Litigation Funding 2024 Comparisons

Third-party litigation funding is permitted in the Netherlands. It is widely used in class actions and becoming increasingly popular in traditional litigation before courts as well as arbitration tribunals.

There are no specific rules or regulations on litigation funding in the Netherlands. However, certain rules do apply to collective actions.

Sufficient Resources

Pursuant to Article 3:305a paragraph 2 sub c of the Dutch Civil Code (DCC), a claim organisation must have sufficient resources to bear the costs of instituting the collective action. This requirement applies if the procedure is funded by the claim organisation itself, but also in case of external funding. In other words, the litigation funder must provide sufficient funds.

Sufficient Control

The claim organisation must not only have sufficient resources, but it must also have sufficient control over the legal action. This requirement relates in particular to the situation where external funding has been obtained. The legislature does not consider it desirable that an external funder can exert decisive influence over procedural decisions, such as decisions regarding the strategy of the collective action, whether or not to agree to a settlement, or whether or not to file an appeal against a negative decision. It is for the claim organisation to take these important decisions itself.

To assess the degree of influence a possible funder has on the procedure or the claim organisation, the court may review the litigation funding agreement in this context. The court will then also address the question of whether the content of the funding agreement hinders careful representation of interests and/or contains unreasonable agreements or improper incentives or allows for disproportionate or excessive compensation for the claim organisation and its funder.

If the court, having reviewed the funding agreement, concludes that the requirements have not been met, it can declare the claim organisation inadmissible. It may also, however, offer parties the opportunity to adjust the funding agreement within a reasonable period if it deems this reasonable.

EU Regulation

In October 2022, the European Parliament voted in favour of regulation of the EU litigation funding sector. The Parliament’s resolution states that third-party litigation funding (TPLF) is growing and while it has the potential to support access to justice, it needs greater regulatory oversight.

The resolution recommends various changes to boost transparency for parties over the involvement in cases of third-party litigation funders, and proposed limits on the percentage share of a court award or settlement that funders can take, and on funders’ ability to unilaterally withdraw funding midway through legal proceedings.

According to the Parliament, there must, for example, be a 40% fee cap on the amount funders could recoup from damages awards in the event of a successful case.

The resolution was negotiated and then adopted after Members of the European Parliament (MEPs) expressed concerns that litigation funders were able to abuse Europe’s largely unregulated market, sometimes abandoning funded parties during the litigation process or demanding a “disproportionate share of the proceeds”.

The Parliament pointed to a lack of transparency that meant EU courts have, on occasion, made awards to claimants “without realising that a share of the award, which might sometimes be disproportionate, will subsequently be redirected to litigation funders”. It said this was particularly concerning in “opt-out” collective redress systems, where not all class members being represented in an action will be party to any funding agreements.

The International Legal Finance Association (ILFA), however, has severely criticised Parliament’s proposed rules for undermining the availability of legal finance in the EU and denying access to justice.

The ILFA’s main criticisms centred around the lack of evidence underlying the so-called Voss Report which the proposed regulation was based on. The association argued that a 40% fee cap would make it “uneconomical for funders to side with smaller parties in complex and costly cases”, even where those claims are legitimate.

The ILFA has asked the European Commission to consult with key consumer rights groups and the European Innovation Council and SMEs Executive Agency on the impact of greater regulation of TPLF in EU member states. The Commission now plans to conduct a mapping study of the existing European funding landscape before adopting any new rules.

The 2019 Claim Code, which applies to collective actions, states under “III- External Funding” that a claim organisation may enter into a LFA with a “solid” external funder for the funding of its statutory activities. The LFA must guarantee the autonomy and independence of the claim organisation.

According to the Claim Code, the board must ensure that individual directors and members of the supervisory board, as well as the lawyers or other service providers engaged by the claim organisation, are self-sufficient and independent of the external funder and the (legal) persons directly or indirectly affiliated with it, and that the external funder and others directly or indirectly associated with it are independent of the defendant in the collective action. The board must also ensure that the funding conditions (including the size of the agreed compensation and its method of calculation) are not in conflict with the collective interest of the injured parties.

The Claim Code details further conditions as follows.

• The claim organisation conducts research into the capitalisation, possible track record and reputation of the external funder.
• The agreement is recorded in writing and has a choice of law for Dutch law and a choice of forum for the Dutch court or an arbitration institute established in the Netherlands for dispute resolution. The agreement contains a choice of domicile for the funder in the Netherlands.
• The agreement stipulates that control over the trial and settlement strategy rests solely with the claim organisation.
• The claim organisation ensures, and has this recorded in an engagement letter, that its lawyers and other service providers engaged by it act exclusively for and on behalf of the claim organisation and its statutory constituency and do not accept assignment(s) from the external funder and the (legal) persons directly or indirectly affiliated with them, which does not change the fact that the funding and actual payment of the legal fees and costs of other service providers on behalf of the claim organisation can take place directly or indirectly by the external funder.
• The agreement must provide for the confidentiality of the information belonging to the claim organisation and defines the information to which the external funder has confidential access.
• The agreement provides that the external funder cannot terminate the agreement, barring special circumstances, before a final decision has been obtained in the first instance and guarantees that such a notice period is applied that the claim organisation has a reasonable opportunity to attract alternative funding.
• The claim organisation states on the publicly accessible part of its website (i) that there is external funding, (ii) the identity and place of residence of the external funder, and (iii) the general system of the arrangements with the external funder regarding agreed fee(s) and agreed services. If the external funder is entitled to compensation based on a percentage of a collective (damage) compensation to be awarded in or out of court, the claim organisation will also state the applicable percentage.
• Subject to what has been provided in the second sentence of the previous point above, the claim organisation is not obliged to reveal the amount of the compensation due to the external funder, the budget available for the case, the funding documentation or other, given the nature of its activities, sensitive information on the website or otherwise. The claim organisation agrees with the external funder that it is authorised to communicate this information to the court if the court issues an order to do so, whereby the claim organisation may strive to prevent the other party from also gaining access to this information.

The Representative Actions Directive (EU) 2020/1828, which has applied since June 2023, aims to ensure that consumers are able to protect their collective interests in the EU via representative actions: the legal actions brought by representative entities (so-called qualified entities). It provides that all EU countries have in place a mechanism of representative actions. The Directive improves consumers’ access to justice while it also foresees appropriate safeguards to avoid abusive litigation. For the purposes of the Directive, “consumer” means any natural person who acts for purposes which are outside that person’s trade, business, craft or profession.

Representative actions are actions brought by qualified entities before national courts or administrative authorities on behalf of groups of consumers to seek injunctive measures (ie, to stop trader’s unlawful practices, similarly to what has been foreseen by the Injunctions Directive 2009/22/EC), redress measures (such as refund, replacement, or repair) or both injunctive and redress measures.

The Directive aims to protect the collective interests of consumers in many areas of law and economic sectors, such as data protection, financial services, travel and tourism, energy and telecommunications.

Article 10 of the Directive provides that a class action may not be brought against a defendant who is a competitor of the funder or against a defendant on whom the funder is dependent. It states that member states shall ensure that, where a representative action for redress measures is funded by a third party, conflicts of interests are prevented and that funding by third parties that have an economic interest in the bringing or the outcome of the representative action for redress measures does not divert the representative action away from the protection of the collective interests of consumers.

Member states must in particular ensure that:

• the decisions of qualified entities in the context of a representative action, including decisions on settlement, are not unduly influenced by a third party in a manner that would be detrimental to the collective interests of the consumers concerned by the representative action; and
• the representative action is not brought against a defendant that is a competitor of the funding provider or against a defendant on which the funding provider is dependent.

Courts or administrative authorities in representative actions for redress measures must have the authority to assess compliance in cases where any justified doubts arise with respect to such compliance. To that end, qualified entities must disclose to the court or administrative authority a financial overview that lists sources of funds used to support the representative action. Courts or administrative authorities must also have the authority to take appropriate measures, such as requiring the qualified entity to refuse or make changes in respect of the relevant funding and, if necessary, rejecting the legal standing of the qualified entity in a specific representative action.

In traditional (commercial) litigation, the freedom to contract prevails and there are no specific risks for litigation funding agreements being modified.

In collective actions, terms in litigation funding agreements that would be at high risk of being modified or declared unlawful are terms that would permit a litigation funder to gain an excessive return on its investment and terms that allow a litigation funder to exercise too much influence over the proceedings. Lawyers and other service providers engaged by the claim foundation act exclusively for and on behalf of the claim organisation and its statutory constituency and may not accept assignment(s) from the external funder and the (legal) persons directly or indirectly affiliated with them.

Return on Investment in Collective Actions

Current practice shows several ways in which third-party funders seek a return on their investment. To indemnify and reimburse their funder, claim organisations often claim a percentage of compensation that may be awarded, by judgment or in a settlement, to all affected individuals or to the claim organisation’s participants.

When determining the return on its investment, the funder must take into account that the reasonableness of its return is not only assessed by the claim organisation (in the decision to engage a third-party funder) and by the participants (in the decision to join a claim organisation or to opt out of the procedure), but also by the court when assessing the funding structure and the appointment of an Exclusive Representative.

A few examples

Hereford Litigation Finance is the litigation funder in a WAMCA case against Apple. Hereford claims as its ROI:

• 24% of the total damages up to EUR150 million;
• 20% of the amount between EUR150 million and EUR400 million;
• 15% of the amount between EUR400 million and EUR650 million; and
• 10% of any amount exceeding EUR650 million.

The reasonableness of the return depends not only on the agreed percentage, but on all circumstances of the case, including the size of the claim. The Amsterdam District Court in Car Claim Foundation v Volkswagen did not object to the claim organisation withholding a maximum of 25% from the final compensation to the injured car owners, at least partly in favour of the litigation funder involved (Vannin Capital).

The court ruled that buyers of a new Volkswagen, Audi, Seat and Škoda with so-called “cheating software” are entitled to a price reduction of EUR3,000 for a new car and EUR1,500 for a second-hand car. This applies to approximately 150,000 cars that consumers purchased from car dealers that the Car Claim Foundation has included in the collective action. If the average is, say, EUR2,000, then this concerns a claim of EUR300 million.

The payments to the claim organisation were deemed acceptable. The Car Claim website states: “The members of the Board of Directors receive compensation for their services to the Foundation. For meetings of the Board of Directors or joint meetings with the Supervisory Board, our board members receive a compensation of EUR1,000 (excluding VAT) per day attended.”

“For additional services in connection with the activities of the Foundation, members of the Board of Directors are entitled to a compensation of EUR175 per hour excluding VAT. The total remuneration that the members of the Board of Directors received together in 2019 amounts to EUR17,960 (including VAT). Travel and other reasonable expenses will also be reimbursed.” “The total compensation that the members of the Supervisory Board received together in 2019 amounts to EUR10,502 (including VAT), consisting of a reasonable expense allowance and a so-called attendance allowance for meetings of the Supervisory Board or joint meetings with the Board of Directors of EUR1,000 (excluding VAT) per day attended.”

In its judgment of 25 October 2023 in TikTok, the District Court of Amsterdam confirmed that what percentage of the compensation to be received by a litigation funder is acceptable will depend on the amount of the compensation to be awarded and the number of people who are expected to be able and willing to claim it. The percentage that was previously accepted as a maximum in case law (25%) may play a role in this, it said, but what is even more important is what result can be expected for the stakeholders on the one hand and the litigation funders on the other when a collective compensation scheme or a settlement agreement is executed.

According to the court it is justifiable that litigation funders receive appropriate remuneration given the risks they take, but this must be in reasonable proportion to the amount they have funded. With regard to the latter, the Amsterdam court held that it intends to consider five times of what a litigation funder has invested as an appropriate maximum.

Governance

In its SILC v Airbus ruling of 20 September 2023, the District Court of The Hague made several important observations regarding the governance of the foundation. First, it held that the Supervisory Board had a far-reaching degree of control within SILC and two of the three members of the Supervisory Board had close ties with the founder and SILC’s litigation funder. In fact, “little imagination” was required to assume that there was a real risk that the course of action that SILC might follow could be influenced by the founder and the litigation funder, who would thereby have regard to their own interests. This was problematic because sufficient control over the proceedings had to lie with SILC.

In addition, SILC was obliged to consult the founder and litigation funder prior to entering into any settlement agreement, meaning they could directly influence SILC’s decision-making. Furthermore, SILC was dependent on its founder. Due to the compensation owed to the founder that existed in the event of termination, it could not in practice terminate the collaboration with its founder if it wished to do so. It had to be concluded, therefore, that:

• SILC carries out virtually no activities of its own;
• SILC has given a power of attorney to its founder to carry out the (essential) activities in the context of the proceedings;
• SILC’s founder and litigation funder can jointly exert decisive influence on its decision-making process; and
• it is not sufficiently certain that the interests of SILC’s participants come first.

Another governance requirement is that the claim organisation that institutes the class action must have sufficient experience and expertise to be able to conduct proceedings. In addition, it must have expertise in the area relevant to the underlying claim. In SILC v Airbus, the District Court of The Hague found that SILC had insufficient experience and expertise and, partly for that reason, should be declared inadmissible. According to the court, it is apparent from the legislative history that the requirement of sufficient experience and expertise means that the claim organisation: “demonstrably has expertise that is relevant to the collective action or has access to it. This required expertise will differ from case to case. If it concerns collective legal action for compensation for investment losses, some financial expertise in this area will be required. This can be made possible because the organization has an expert in this field on its board or because the organization has easy access to such an expert. If it concerns personal injury, the required expertise lies more in the field of the possible types of injuries and their consequences caused by the event.”

The court ruled that SILC could be expected to have board members with sufficient specific experience and expertise. However, this was not the case: “The current board members [board member 3], [board member 4] and [board member 2] do not meet those qualifications. It has not been stated or proven that they have experience and expertise with regard to collective actions. According to SILC, [board member 1] did, but he has since resigned.”

With regard to two of the members of the Supervisory Board, this was different, they did have sufficient specific experience and expertise. However, they were either contractually linked to the litigation funder and the founder, which, according to the Court, meant that they are not independent, or they have such a relationship with the litigation funder and the founder that the conclusion is justified that they will not take a sufficiently independent position in relation to the funder and the founder in the performance of their duties as members of the Supervisory Board of SILC. The court, therefore, said in so many words that the members of the Supervisory Board were sufficiently experienced and had the required expertise, but that this experience and expertise did not count because they were not independent.

Settlement

If the funding concerns regular, non-collective, proceedings the parties may agree that if the litigant refuses to accept a settlement that the funder considers appropriate, the litigant shall reimburse all costs of the funder, as well as the amount the funder would have received in case of a settlement. In collective actions, the foundation determines whether the settlement amount is acceptable or not. So, terms which state that if the litigant refuses to accept a settlement that the funder considers suitable, the litigant shall reimburse all costs of the funder, will be considered terms that allow a litigation funder to exercise too much influence over the proceedings.

Dutch law does not generally require a litigant to disclose the funding agreement to the court or to the opposing party. However, in collective actions, in order to assess the funding structure of the claim organisation, the court will usually ask it to submit the litigation funding agreement for review. It will also consider the percentage that the claim organisation demands from its participants as their own contribution. According to the legislature, review of the LFA by parties other than the court – for example, the defendant – is neither desirable nor necessary.

Indeed, insight into the actual content of the funding agreement between the claim organisation and the litigation funder could result in strategic abuse of the information, for example, because the defendant adjusts its litigation strategy. The defendant may try to delay the proceedings in order to financially stress the claim organisation, if it knows that the claim organisation has insufficient financial resources. Nonetheless, in the TikTok case referred to earlier, the court has required all three claim organisations to give TikTok access to their LFA, while allowing them to redact the actual funding amounts.

A party may be held liable to pay adverse costs and the party and the litigation funder may have agreed that the funding agreement covers such costs. The court’s award of costs will cover the actual costs of service of the writ of summons and the court fees, but legal fees are only compensated on the basis of a flat rate (liquidated tariff), which hardly ever covers the actual cost incurred. Only in IP cases may the award of costs cover the costs of the prevailing party. The unsuccessful party will be ordered to pay the “reasonable and proportionate” litigation costs incurred by the prevailing party. The unsuccessful party therefore pays not only its own costs, but also a large share of the costs of its opposing party.

There is no specific (increased) liability for a litigation funder in this matter.

Typically, a court will not order security for costs in the Netherlands. However, there is an exception to that general rule. Courts may order that security for costs be provided by a plaintiff residing in a jurisdiction where enforcement of a Dutch court ruling is not provided for under any treaty (Article 224 of the Dutch Code of Civil Procedure).

After the Event (ATE) insurance is not used in the Netherlands. Legal fees are only compensated on the basis of a flat rate (liquidated tariff). Since adverse costs are therefore always relatively low, except in IP cases, there is no market for this type of insurance.

Lawyers are allowed to conclude fee arrangements at a reduced hourly rate, provided that this rate is “reasonable” and that at least the actual costs are covered, which may be raised when the proceedings are successful.

There is no objection to an agreement whereby the increase in the low rate in the event of achieving a positive result is related to a percentage of the value of that positive result, provided the low rate covers costs and provides for at least a modest salary for the lawyer.

There is, however, a general ban on “no-cure-no-pay” arrangements for lawyers.

Fee sharing with non-lawyers is not permitted under the Code of Conduct for European lawyers. Article 3.6.1 provides: “A lawyer may not share his or her fees with a person who is not a lawyer except where an association between the lawyer and the other person is permitted by the laws and the professional rules to which the lawyer is subject.”

The professional independence of lawyers prohibits non-lawyer ownership of law firms.

Since 1 January 2014, lawyers have been required to charge 21% tax on their legal services just like other businesses.

If you are an entrepreneur in the Netherlands and practise your profession or run a company independently, you must calculate and add VAT (turnover tax) on the sales price of the products and services you provide. The legal form (for instance, private limited company – BV; or public limited company – NV) of your business makes no difference. Foundations and associations also pay VAT if the Dutch Tax and Customs Administration (Belastingdienst) considers these entities entrepreneurs.

The Dutch VAT regime has three rates: 0%, 9% and 21%. In some instances, businesses are exempt from VAT and in some cases there are special arrangements regarding VAT.

0% Rate

If you are based in the Netherlands and you do business in other countries, the 0% VAT rate may apply. The 0% rate also applies to services related to cross-border transactions. For instance, to services for the international carriage of goods. Or work on goods, such as repairs, that are exported to non-EU countries.

9% Rate

The 9% rate, or low tariff, applies to a number of products and services, such as food products, medicines, books (also e-books), newspapers, magazines, online publications, and paint and plaster work on homes.

21% Rate

The 21 % rate is also called the general tariff. This is the most common rate. The 21 % applies to all other products and services, including legal services, unless there is a reason for exemption or reverse charging VAT.

There are no specific arrangements under Dutch law.