Commercial litigation funding is becoming more and more established in Germany. Being a rather conservative jurisdiction, there was lot of criticism in the market when the first funders entered Germany. This initial scepticism is now a thing of the past; litigation funding is enjoying rapid growth and general awareness. It has closed the gap between bank loans that are typically not granted without securities being provided by the plaintiff, and the German law prohibition for lawyers to agree on contingency fees.
So far, there are no legal regulations for litigation funding in Germany. However, the draft EU directive on responsible private financing of litigation (2020/2130 [INL]) provides minimum requirements for the regulation of litigation funding. This approach preserves the integrity of the European legal system and prevents purely profit-oriented funding at the expense of those seeking justice.
In the German legal market, the growth in litigation financing is matched with another development that is rather new to national procedural law: So far, proceedings are conducted by single parties, and class actions are outside the scope of existing provisions. However, there is a growing interest in more flexibility like bundling cases and collective redress.
The legal industry is on the move and German courts are currently considering how collective actions can work in the context of prohibited contingency fees in Germany. Some litigation funders have had the claims assigned to them acting as collection service providers and only demand remuneration for successful cases. Others fear inadmissibility of this model and therefore buy the claims while accepting a higher initial risk.
One way or another, litigation funding and collective redress will be more and more relevant in the future and the pandemic will quicken this trend. Many entrepreneurs hit by Covid-19 will shy away from taking legal action in order to avoid enormous costs. Litigation funding might enable those claimants to enforce their rights with limited risks. The likelihood of increasing demand for third-party funding as a tool for immediate liquidity improvement is very high.
The German legal system has awoken from its slumber and has picked up speed. It remains exciting and the developments are worth being closely observed. Stay tuned!