A brief introduction to Litigation Funding is undoubtedly necessary.
TPLF – Third Party Litigation Funding is an Anglo-Saxon practice that aims to provide private individuals, companies, public corporations, or local authorities with financial support (in some circumstances also professional support) to facilitate their access to justice.
This access is facilitated through the provision of a fund from which the above-mentioned parties can draw so as to avoid moving sums from their budgets and allow them to concentrate on their core business.
Already widely used abroad, it is a highly advantageous practice that is rapidly spreading throughout Italy.
There are various forms of TPLF. Currently, the most popular is the assignment of the chose in action whereby the Fund makes available an agreed sum for the purpose of “financially supporting” the costs of litigation, technical consultancy and any other expenses related to managing the litigation.
These sums by their nature, both legal and contractual, cannot accrue interest in any way, since this would transform the legal concept of the fund into a loan, something that is usually reserved for financial and credit institutions and which is subject to quite different authorisation and regulatory enforcement processes.
Moreover, in addition to the financial benefit, the beneficiary of the litigation fund also has the advantage of not having to return any sum in the event of losing the case, since the agreement assigning the chose in action expressly states that the Funder also assumes the risk of losing the case – if no further action is to be taken –, also referred to as a “non-recourse” assignment.
Litigation funding in relation to other judicial concepts: legal standing
Having ascertained generally how Litigation Funding works, we must address the question of how it relates to the Italian legal concepts of legal standing, procedural substitution and substitution in relation to a disputed right.
The legal principle of legal standing – legitimatio ad causam – establishes the possibility for a party to assert the existence of their own right and not the relative ownership of said right.
It will then be for the judge to confirm or refute the existence of such a right on the part of the party with “standing”.
This follows from the provisions of Art. 75 of the Italian Code of Civil Procedure, under the heading of Legal Capacity, which reads as follows:
“Persons who are able to freely exercise the rights asserted therein are capable of standing in court.” Anyone, therefore, can assert a right in court if they have direct capacity or, in the case of legal persons, through their legal representative and, naturally, by proving the facts in support of said right, pursuant to Art. 2697 of the Italian Civil Code, under the heading “Burden of Proof”.
Litigation Funding and procedural substitution
Having established the above-mentioned concept, it is worth dwelling briefly on another aspect.
Any parties wishing to avail themselves of Litigation Funding must deal with the delicate issue of Procedural Substitution, pursuant to Art. 81 of the Code of Civil Procedure, which very firmly states that
Except in cases expressly provided for by law, no one may assert in their own name a right of another person.
Procedural substitution represents an exception to this principle since it dissociates ownership of the action (legitimatio ad causam) from ownership of the substantive situation averred in the proceedings, and for this very reason is permitted only in specific cases.
Litigation funding in relation to other judicial concepts: assignment agreement
This rightly raises the question of whether the Assignment Agreement, through the acquisition of the chose in action by the Litigation Funder, may constitute such a case.
The services provided by the Funder, i.e., the entity supporting the person with standing to sue, are unrelated to legal assistance and do not entail subrogation of the same in asserting their rights. Instead, the Funder covers the costs of litigation and, to a lesser extent, in the case of LexCapital, can help procure a lawyer ( a Super Specialist), in the capacity of a professional contact rather than offering direct assistance.
It is, conceivably, the personification of the fund as a source of aid, which does not replace the party with standing, but rather combines a series of activities aimed at guaranteeing easy access to justice, which for many is increasingly difficult and cumbersome.
However, the term “assignment”of the chose in action brings us back to the question of whether a party, when ceding the right to sue (legitimatio ad causam), in the fullness of their faculties, to another party, cedes the right itself to sue, while assuming the financial risk of losing the litigation costs of the party and of the counterparty.
A persuasive answer to this question is that the Funder, through the assignment agreement, formally substitutes the party in the legal proceedings but not with regard to ownership of the right claimed in the proceedings, the judgment of which, as stated above, has legal effect on the substituted party.
More specifically, the law provides that the effects of the judgment shall always apply to the “substituted” party, also incorporating the obligatory joinder of parties (Art. 102 of the Italian Code of Civil Procedure. “If the judgment must be pronounced with respect to several parties, they must be plaintiffs or defendants in the same proceedings”) in which the effects of the judgment apply to the substituted party, while the financial effects apply to the substitute, owing to the assignment agreement under which the substitute assumes the financial risk of losing the case, with respect to the costs of the proceedings.
Litigation funding: an important distinction
This concept should not be confused with actions brought under subrogation under Art. 2900 of the Civil Code in which a creditor may exercise the rights of others to protect its own interest.
In this case, the Funder does not seek to assert its own interest, which will be limited, in the event of a victory in court or an out-of-court settlement, only to the retention of an agreed percentage of the value of the lawsuit (or the “petitum”, i.e., the economic value of the Res Litigiosa and, therefore, the amount required as an economic return from the infringement of the right).
In other circumstances, the question arises as to whether the Funder, through the assignment agreement, is acting as a substitute under a particular title in a specific claim or legal relationship.
Art. 111 of the Code of Civil Procedure gives us a first indication:
If, in the course of the proceedings, the disputed right is transferred by an act between living persons under a particular title, the proceedings shall continue between the original parties”.
In the case of succession by particular title, the transferor (assignor) brings or defends actions in court not as the original party entitled to act but as a procedural substitute (Art. 81 of the Code of Civil Procedure), continuing to be a party to the proceedings for a right they no longer own.
Also in this case, the Fund does not take over the disputed right, which is the crucial point on which a party asserts their rights or ascertains ownership thereof, but takes over in the action to protect or ascertain the disputed right, keeping it in the hands of the assignor.
Difference between the chose in action and the disputed right
Finally, the question arises of whether the chose in action and the disputed right are the same thing.
The answer is a reassuringly simple: no.
Chose in Action is the right to take legal action to protect one’s rights (a hybrid form of legitimatio ad causam and legal assistance), which is assigned in return for financial support (for the litigation costs, etc.).
The Disputed Right is instead the subject matter on which a grievance lies: is a certain property mine or not? The Disputed Right concerns understanding the proper ownership of a right and, in the present case, understanding whether or not a person is actually entitled to compensation for damages due to unlawful conduct.
According to Art. 81 of the Code of Civil Procedure, ownership of a right, by virtue of an agreement assigning the Chose in Action, cannot be acquired in these cases unless ownership of the right itself is transferred, by assignment or sale, before or during the proceedings, only in the cases specifically provided for, as mentioned above in Art. 111 of the Code of Civil Procedure.
Due to the current legislative vacuum, agreements concluded with a Litigation Funder remain atypical contracts under Italian law, regarding which the European Parliament expressed its views in its Resolution of 13 September 2022 with recommendations to the Commission on Responsible Private Litigation Funding (2020/2130 (INL)).
The fund is a key element in the assignment agreement and it is to be expected that the Court will intervene by applying the rules of legal standing, transferring this standing to a third party but ensuring the main legal effects of the judgment are applied to the substituted party, while the economic effects, deriving from the agreement between private parties, are applied to the “substitute”, by virtue of the agreement between the parties, pursuant to Article 81 of the Code of Civil Procedure.