In review: third party litigation funding in Spain – Lexology

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Market overview
Although third party funding (or litigation funding) is relatively new in Spain, in recent years the Spanish market has experienced a rising demand from companies, law firms and individuals that see litigation funding as a tool to reduce costs and manage risks. Third party funding is not expressly regulated in Spain, but it is allowed under the Spanish civil law principles governing commercial contracts. As a civil law jurisdiction, the concepts of champerty and maintenance are not part of Spanish legal culture; thus, there is no prohibition on litigation funding.
Since the first funders entered Spain in 2016 and 2017, the market has been growing exponentially year on year, and this trend is expected to continue in the coming years. While not a mature market compared to other countries such as Australia, the US and the UK, and still far from the level of consolidation observed in those markets, Spain is establishing itself as an active market with a clear growth trend.
Third party funding has become a hot topic of debate, and not only at arbitration conferences and webinars, but also evidenced via a proliferation of published articles on the subject,² with a growing interest among different stakeholders in learning more about it.
The various types of claims that have been driving the growth of the Spanish litigation funding market have been those either litigated in Spain or with key Spanish components that can accommodate different investor profiles. The areas that investors have gathered to be of particular interest are natural resources and energy, regulatory markets, banking and financial markets, renewable energy, capital projects and infrastructure, antitrust and intellectual property.
There is an interest in the legal financing of complex cross-border disputes, some of them pursued before the Spanish jurisdiction and others in arbitration. The rise of cross-border disputes submitted to arbitration in recent years has created the right atmosphere for the third party funding market to develop. Arbitration teams in the Spanish offices of top-tier law firms and boutique arbitration firms are showing an increasing interest in litigation finance solutions.
It should be noted that Spain is one of the countries with the highest number of investment arbitrations in ICSID (mainly related to the conflict regarding renewables based on the cutbacks carried out by the Spanish government from 2010 to 2013 to the incentive system set out for renewable energy companies). Moreover, according to ICSID statistics, the number of arbitrations involving Spanish referees is also very high.
On the other hand, private enforcement of competition law cases, and more particularly follow-on actions based on the transposition into Spanish law of the EU Damages Directive,³ have been important drivers as well for the Spanish funding market. The new legislation has enhanced the process of claims for damages caused by restrictive practices and encouraged a large number of claims being brought in this area.
Under the current economic conditions shaped after the covid-19 pandemic’s height, and along with the availability of qualified and sophisticated practitioners, the following features of Spanish litigation have been facilitating the growth of the Spanish litigation funding market:
Finally, with regard to after the event (ATE) litigation insurance, at the time of writing only foreign insurance companies have been reported as making ATE insurance available for litigation funding cases in Spain.
Legal and regulatory framework
In Spain there is no specific (lex specialis) legal and regulatory framework applicable to third party litigation funding. In addition, currently there are no strong signals regarding prospects of an immediate domestic overturn of this situation.
At the EU level, however, Spain, as an EU Member State, soon will have to implement with its national legislation Directive (EU) 2020/1828 of the European Parliament and of the Council, of 25 November 2020, on representative actions for the protection of the collective interests of consumers,⁷ whose Article 10 establishes certain rules on funding of representative actions for redress measures, the purpose of which is to prevent conflicts of interests and to ensure that funding by third parties that have an economic interest in the bringing or the outcome of a representative action for redress measures does not divert the representative action away from the protection of the collective interest of consumers. This is a significant rule, but obviously one with a very limited subject-matter scope within the third party litigation funding sector.
This situation might change, however, if the EU pushes forward the European Parliament Resolution of 13 September 2022 with recommendations to the Commission on responsible private funding litigation, which basically has its origins in the responsible private funding of litigation study conducted by the European Parliamentary Research Service (March 2021).⁸ It is interesting to point out that the annex of this Resolution contains specifically a proposal for a directive of the European Parliament and of the Council on the regulation of third party litigation funding.⁹ There have been some immediate negative reactions to the EU Resolution from relevant third party litigation funding stakeholders and we still need to see if there is a determined political will at the EU level to bring this project to completion. However, the fact that we have already reached this stage might mean that harmonised legislation on third party litigation funding in EU Member States is no longer wishful thinking.
In the meantime, in Spain third party litigation funding, from a legal and regulatory perspective, is in the hands of the general statutory rules applicable to civil and commercial operations, which do not oppose this mechanism, as unanimously acknowledged within academia, the legal profession and the courts. In fact, some court decisions have already given credit to the validity of third party litigation funding in Spain.
This is particularly clear in the decision adopted on 24 June 2020 by the Court of Appeals of Álava,¹⁰ in which the Court in an obiter dicta declared that, in the absence of any specific legal and regulatory framework, third party litigation funding is lawful in Spain. The Court in particular indicated that the legal basis for its position is grounded both in Article 1255 of the Spanish Civil Code (CC) and Articles 239–243 of the Spanish Commercial Code (CCom). The reference to Article 1255 CC is an obvious, and expected, one, as this is the central article in Spanish private law in relation to party autonomy: ‘The contracting parties may establish any covenants, clauses and conditions deemed convenient, provided that they are not contrary to the laws, to morals or to public order.’ As such, if this is viewed from a contractual perspective, third party litigation funding transactions are free to be developed, unless they contravene mandatory rules or public policies (order) in force in Spain. References to Articles 239–243 CCom, on the other hand, are more significant because these rules may point to the most proper legal nature and legal regime of third party litigation funding operations. These Articles provide for a basic regulation of silent partnerships, which are qualified as those agreements where ‘[B]usiness persons may participate in operations by other businesspersons, contributing to them with a part of the capital they may agree on, thus becoming partners in the profits or losses according to the proportion determined’ (Article 239 CCom).
Interestingly, scholarly opinion in Spain shares the same, or a similar, mindset as to what seems to be the most acceptable legal characterisation of third party litigation funding mechanisms: an atypical contract featuring silent partnerships characteristics.¹¹
All in all, irrespective of the specific legal characterisation of third party litigation transactions that we might concur with, it is undeniable that the Spanish legal system presents no obstacle whatsoever to the development of third party litigation funding in our country, at least with respect to civil and commercial claims. Relying on the Supreme Court decision of 22 January 2020,¹² however, some commentators have suggested that third party litigation funding in administrative law claims might not be accepted under Spanish law. This decision contains a dissenting opinion by Justice Arozamena, in which he analyses the practice of third party litigation funding under its different formats.
In addition to the general legal and regulatory framework mentioned above, the Spanish arbitration entourage has also produced some rules applicable to third party litigation funding in which, following relevant practices at the international arbitration level, this mechanism is addressed from different perspectives. The most important examples of this arbitral approach to third party litigation funding are:
All these rules are to be classified as soft (or soft law) rules due to their non-statutory nature, and are only binding on the parties to a particular arbitration proceeding when the corresponding rules have been accepted by them. They all share the same goal of attaining proper disclosure of information related to the use of third party litigation funding in arbitration in order to avoid potential conflicts of interests.
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