The following article was originally published here by Clyde & Co on 14/12/23) in their latest international arbitration series covering the topic of litigation funding across various international jurisdictions.
In this piece, Georg Scherpf (Head of Arbitration Hamburg) and Trami Nguyen (Legal Trainee) interview Dr Malte Stübinger (General Counsel Germany at Deminor Litigation Funding) to provide an overview of the third-party funding landscape in Germany.
1. Is litigation funding permitted in your jurisdiction?
Malte Stübinger: The simple answer is, yes, it has always been permitted under German law. There are no restrictions regarding third-party litigation funding under German law. What is generally not permitted to lawyers are contingency fees pursuant to § 49b of the German Federal Lawyers’ Act. Contingency fees can only be agreed to a very limited extent within the scope of § 4a of the German Act on the remuneration of lawyers. For instance, when the mandate relates to a monetary claim of a maximum of EUR 2,000, exemptions apply. These are very limited and, in a commercial context irrelevant. Therefore contingency fees under German law cannot be compared with contingency fees or damages-based agreements under English law. It is therefore not possible for German attorneys (Rechtsanwälte) to obtain an uplift in legal fees if the case is successful as a trade-off for potentially lower fees being paid out during the (funded) proceedings. This is one, but certainly not the decisive factor for the success of third-party funding in the German market, as we also see third-party funding flourish in jurisdictions where attorneys’ renumeration rules are more flexible.
2. Does this position on litigation funding apply in the same way to arbitration?
Malte Stübinger: Yes, it does. There are no restrictions in the arbitration law in the 10th book of the German Code of Civil Procedure (CCP), which is modelled after the UNCITRAL Model Law 1985 (as amended in 2006). Moreover, the Arbitration Rules of the German Arbitration Institute (DIS) – which is Germany’s primary arbitral institution – also provide no restrictions or disclosure obligations regarding third-party funding, unlike, for example, the Arbitration-Rules of the International Chamber of Commerce (ICC), the Stockholm Chamber of Commerce (SCC), the Vienna International Arbitration Centre (VIAC), or current proposals of the UNCITRAL Working Group III dealing with Investor-State-Dispute-Resolution. These disclosure obligations are primarily intended to safeguard arbitrator independence and impartiality. There are, to my knowledge, no major arbitration institutions prohibiting parties to an arbitration from seeking third-party funding.
3. Are there any upcoming or proposed rules or regulations in respect of litigation funding that may alter how your jurisdiction approaches it?
Malte Stübinger: The reform of the German arbitration law is currently being discussed. However, the Position Paper published by the Federal Ministry of Justice on 18 April 2023 (Eckpunktepapier)1 does not contain any reform proposals or clarifications regarding third-party funding, and there seems to be no need to do so.
However, the European Union intends to regulate third-party funding. On 13 September 2022, the European Parliament passed a resolution on "Responsible private funding of litigation" (2020/2130(INL)).2 After 25 June 2023, the European Commission is asked to propose a Directive to establish common minimum standards at Union level on commercial third-party litigation funding. The minimum requirements proposed in the resolution (which are not binding for the Commission) will include an authorisation, supervision and complaints system, as well as regulations regarding disclosure and control of the financing agreement.
4. Have there been any key decisions or awards?
Malte Stübinger: At present, I am not aware of any domestic German decisions or awards restricting third-party funding in principle. In the past, there were two decisions of the Federal Court of Justice restricting funding in the context of consumer related claims brought by consumer associations.3 However, these decisions were to some extent made redundant following the introduction of the new collective redress possibilities under German law (Abbhilfeklage). There are, to me, no known awards or decisions that portray third-party funders in a negative light, for example, as “mercantile adventurers” (RSM v. St. Lucia) or voice criticism of the general concept of third-party funding when modelled on damage based agreements, like in the recent PACCAR decision in the UK.4 In that sense, the German funding market may be a more flexible alternative to jurisdictions with stricter regulations or case law. Restrictive concepts such as champerty and maintenance do not exist under German law. Although, less relevant in England and Wales these days, they are still prevalent in Ireland.
5. What is the current landscape of such funders in your jurisdiction – is there a notable market and are there any litigation funders well established in your jurisdiction?
Malte Stübinger: The German market was originally dominated by subsidiaries of the major insurance companies, who were arguably rather risk averse and had an appetite for mid-size disputes from EUR 50-100k in claim size on. Over the last years, more (international) third-party funders entered the German market and now offer funding for large volume B2B disputes in all areas of commercial and investment law, with different practice areas and funding criteria in detail. The well-known players in the market for those larger disputes, besides Deminor, are OmniBridgeway, Burford Capital, and Nivalion. Two further, well established providers – who fund from smaller claim sizes on – are Foris and Legial. Besides that, today there are countless providers of fully funded claim enforcement solutions in the B2C market, offering customers the ability to pursue their potential claims in scalable, mostly homogenous claim types, such as the infamous Diesel Claims, overpaid bank fees, rent control reimbursement, or online casino losses.
6. What is the process to obtain third-party funding?
Malte Stübinger: Usually, the advising law firm prepares a draft statement of claim and/or a first legal opinion on the prospects of success at the outset. This generally also contains a structured budget for the entire proceedings, providing also for various contingencies. After that, either the attorneys or the client seeking funding will submit the legal opinion to a third-party funder. The funder will then conduct a due diligence of the case, which includes the dispute’s risk profile, the potential recovery amount, and enforcement prospects. If the case seems eligible, the funder will propose a term sheet and negotiate commercial terms with the client. Once such an agreement is found, the funder will usually request an exclusivity period and procure a second opinion on the case (or some crucial key elements) at its own cost. If the key parameters are met, no red flags show up, and the case matches the funder’s portfolio and risk appetite, the third-party funder presents the case to his funding committee. If the committee approves third-party funding for the case, the parties will agree on the litigation funding agreement (LFA).
7. What are funders looking for in terms of success chances and the amounts claimed and why?
Malte Stübinger: There is no generally applicable set of criteria across the industry. As a commonality, all funders will at least require positive prospects of success, so at least 50% plus X, based on the attorneys’ assessment and the funder’s own assessment. This is crucial for ensuring a positive return on investment for the funder. Some funders will differentiate between practice areas and/or industries here. Furthermore, the potential compensation and/or damages in the case should be significant enough to justify the financial investment by the funder. The threshold of the amount in dispute will depend on the market strategy and capacity of each individual funder, but generally, claim values of EUR 2-3 million will be able to attract the interest of some of the international funders. A further relevant factor for the attractiveness of a case from a funder’s perspective is the ratio of the total investment budget to the claim value. As a rule of thumb, the budget should not exceed 10% of the claim value, as it can otherwise become very hard to get to economic terms that are attractive for all, client, funder, and counsel.
8. Is there a possibility to fund smaller value claims?
Malte Stübinger: Some funders in Germany offer funding for claims from around EUR 50-100k claim size on. For even smaller claims, individual case funding can become hard to achieve, as the potential outcome in relation to the amount to be invested and the efforts the funder needs to invest in the due diligence of a case make it challenging to design a workable business case.
2 https://www.europarl.europa.eu/doceo/document/TA-9-2022-0308_EN.pdf.
3 Decision of the Federal Court of Justice of 13 September 2018 - I ZR 26/17 and of 9 May 2019 – I ZR 205/17: (bundesgerichtshof.de).
4 R (on the application of PACCAR Inc) v The Competition Appeal Tribunal [2023] UKSC 28.
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Malte Stübinger – Deminor General Counsel Germany
