In order to project an overview of litigation funding in Spain, the first idea that must be considered is that Spanish Law establishes no explicit legal prohibition on funding others' claims. Bearing that in mind, it has been determined that Article 1.255 of the Civil Code provides the possibility for litigation funding by standing that contracting parties are hold by the principle of autonomy, with the limitation of law prohibitions, morality and public order. The legal reality being that litigation funding is starting to be a trend in Spain, although it is developing very slowly.
Until 2008, sharing litigation risks for profit was forbidden by the Spanish Supreme Court on the basis that was contrary to competition law but currently, no prohibition prevents third-parties from receiving a sum in exchange for sharing or assuming the cost of litigation.
Considering that no specific rules regarding litigation funding have been adopted, the legal framework will be that for private contracts subject to the limitations of law and professional and ethical rules of the Spanish Bar Association, and must always respect the ethical principles of professional secrecy, conflict of interest and independence in all professional undertakings.
The funds disbursed for the monetization of a legal claim or arbitration are usually allocated to cover litigation expenses, including attorneys' and solicitors' fees, expert and investigation fees and court costs, amongst others. Therefore, if a claim or arbitration is successful, the investment fund will receive the percentage agreed in the private contract, and in the event of an unfavorable judgement, the fund will lose its entire investment. Spanish Law does not contemplate limitations on the fees and interests’ funders could charge.
This financial transaction should not be classified as a loan, but the legal concept of litigation funding is still subject to debate. In case the private agreement may be considered a loan, certain protection provisions for usury borrowers would have to be considered.
Given the absence of specific regulation, the funding party will have extensive freedom to determine, among others: i) the decision on whether or not to enter into a settlement agreement; ii) the specific events of default to enable the termination of the private agreement; iii) the role in the litigation process; iv) the decision on whether the litigation funder can be held liable for adverse costs and; v) all the remaining provisions that must be considered.
For a fund to invest in litigation funding in Spain, there are some procedural aspects that must be appreciated. First of all, the timeframe of commercial and civil law claims filed before the Courts of First Instance take, on average, a year until a judgment is reached, and the second instance proceedings (appeal) take almost eight months. Secondly, in the course of the second instance proceeding, it is possible to request the provisional enforcement of the first instance court judgement. Therefore, the claimant would not have to wait until the second instance judgement is reached to be satisfied in his/her claims. Such proceeding is not complex and would be undertaken with the necessary caution and guarantee measures.
Regarding the costs associated to litigation, the general rule under Spanish Law is that the party whose complete pleadings are rejected, bears the costs of the successful party. Such expenses normally match with the funds disbursed by the funding investor. However, the final amount to be paid with regard to litigation costs would normally be less than the real costs incurred since the Spanish Bar Association limitations must be respected.
In conclusion, the litigation finance industry needs to act in a specialized manner by conducting complex audits so that the cases being financed meet all requirements to have the utmost probabilities of being successful, a so called ‘approved case’ basis. This creates a double guarantee for the specific case that gives the fund a higher chance of success. Aspects such as the certainty of recovery or the solvency of the defendant are key elements to decide on the investment.