issues have yet arisen or been addressed by courts concerning how the cost of a litigation funding agreement would be treated under Article 91 of the Italian Code of Civil Procedure.
VI CONCLUSION AND OUTLOOK
In light of the foregoing considerations, it is reasonable to conclude that, even though it is still hard to say whether and when third party funding will be successful in Italy, currently there are no rules preventing it. Accordingly, the Italian legal system leaves room for third party funding.
In this connection, the third party funding may cover several fields. Firstly, bankruptcy proceedings. The funder's support might allow and enhance bankruptcy proceedings to pursue a complex and time-consuming claim without any risk of incurring relevant costs that may reduce the (usually restricted) assets available to the creditors.
Another relevant field may be debt collection. For instance, bankrupt entities could sell debts for collection to third parties as part of the court-supervised bankruptcy process, so that the debt purchaser can pursue the debt collection process against debtors who failed to pay the due amount instead of the bankrupt entities.
Finally, funders may play a role in the area of antitrust claims. Most cartel damage claims are follow-on actions from a European Commission finding of liability. In such a context, the funder may help claimants in overcoming obstacles to class actions, including the length and cost of the entire process and the risks related to the passing-on defence.
In essence, even though not yet common, third party funding may represent a shift towards increased access to justice, private enforcement of law and equality of arms in the Italian legal system.
1 Federico Banti is a partner and Eva de Götzen is a senior lawyer at Osborne Clarke.
2 They were at first allowed pursuant to Law Decree No. 223/2006. See below.
3 See Article 74 of Presidential Decree No. 115 dated 30 May 2002.
4 Article 2549, Italian Civil Code.
5 Article 2552, Italian Civil Code.
6 Article 2553, Italian Civil Code.
7 See the consolidated version of Milan Court Circular No. 2/2010, bankruptcy section, dated 23 March 2010 and integrated pursuant to Circular No. 4/2010 dated 29 September 2010, point H.15.o).
8 See the Milan Court Circular No. 3/2012, bankruptcy section, dated 4 December 2012 (available at https://www.tribunale.milano.giustizia.it/files/fallimenti/Circolari/circolare3_2012.pdf).
9 See, for instance, Article 18 of the Regulations of the Milan Chamber of Arbitration.
10 Namely, the IBA Guidelines on Conflicts of Interest in International Arbitration.
11 As referred to by Article 13 of Law 247 dated 31 December 2012.