Litigation: Cost or Investment? Shifting Perspectives in Legal Proceedings
It is widely understood that litigation is synonymous with cost. But what if it were seen as an investment? When deciding whether to initiate legal proceedings or arbitration, litigation costs are a crucial factor to consider. A potential litigant must assess not only their own legal expenses but also the risk of covering the opponent’s costs if they lose. Similarly, when we are on the other side—facing a claim—what solutions exist if we cannot bear the financial burden of the case?
Whether it’s a court proceeding or arbitration, this is where third-party litigation funding (TPLF) comes into play. This growing model is key to ensuring access to justice. But what does this concept entail? Broadly speaking, it involves a third party assuming the legal expenses of a lawsuit in exchange for a financial benefit (usually a pre-agreed percentage fee) if the case succeeds. This innovative model is increasingly used to address legal costs and mitigate financial risks, particularly in cases with high success potential.
Litigation Funding in Spain: From Anglo-Saxon Roots to Spanish Market Consolidation
Third-party litigation funding (TPLF) is well-established in the Anglo-Saxon legal system. However, its arrival in Spain has been more gradual, emerging less than a decade ago without a specific regulatory framework. While still in its early stages from a regulatory perspective, interest in this model is growing rapidly. The potential for litigation funding in Spain is undeniable, with the country ranking as the fourth largest European market for this sector. More and more businesses and individuals are turning to TPLF as a strategic partner in resolving disputes.
The Business Model: An Investment Based on Success Prospects
More and more companies are using TPLF as a strategic tool to eliminate financial risk associated with litigation, free up cash flow, and keep risk off their balance sheets. If the funder assumes the litigation risk, where does their profit lie? Unlike a traditional loan, litigation funding is a genuine investment, where the return depends on the likelihood of success. Rather than focusing on the financed party’s ability to pay, funders emphasize another critical factor: the solvency of the opposing party to ensure recovery of claimed damages or reimbursed legal costs.
The business is straightforward. In exchange for assuming the litigation risk, the funder:
- Receives a financial return if the case succeeds, after the funded party collects the proceeds from the litigation.
- Loses their investment if the case fails, as if it were a speculative bet.
For this reason, funding entities conduct rigorous due diligence to select claims with high success probabilities, minimizing the associated risk. This meticulous evaluation process allows funders to target solid and viable cases, positioning TPLF as a highly profitable business model.
The Regulatory Gap: A Challenge Beyond Spain’s Borders
While TPLF has emerged as a vital tool for ensuring access to justice, its development faces a key challenge: the lack of specific regulation to formalize and standardize its use. The need for a regulatory framework extends beyond Spain, as there is currently no uniform regulation in the European Union for this practice. This absence creates a legal vacuum, hindering its consolidation as a legitimate funding model.
In the absence of formal regulation, funding entities rely on codes of conduct from jurisdictions with more experience in litigation funding. These codes allow funders to operate according to ethical standards, addressing the needs of various clients and the unique aspects of each legal dispute.
A Key Ruling Clarifying Its Legal Configuration: Judgment of the Commercial Court No.3 of Barcelona
It is not uncommon to mistakenly associate TPLF with a simple loan or even a credit assignment. Given the limited case law available, courts are gradually clarifying the nature and distinctions of litigation funding.
In a recent case, the claimants resorted to a third-party funder (TPLF). The Commercial Court firmly disagreed with equating the arrangement to a credit transfer, concluding that:
- The claimant would receive the awarded sum and subsequently pay the funder their pre-agreed commission.
- The right to receive the sum was never transferred, leaving the claimant as the sole legitimate party.
Towards Greater Accessibility: The Need for a Regulatory Framework
The European Parliament Resolution of September 13, 2022, directly recommends that the European Commission develop a Directive for responsible private litigation funding. In this context, the European Law Institute (ELI) published a report outlining twelve principles to harmonize and improve this practice.
Currently, the ELI Principles serve as a guide for legal operators, funders, and stakeholders, marking a crucial step toward a definitive regulation of TPLF in Europe. Approving a European Directive would consolidate this business model in Spain, ensuring fairer and more effective access to justice.
[1] Consejo General del Poder Judicial: Buscador de contenidos
[2] Textos aprobados – Financiación privada de litigios responsable – Martes 13 de septiembre de 2022
[3] ELI_Principles_Governing_the_Third_Party_Funding_of_Litigation.pdf
