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22 December 2020
Third-party litigation funding is essentially unknown under Italian law. For instance, Italian contract law does not regulate litigation funding agreements. In addition, there is little case law dealing with third-party funding and only a few Italian commentators have addressed the topic to date.(1)
However, Italian law includes no mandatory rules or public policy principles that expressly preclude third-party funding.(2) In other words, the Italian legal system does not seem to impose any insurmountable obstacles to third-party funding.(3)
Therefore, third-party funding is likely to become an increasingly attractive litigation feature under Italian law, especially considering the national provisions governing the allocation of litigation costs.
Pursuant to Article 91 of the Code of Civil Procedure, a losing party must pay the costs of proceedings and attorneys' fees according to the 'loser pays' rule. Nonetheless, until a winner is determined, both sides bear their own costs and fees. This implies that if a party cannot afford such costs, its right to access justice is essentially precluded, unless that party is so indigent as to be eligible for state legal aid.
For this reason, third-party litigation funding agreements may be an efficient private law instrument to provide parties with the right to access justice enshrined in Article 24 of the Constitution.
A 'third-party litigation funding agreement' can be defined as an agreement between a prospective claimant,(4) the funded party, and a funder, by virtue of which the funder undertakes to bear the costs of litigation and the risk of an adverse outcome in return for a percentage of the proceeds in case of a successful claim.(5)
As discussed above, Italian contract law includes no specific provisions which govern third-party litigation funding agreements. In other words, a third-party litigation funding agreement qualifies as an 'atypical' contract (ie, a contract which is not expressly regulated by law).(6)
Article 1322(2) of the Civil Code expressly grants parties the freedom to conclude atypical contracts to the extent that they "pursue interests worthy of protection".(7) As discussed above, third-party funding allows and facilitates access to justice. Accordingly, third-party funding litigation agreements can be considered as pursuing interests worthy of protection under Article 1322 of the Civil Code.(8)
Therefore, under Italian law, parties are free to conclude a litigation funding agreement and determine its terms and conditions, subject only to the limit set out in Article 1322(2) of the Civil Code.
Under Italian contract law, there are essentially two contractual paradigms (and respective sets of rules) that parties may wish to use as a model when drafting the terms and conditions of a litigation funding agreement.(9)
Parties may decide to construe a litigation funding agreement as a loan agreement. The social and economic interests pursued through a litigation funding agreement are similar to those underlying a loan agreement. However, the two agreements are significantly different, in that litigation funding agreements are speculative, whereas loan agreements are not. In other words, in litigation funding agreements, the funded party's obligation to pay the funder is subject to a successful claim. If the funded party's claim is dismissed, its obligation to the funder no longer exists (or does not even arise).
Assignments of debts
Alternatively, the parties may refer to the rules governing the assignment of debts.(10) A litigation funding agreement may be construed as an assignment of debt, pursuant to which the funder undertakes to pay litigation costs and expenses in lieu of the funded party in return of a consideration.(11)
Irrespective of the contractual model that the parties opt for, the same general considerations apply regarding the funder's and funded party's respective obligations under a litigation funding agreement governed by Italian law.
In the pre-contractual phase, the funder evaluates the pros and cons of the investment, carrying out an in-depth enquiry into the claim's chance of success. The funder's decision of whether to finance a certain claim depends on several elements, including:
A key factor taken into consideration by prospective funders is the level of control over the appointment of the funded party's legal team. Funders frequently stipulate that their choice to finance a claim depends on the funded party consenting to the appointment of the funder's chosen professional as its legal counsel or, at a minimum, to include such professional in its legal team.
As discussed below, this may give rise to significant issues regarding the ethical and professional rules applicable to the conduct of the funded party's lawyer.
The accurate due diligence carried out by the funder in the pre-contractual phase necessarily requires the prospective funded party's collaboration and cooperation in disclosing all relevant information. Therefore, it is in the funder's interest to include in the litigation funding agreement some representations (and related penalties in case of a breach) concerning the truth and completeness of the information disclosed by the funded party during the pre-contractual phase.
Conversely, the prospective funded party has an interest in the preserving the confidentiality of information which is disclosed to the funder during the pre-contractual phase. Such an interest can be protected by concluding specific non-disclosure and confidentiality agreements between the prospective funder and the funded party.
As discussed above, by concluding a litigation funding agreement, the funded party undertakes two obligations:
The funded party's obligation to communicate to the funder all of the relevant information concerning the proceedings may require the involvement of the funded party's lawyer, given the technical and legal nature of such information. Accordingly, in international practice, it is not uncommon for litigation funding agreements to provide an express derogation of the funded party's lawyer's confidentiality obligation. Pursuant to such derogation, the funded party's lawyer is authorised to share with the funder all of the relevant information concerning the conduct of the proceedings. A similar clause may also be included in a litigation funding agreement governed by Italian law, to the extent that it allows the funded party's lawyer to share with the funder only specific information. On the contrary, a clause pursuant to which the funded party waives its confidentiality rights towards its lawyer entirely would most likely be null and void under Italian law as it would be deemed to conflict with public policy principles.
As discussed above, under a litigation funding agreement, the funder usually undertakes two obligations:
Litigation funding agreements may bestow on the funder significant powers in relation to the conduct of the proceedings, such as the power to:
By virtue of such powers, the funder ends up having de facto control over the dispute.(12)
This may give rise to concerns insofar as the funded party's lawyer's ethical and professional duties are concerned.
Pursuant to Articles 9, 10 and 11 of the Italian professional code of conduct, lawyers have a duty to act independently and with professional due diligence and care in the best interest of their clients.
Therefore, how should a lawyer act in case of a disagreement between a funded party and the funder in respect of the conduct of the proceedings?(13) In other words, how should a lawyer act when a conflict of interest arises between a funded party and the funder? The answer to this question is not straightforward.
Pursuant to Articles 10 and 23 of the professional code of conduct, Italian lawyers have a duty to act in the "exclusive interest" of the represented party. Accordingly, from a purely ethical perspective, lawyers would seem to be bound to proceedings and make decisions in the exclusive interest of the funded party.
However, this would constitute a violation by the funded party of its obligations towards the funder under the litigation funding agreement.(14)
It follows that when drafting contractual provisions which grant the funder extensive powers over the conduct of the proceedings, parties should take into account the funded party's lawyer's duties as established in the professional code of conduct.
For further information on this topic please contact Marco Torsello or Lucia Pontremoli at ARBLIT Radicati di Brozolo Sabatini Benedettelli Torsello by telephone (+39 02 8425 4810) or email (email@example.com or firstname.lastname@example.org). The ARBLIT Radicati di Brozolo Sabatini Benedettelli Torsello website can be accessed at www.arblit.com.
(4) In principle, defendants may also resort to third-party funding. However, in that instance, the agreement concluded with the funding party will more likely be drafted as an after-the-event insurance agreement, rather than a funding agreement in the strictest sense (L Coppo, Il contratto di finanziamento della lite da parte di terzi: profili sostanziali, p 25). In practice – as it is readily understood – funders are less likely to finance defendants. Indeed, even in case of a favourable decision (and except in cases where a counterclaim is brought) defendants do not increase their economic assets to the funder's advantage.
(7) Article 1322 of the Civil Code reads as follows: "[p]arties' autonomy. Parties are free to conclude contracts other than those expressly governed by the law, to the extent that such contracts pursue interests worthy of protection under the legal system."
(8) G De Nova, "The impact of a Litigation Funding Agreement on Commercial International Arbitration with seat in Italy", Rivista dell'Arbitrato, fasc 4, p 815 and ff and L Coppo, Il contratto di finanziamento della lite da parte di terzi: profili sostanziali, p 48.
(10) Article 1273 of the Civil Code reads as follows: "[i]f the debtor and a third party conclude an agreement pursuant to which the debtor assigned its debt to the third party shall bear the debt of the third party, the creditor may join the agreement, thereby rendering it irrevocable."
(13) Disagreements may arise in a variety of situations with respect to making decisions that may increase costs of the proceedings or in relation to a proposed settlement. Please see P Bernardini, "Third Party Funding in International Arbitration", Rivista dell'Arbitrato, fasc 1, 2017, p 1 and ff and G De Nova, "The impact of a Litigation Funding Agreement on Commercial International Arbitration with seat in Italy", Rivista dell'Arbitrato, fasc 4, p 815 and ff.
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