Regulation

Overview

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

Spanish law neither expressly permits nor prohibits third-party litigation funding. The figures of champerty and maintenance are foreign to Spain. Many legal authorities have studied how litigation funding can fit into Spanish law, and have observed that article 1255 of the Spanish Civil Code states that contracting parties can establish the pacts, clauses and conditions that they deem convenient, as long as they do not violate the law, morality, nor the public order. Thus, one can infer that as long as third-party funding agreements do not violate the law, morality nor the public order of Spain, such agreements are lawful. In addition, the buying and selling of claims is permitted in the Spanish Civil Code, and article 1534 allows the withdrawal from a litigious credit and understands that it exists once the suit has been answered, and not before.

Third-party funding agreements have not been very common in the past, but this trend is slowly changing. Also, international arbitrations with a Spanish element or in which Spain is a party are also the object of third-party funding. The past years have seen an increase in Spain as a party in international arbitration proceedings, especially under the Energy Charter Treaty.

The attitude of Spanish courts has been to allow third-party funding agreements. For example, Commercial Court No. 3 of Madrid approved on 4 November 2014 the liquidation plan of Petersen Energía Inversora, SAU and Petersen Energía, SAU, two Spanish Companies under insolvency proceedings. The plan included that both companies would enter litigation funding agreements to begin proceedings against the Republic of Argentina. Furthermore, Amanda Cohen Benchetrit, specialist judge on commercial law and adviser to the Directorate General of International Legal Cooperation of the Ministry of Justice of Spain, points out in her article, Legal situation in Spain and the EU: possibilities for future regulation, which was published on the website of the Spanish National Bar Association, that she believed that an explicit regulation of third-party funding was not necessary. However, she stated it might be necessary to regulate other more contentious issues such as disclosure of third-party funding agreements and their terms, and conflict of interest.

Restrictions on funding fees

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

No. Spanish law does not contemplate limits on the fees and interest funders can charge. However, if one were to consider third-party funding as a type of loan, Spain does indeed have provisions protecting borrowers from usury that would have to be considered. However, the consideration of third-party funding as a loan is a subject of debate and does not hold water in the view of a sector of Spanish legal doctrine, according to Cohen Benchetrit.

But leaving the consideration of third-party funding as a type of loan aside, in 2008, jurisprudence of the Supreme Court of Spain established that the prohibition of perceiving percentage-based fees only in the case of winning at trial was contrary to competition law, which strictly forbids direct or indirect price fixing. This historic ruling thus liberalised fees charged by lawyers and opened the door to third-party funders since there is nothing that prohibits a third-party from receiving a sum in exchange for sharing or assuming the cost of litigation.

Specific rules for litigation funding

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

No. In Spain there are no specific legislative or regulatory provisions applicable to third-party litigation funding. Litigation funding is very new in the Spanish legal world and it is slowly developing. Prominent and highly influential legal institutions and experts are debating whether it would be better to draft legislative provisions to regulate the issue, in accordance with continental law or, on the other hand, to let the market regulate itself, albeit with some exceptions, as we have seen in common law jurisdictions. Third-party litigation funding could be regulated in a European framework but considering the different legal systems of the EU member states, this regulation would not be an easy task.

In our opinion, excessive regulation can pervert the nature of third-party funding, which should be a tool that the market offers to claimants and defendants and that both parties, funders and clients, should adapt to each specific case. That said, a minimum framework should be established with the main rules in order to establish the parameters, leaving to the parties involved the negotiation of the major content of the relationship.

Legal advice

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

Spanish lawyers are always subject to the professional and ethical rules of the Spanish National Bar Association, and must always respect the ethical principles regarding Professional Secrecy, Conflict of Interest, and Independence in all of their professional undertakings. However, there is no specific set of ethical rules that applies to lawyers advising clients in relation to third-party litigation funding. Our opinion is that lawyers should exercise caution to not enter conflict of interest when, in addition to advising their clients on a case, they are going to advise them on the financing contract.

Notwithstanding, third-party funding is an extra legal tool that should be based precisely on professional and ethical rules in order to provide an honest service to the client that makes the market confident and comfortable, and the relationship between the parties stronger. The reputation in this market is one of the most important things that the professionals of the sectors should take care of. Hence, professional or ethical rules should always be borne in mind.

Regulators

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

For the time being, Spanish public bodies have not expressed a particular interest in or oversight over third-party litigation funding. Pacts of this nature would always be subject to article 1255 of the Spanish Civil Code and thus have to abide by the laws, morality and public order of Spain. Precisely because champerty is unknown in Spain, third-party funding agreements in the country have greater flexibility in the definition of their terms.

Moreover, the debate is still open (see question 3) and many bodies, such as, for example, the Spanish National Bar Association, are housing conferences of sector experts, including judges, in order to sharpen their view of third-party litigation funding.