At a glance: regulation of litigation funding in Luxembourg

Regulation

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

There are currently no specific rules in Luxembourg concerning the financing of a dispute by a third party. Further, the admissibility of third-party litigation funding has never been, as such, reviewed by the Luxembourg courts. However, recent practice shows that third-party litigation funding is in fact increasing in Luxembourg, while it is impossible to say at what level.

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

Due to the lack of legislative or regulatory provisions in the field of third-party funding, explicit limits on the fees and interest that funders can charge do not exist. Indeed, the determination of fees and interest is subject to the parties’ freedom of contract, and therefore subject to applicable general contract law.

However, French case law, to which Luxembourg judges often refer in contractual matters, considers that funders run the risk that courts could eventually reduce the contractually agreed funder’s fee if the fee is considered excessive or disproportionate in comparison to the services rendered.

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

In Luxembourg, there are currently no specific regulatory or legislative provisions applicable to third-party litigation funding (TPLF). As there is no specific legislation, the latter must comply with the general rules regarding contracts provided by articles 1101 et seq of the Civil Code and the principle of contractual freedom. If the beneficiary of the TPLF is a consumer, the regulation protecting consumers should equally apply. Finally, TPLF must comply with Luxembourg public policy.

Further, specific rules of professional conduct governing the attorney-client relationship could affect the third-party funding relationship, such as the ethical rules provided by the Bar (Règlement Interieur de l’Ordre) and the amended law of 10 August 1991 on the legal profession (LPA) (loi du 10 août 1991 sur la profession d’avocat).

Lastly, the only existing legal framework in the Luxembourg legal regime which refers to TPLF is Draft Bill No. 7650 on class actions, which is currently being discussed in the Luxembourg Parliament (transposing EU Directive 2020/1828). This bill will authorise class actions in consumer matters.

The overall aim of the bill is to improve access to justice for consumers, particularly by introducing the option to finance class actions through funding from private third parties. Interestingly, the bill expressly addresses the supervision of third-party class action financing. It stipulates that funders are prohibited from influencing the clients’ decisions and allows the court to request a financial overview if there are any concerns about potential conflicts of interest.

Currently, the bill is still under discussion, and its drafting may evolve during the Parliamentary phase.

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

Attorneys in Luxembourg must carry out their activities in compliance with the very strict ethical rules laid down by both the LPA and the Bar Rules.

In that regard, the prohibition against relying solely on contingency fees, the duty of professional secrecy and the duty of independence are the most relevant in the field of third-party funding.

The duty of professional secrecy applies to any type of communication (written or oral), or information exchanged between an attorney and their client. However, the amended law of 10 August 1991 on the legal profession allows an attorney to disclose information covered by professional secrecy under specific conditions. Further, a client is also free to independently communicate documents or information received from attorneys to third parties, including third-party funders.

The funder’s information rights regarding privileged information should, however, be precisely defined in the litigation funding agreement.

Attorneys also have a duty of independence to their clients. This means that an attorney must have all the means and freedom to determine what must be done to effectively carry out their functions of assistance, advice and defence in the service of the client. This duty applies to any strategic advice throughout a proceeding, including the choice of whether to settle or withdraw an action.

Finally, article 38(1) of the LPA and the Bar Rules dictate transparent fee structures, fairness in fee allocation and compliance with professional standards. Consequently, a Luxembourg lawyer shall always respect ethical rules and considerations when entering into a fee agreement with a client or advising one on entering into an agreement with a funder.

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

At present, since TPLF is not regulated under Luxembourg law, TPLF generally escapes any type of supervision by public bodies.

However, it cannot be excluded that in the future, depending on the structuring of the funding agreement, a specific funding model may be considered a regulated service falling under the supervision of the Luxembourg financial regulator. We are not aware of any plans to this end at the time of writing.

Further, since the financing of a dispute by a third party is indirectly subject to compliance with the attorney’s ethical or legal obligations, the Bar Council too could be considered to be a competent regulator should a dispute arise that involves the attorney.