Regulation

Overview

Is third-party litigation funding permitted? Is it commonly used?

Third-party funding was launched in Germany in 1999. As is customary with new ideas, there were a few who took a critical standpoint, but the overwhelming majority of the legal community welcomed the idea. Litigation funding closed the gap between credit facilities provided by banks, which are typically not granted without securities being provided by the claimant, and the prohibition of lawyers providing legal services whose remuneration is based solely on a successful outcome of the case (pactum de quota litis). Commercial litigation funders do not - and are not allowed to - provide legal services. Therefore, statutory limitations on providing funding in return for a share of the proceeds do not apply in their case. Since 2010, conditional fee agreements may be concluded, pursuant to section 4a of the German Law on the Remuneration of Attorneys (RVG), but only in limited cases.

Third-party funding has, in fact, never been legally challenged; today, it is widely known and accepted. A small number of court decisions have also confirmed its legal structure as a partnership organised under the laws of the German Civil Code between claimant and funder. The courts’ attitude ranges from neutral to positive, with no negative decisions against professional funders being known. This is different in cases in which lawyers try to use their own funding firms with the intention of acquiring clients and therefore funding their own mandates. Such practise would trigger a conflict of interest and accordingly constitute an infringement of the German lawyers’ code of conduct, the Federal Regulations for Practising Lawyers (BRAO).

Restrictions on funding fees

Are there limits on the fees and interest funders can charge?

When it comes to determining a reasonable share of the proceeds for which a funder may ask, very few court decisions have been delivered so far. The standard terms and conditions call for a 30 per cent share of proceeds amounting to €500,000, and a 20 per cent share for any proceeds in excess of said amount. The Higher Regional Court of Munich confirmed in one case that a share of 50 per cent was justified because the funder stepped in after the first instance hearing had already been lost. A good rule of a thumb is that a share of 50 per cent is safe, but any share higher than that would, in all likelihood, and unless fully justified, go against public policy. As a matter of principle, the market regulates the share amounts to be agreed in litigation funding.

German funders do not charge interest. They prefer to structure their remuneration either as a percentage of the amount actually recovered or as a multiple of the amount invested. A hybrid model equipped with a cap or a floor is also a conceivable structure, for example, in international arbitration.

Specific rules for litigation funding

Are there any specific legislative or regulatory provisions applicable to third-party litigation funding?

Because third-party funders are neither qualified as banks nor as insurers, neither legislative nor regulatory provisions apply.

Legal advice

Do specific professional or ethical rules apply to lawyers advising clients in relation to third-party litigation funding?

The BRAO stipulate professional and ethical rules and regulations for lawyers; however, no specific rules regarding third-party funding exist. In accordance with various regulations and confirmed by innumerable court decisions, lawyers are obliged to advise their clients comprehensively and impartially. There have been no court decisions to date obliging lawyers to advise a client specifically about litigation funding and its options.

However, various contributions to the legal field champion such a duty of enabling the clients to choose whether they would like to take on the cost risk themselves or whether they would like to pass it on to a litigation funder. Because lawyers are already obliged to inform their clients about the possibility of obtaining litigation protection insurance, they are well advised to cover litigation funding too when informing their clients.

Regulators

Do any public bodies have any particular interest in or oversight over third-party litigation funding?

Financial institutions such as banks and insurance providers are regulated and supervised by the Federal Financial Supervisory Authority (BAFIN), located in Bonn. Commercial litigation funders are qualified neither as banks nor as insurance providers, therefore, they are not under the oversight of any public authority.