EU Parliament proposes directive to regulate third-party funding

The European Parliament recommended to the Commission to propose a Directive on the regulation of third-party funding in the EU with the title “Responsible funding of litigation.” If adopted in its current form, this directive would regulate third-party funders financing proceedings in the EU. A broad definition of proceedings would likely encompass court proceedings, commercial arbitration, and investor–state arbitration (note: The European Commission has the exclusive right to initiate EU legislation. In its proposal, the European Parliament recommends that the Commission initiate proceedings in line with the proposed directive.)

In the context of investor–state arbitration, third-party funding is increasingly viewed critically. States participating in the UNCITRAL Working Group III process have expressed concerns about the lack of transparency of funding arrangements, potential conflicts of interest, and the impact on the cost and duration of arbitral proceedings.

The proposed directive, if formally introduced and later adopted, would create a minimum standard for third-party funders in the EU and proposes, inter alia, to establish a supervisory authority granting permits to funders and monitoring their activities, hold funders jointly liable with the funded disputing party to pay the cost of the proceedings that may be awarded, impose an obligation on funders to adequate financial resources to fulfill their liabilities under the funding arrangement, impose a fiduciary duty of care the funder owes toward the funded disputing party, establish specific disclosure and transparency obligations to inform competent judicial or administrative organs of the existence of a funding arrangement, and limit the financial stake of funders to 40% of the amount of compensation awarded, save for exceptional circumstances.

If adopted, the directive could serve as a viable benchmark in discussions on a possible multilateral regulation of third-party funding at UNCITRAL Working Group III and elsewhere.