The Third Party Litigation Funding Law Review: Italy
The Italian legal system is still largely unfamiliar with litigation funding.
Currently, there are neither national rules nor standards in this respect. Similarly, no cases involving litigation funding in Italy have yet been published at the time of writing. As a result, albeit the subject of discussion from time to time, this phenomenon has yet to be properly addressed by legal scholars. 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 practice of third party funding, which lies in the common law system. Moreover, Italian court proceedings have traditionally been considered time-consuming and, therefore, evidently not consistent with the goals sought by investors. Furthermore, contingency fee arrangements between client and lawyer have traditionally been forbidden under the Italian legal system. Accordingly, as the recently passed review of the Italian Code of Professional Conduct for Lawyers currently stands, Italian lawyers cannot accept a share of an asset that is challenged in the case. Furthermore, close inspection indicates that litigation costs are lower in Italy than in other jurisdictions. Finally, there has been a general lack of awareness on the part of potential users of litigation funding (i.e., prospective claimants) and of the opportunities connected to it.
It flows from the above that in recent years Italy has not provided the perfect environment to nurture litigation funding and it has remained rather underdeveloped as a result.
Against this background, the Italian legal system has 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 information technology and telecommunications 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 (the 2013 budget law); 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 measures 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. First of all, the new Article 140 bis of the Consumer Code contemplates opt-in collective actions for damages arising out of liability in connection with mass contracts, torts, unlawful commercial practice or anticompetitive behaviour or antitrust infringements. In addition, in implementing EU Directive 2014/104/EU, Legislative Decree No. 3/2017, introduced a series of new procedural rules that considerably simplified the possibility of obtaining compensation for damage caused by infringements of EU or national competition laws, by addressing both private claims and class actions. Finally, as of 19 November 2020, class actions can be now brought not only by consumers, but also in any situation where there are 'homogeneous individual rights' to be defended. Thus pursuant to the brand new Article 840 bis ff. of the Italian Code of Civil Procedure, introduced by Italian Law No. 31 of 12 April 2019, class actions are no longer limited to the field of consumer rights. Under the new regime, claimants can be associations, no-profit organisations or the sole member of any class of people. Correspondingly, defendants can be companies or entities managing public services, for acts carried out during their activities. As a result of this new remedy, the overall value of proceedings is expected to increase.
Further elements favourable to third party litigation funding in Italy may be:
- the increasing number of Italian insolvency proceedings in relation to high-value claims for which claimants do not have sufficient resources to start proceedings or pursue the claims to an economically efficient conclusion. In this respect, it cannot be overlooked that, under the recently passed 'Business Crisis and Insolvency Code', the insolvency trustee will be expected not only to draw up a list of all possible claims to be brought and related costs, but also to bring related actions in the following six months. Furthermore, under the Code, the trustee will also be entitled to terminate the judicial winding-up in the event of ongoing litigation, as it is now possible to effect a supplementary division of assets after the termination of the procedure and once the court proceedings have reached a final judgment;
- the fact that any judgment delivered by the lower courts is immediately enforceable in Italy, regardless of the fact that it has been appealed
- 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, together with that of cohabiting dependant family members, a total annual gross taxable income lower than €11,528.41; and
- last but not least, Article 43 of the 2019 Arbitration Rules of the Milan Arbitration Chamber (the CAM Arbitration Rules) expressly states: 'The party that is funded by a third party in relation to the proceedings and its outcome shall disclose the existence of the funding and the identity of the funder.' This new provision breaks the ice on the admissibility of third party funding in Italy, at least in the context of (international) commercial arbitration.
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. Thus third party funding may well find its market in Italy. Notably, several professional litigation funders, at both international and national level have reportedly shown interest in financing claims in Italy. For instance, it was recently reported that Omni Bridgeway, a global leader in dispute resolution finance, funded two cases in Italy (an arbitration case under ICSID rules and a claim for damages related to a cartel case). Similarly, to pursue their high-value claims abroad, some liquidators in Italian insolvency proceedings have started evaluating whether to request support from litigation funders. Furthermore, in view of the covid-19 pandemic, it is possible that Italian companies (which already participate in international arbitration proceedings) may be encouraged to resort to litigation funding to control their expenses and costs. Finally, the enforcement abroad of both awards issued by arbitration proceedings seated in Italy and Italian judgments may also represent a suitable field for litigation funding.
Legal and regulatory framework
Although Italy still lacks any specific procedural and substantive rules governing litigation funding, the Italian legal system does not forbid it. Funding solutions aimed at removing the financial risk associated with litigation are in principle consistent with the Italian legal system, and do not run counter to 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 Paragraph 2 of Article 1322, parties are free to enter into other kinds of agreement and that differ from those provided by Italian law, provided that any non-traditional agreements (atypical contracts) seek interests worthy of protection under Italian law. In other words, the parties are free to deviate from the typical forms of contract specifically provided for in law and to validly enter into atypical contracts, provided that the aims pursued by the parties deserve protection.
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 avoiding unfair settlements because of 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: (1) moving to the funder the cost and (financial) risk involved in pursuing justice; and (2) 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 by the Italian legal system in this respect. The authors believe that the relationship should be considered 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 contractual relationship that is extremely close to litigation funding is the 'association in participation' contract (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. Third parties acquire rights and obligations only towards the associating party. 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. 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, because of force majeure, he or she cannot actually use the sum lent. The key aspects of third party funding that make it different from a loan are: (1) the claimant is not obliged to pay anything if the case fails, and (2) in the event 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 also be acceptable under the Italian legal system from the contingency fee standpoint. According to Paragraph 1(a) of Article 2 of (former) Law Decree No. 223/2006, on condition that the lawsuit was successful or settled favourably out of court, the successful lawyer could be paid a percentage of the damages recovered by its client instead of, or as a discount on, a traditional fee; this Article overcame the former prohibition on contingency fee agreements set out by Italian law to safeguard the independence and 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 lawyers 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 aimed at collecting sums or other assets. However, as noted above, the changes introduced to the Italian Code of Professional Conduct for Lawyers by Law No. 247/2012 prohibited contingency fee arrangements while allowing success fees. Consequently, since 2012, Italian lawyers have been unable to accept a return share of the recovery or out-of-court settlement instead of fees for services should the action succeed, since an agreement of this kind could amount to a breach of professional duty or ethical rules of professional conduct. As a result, Italian counsel are expected to request fees to be calculated in relation to both the amount in dispute and the tariff system provided by the law, although room is left in relation to success fees.
In contrast, a third party funder may enter into contingency fee arrangements, as the funder is not a lawyer. Moreover, the relevant contract is entered into by the funder directly with the disputant and not with the lawyers. This leads us to conclude that a funder is not affected by any limit set 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, 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 right that is the subject of dispute before the courts. 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 previous case law of the lower courts concerning the exercise of an organised business purchasing damages claims in correlation with advancing the repair costs for vehicles damaged in road accidents, professional claims collection could be regarded as a 'financial business', thus falling within the meaning of Article 106 of the Consolidated Law on Banking. As a consequence, a claim assignee operating such a business would be expected to be expressly authorised by the Bank of Italy. Otherwise, if the assignee were not registered in the relevant roll held by the Bank of Italy and did not hold the relevant authorisations, the assignment of the claim would be null and void as it would be contrary to Italian mandatory rules. The Italian Supreme Court, however, has recently set aside the above-mentioned legal ruling of the lower courts, by stating that, according to Article 1260 et seq. of the Italian Civil Code, the claim for damages arising from a road accident can be assigned by the damaged party to the mechanic in payment for the repair works carried out. The assignment in question is lawful since it is not a financial transaction but merely a means of payment whereby the assignor pays for the mechanic's services, which are carried out by the assignee (in this case, the mechanic).
This leads us to conclude that the Italian legal system leaves room for a funder to be assigned a legal claim by the claimant.
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 Articles 3 and 9 of Regulation (EC) No. 593/2008 allow freedom of choice of the law governing a contract, provided that certain safeguards concerning weaker parties (consumers, assureds, employees) are guaranteed and relevant overriding mandatory provisions 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.
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;
- amount in dispute
- likelihood of success;
- quantum likely to be awarded (higher than a certain threshold amount);
- estimate of costs to be funded;
- claimant's solvency;
- defendant's solvency and prospects of recovering the sum awarded; and
- timing of recovery of the sum awarded and possible challenge of the judgment.
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, setting out the boundaries of the funder's financial support;
- conditions and obligations of the parties as to payment of the claimant's legal costs;
- the claimant's duties as to 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 the event of breach of the claimant's duties, such as 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 the proceedings or in the case of interim or partial recoveries (provision can also be made for the management of any settlement negotiations);
- obligations of the funder in the event of counterclaims;
- amounts to be received by the claimant;
- parties' obligations in the event of no success in the proceedings;
- conditions for termination;
- accrual of interest;
- tax impact; and
- the 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 to file a claim or to appear before an Italian court. However, providing that certain requirements are met, an Italian judge can issue a disclosure order for 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 to the party or the third party and will not require them to violate any of the secrecy obligations provided in Articles 200 and 201 of the Italian Code of Civil Procedure (on professional and official secrecy);
- proof of the relevant fact cannot be obtained from any other source; and
- the order to produce a document 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 fund concerned, it is equally unlikely that the above conditions would be met. Therefore, in circumstances such as these 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 would not be issued.
Similarly, 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 (in both national and international proceedings), 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 the context of such an evaluation.
As has already been pointed out, this is clearly envisaged by Article 43 of the CAM Arbitration Rules, which provides for the disclosure of any funding arrangement existing between one of the parties and a third party funder. The disclosure concerning the existence of the funding arrangement and the identity of the funder is de facto instrumental in the evaluation of any possible conflict of interest involving the arbitrators.
Conclusions and outlook
In light of the foregoing considerations, it is reasonable to conclude that, although 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 and the activity of funders in the country is expected to increase.
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.
Furthermore, funders may play a role in the area of antitrust claims. Most cartel damages claims are follow-on actions from a European Commission finding of liability. In this 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.
Finally, in light of the new remedies recently adopted by the Italian legislature, it cannot be excluded that the development of collective actions against financial institutions and commercial entities and their directors and officers may encourage an increasing number of funders to enter the Italian market.
Ultimately, the execution of judgments and awards abroad may become fertile ground for litigation funding in Italy too.
In essence, although 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.