General Permissibility of TPLF

In Italy there are no legal provisions against third-party litigation funding (TPLF). Therefore, it is commonly held that litigation funding is generally permissible. The general permissibility of litigation funding under Italian law has been implicitly confirmed by the Italian legislature in implementing Directive 2020/1828/EU on representative actions for the protection of the collective interests of the consumer. This directive requires member states to introduce certain rules on litigation funding only to the extent that TPLF is allowed by national law. By introducing these TPLF rules in Law No 28 of 10 March 2023, which implements the directive, the Italian legislature implicitly acknowledged that TPLF is generally admissible under Italian law.

General Permissibility of the Assignment/Purchase of Claims Model

Under Italian law, the litigation funder may also elect to perform its activity through the assignment of claims model – that is, by purchasing the claim (so-called “res litigiosa”). Indeed, according to settled case law of the Italian Supreme Court (among the many see Corte di Cassazione, 10 January 2012, No 52; 13 May 2009, No 11095; 5 November 2004, No 21192; and 21 April 1986, No 2812), the purchase of a claim for compensation of damages is a perfectly valid and enforceable contract, both for pecuniary and non-pecuniary damages.

Enforceability of the Purchase of a Claim Against the Defendant and Other Third Parties

In order to make the purchase of claim effective and enforceable against the defendant, it is sufficient to inform the defendant by any means (eg, by registered mail or email) of the purchase. On the other hand, in order to make the purchase effective against other third parties (eg, other purchasers of the same claim, or creditors of the seller of the claim), it is necessary to serve the purchase to the defendant, either by introducing the proceedings (so-called “litis contestatio”) or by extrajudicial means through a bailiff. If claims are purchased by a securitisation company en bloc (eg, the claims of a certain number of victims of a cartel), it is sufficient to publish a notice of the purchase in the Italian Official Journal (IOJ) to make the purchase effective against the defendant and any other third party. Publication of the notice of purchase in the IOJ only has effect within Italian territory. Therefore, if the claim purchased in Italy will be enforced in another jurisdiction (eg, Germany), it may be necessary to notify the defendant of the purchase by other means that produce the same effects under the relevant national law.

According to Italian law, the purchase of claims on a professional (ie, recurring) basis is an activity reserved for banks or other financial intermediaries duly registered and supervised by the Bank of Italy (Article 106 of the Italian Banking Act). This activity may also be performed by alternative investment funds, directly or indirectly supervised by the Bank of Italy or another EU supervisory authority (Article 1(k) of the Italian Financial Act and Article 4(e) of the Decree of the Ministry of the Economy and Finance No 30 of 5 March 2015) or by securitisation companies (Law No 130 of 30 April 1999).

Any purchase of a claims contract concluded by a subject not duly authorised, which performs its activity on a professional basis, is null and void. As a consequence thereof, the defendant may successfully challenge the legitimacy of the assignee on the grounds that it did not validly acquire the property of the claim. In addition, purchasing claims on a professional basis without being duly authorised represents an illegal activity that exposes the assignee to administrative and criminal sanctions.

Some argue that engaging in litigation funding on a professional (ie, recurring) basis may be an activity exclusively reserved for financial intermediaries, alternative investment funds (AIFs) or securitisation companies. This view is based on the argument that, when the consideration of the litigation funder is a share of the judicial award (eg, 30% of the award), the litigation funding is equivalent to the purchase of a share of the claim, under the condition that the case is successful. Therefore, if performed on a recurring basis, it falls under the activities reserved for these entities (financial intermediaries, AIFs or securitisation companies).

Therefore, even though the Italian Supreme Court recently held that the purchase of a claim where no consideration is paid upfront does not qualify as a financial activity, it may be advisable that any future litigation funding agreements (LFAs), especially where the funder is remunerated through a share of the judicial award, are entered into by entities, whether financial intermediaries, AIFs or securitisation companies, which are directly or indirectly supervised by the Bank of Italy or other EU supervisory authorities.

In Italy, as in all other EU member states, special provisions apply to funding of representative actions brought by qualified entities (eg, consumer associations) on behalf of consumers. In particular:

• The qualified entity that brings the action is obliged to disclose to the tribunal the fact that the action is financed by a third-party funder and its identity.
• Before admitting the action, the tribunal must verify, also by its own motion, that there is no conflict of interest between the third-party funder and the interests of the consumers represented in the action, and in particular, that the funder is not a competitor of the defendant or does not depend on the defendant (Article 140-septies, paragraph 8(e) of the Italian Consumer Code, implementing Article 10 of Directive 2020/1828/EU).
• Any settlement between the qualified entity and the defendant must be approved by the tribunal, which will also verify that the funder did not unduly influence the terms of the settlement in a manner that would be detrimental to the collective interests of the consumers concerned (recital 52 of Directive 2020/1828/EU).

However, it should be noted that, at least for the time being, representative actions are not attractive for funders. This is due to the fact that Italian law foresees that only the lawyer of the qualified entity and the so-called “representative of the class” are remunerated through a share of the award in case of success. There are no obstacles to the funder sharing in the lawyer’s share of the award and that of the “representative of the class”. However, these shares are too little, because each of them ranges from 0.5% to 9% of the total award, depending on the number of consumers opting in. Therefore, it seems that, at least until the Italian representative action regime is made more effective, the assignment of claims model will remain more attractive to funders in consumer cases.

Codes of Conduct of Industry Associations

In Italy, TPLF is generally unregulated, also as far as non-legal rules are concerned. This is probably due to the fact that the Italian industry of litigation funding is still relatively underdeveloped and, in particular, a national association of litigation funders has not yet been established. Therefore, there is still no Italian code of conduct that is applicable to the industry. Of course, Italian litigation funders or international funders providing their services in Italy are free to align their activities with an international code of conduct, such as the Code of Conduct of the European Litigation Funder Association, provided that such codes are not in contradiction with Italian mandatory rules.

Rules by Arbitration Institutions

Like other European arbitration institutions, the most important Italian arbitration institutions recognise the relevance of TPLF in arbitration and have recently introduced some provisions that are binding for arbitration proceedings administered under their rules. For example, the Arbitration Rules of the Milan Chamber of Arbitration, by far the most important Italian arbitration institution, foresee that a party that is funded by a third party in relation to the proceedings and their outcome must disclose the existence of the funding and the identity of the funder (Article 43 of the Rules).

Consumer Protection

If litigation funding is provided directly to consumers, the general rules on consumer protection apply. In particular, the rules against unfair terms in consumer contracts introduced by Directive 93/13/EEC must be considered. In this respect, the LFA may not include any contractual term which, contrary to the requirement of good faith, determines an excessive imbalance between the rights and obligations of the parties to the detriment of the consumer. For example, a contractual term that reserves the exclusive right to decide when and on which terms to settle the case to the funder may be considered unfair and contrary to the requirement of good faith.

No Fairness Test of the Economic Terms of the LFA With Consumers

Italian courts are not allowed to question the fairness of the economic terms (eg, the price) of any contract concluded between professionals and consumers, provided that such economic terms have been determined in a clear and transparent manner. Therefore, Italian courts may not question the fairness of the remuneration of the litigation funder, if it has been clearly agreed with the consumer.

No Fairness Test of the Economic Terms of the LFA in Representative Actions

The EU Directive on Representative Actions left it open to member states to allow their national courts to refuse to approve a settlement on the grounds that the settlement is unfair. When the representative action is financed by a third party, this verification of the fairness of the settlement may extend also to the remuneration of the funders, and in particular to their share of the award. In implementing the Directive on Representative Actions, the Italian legislature excluded the possibility of national courts also verifying the fairness of the settlement and limited the verification of the conformity of the settlement to mandatory rules and to its enforceability according to Italian law. Therefore, Italian courts, in approving any settlement agreed by a qualified entity and a defendant, if the representative action has been funded by a third party, may not question the fairness of the remuneration of the litigation funder and in particular of its share of the award.

No Fairness Test of the Price Paid in the Assignment of Claim Model

For the same reason, when the litigation funder has used the assignment of claims model, by purchasing the claim, Italian courts are not allowed to question the fairness of the agreement reached by the parties to the assignment. The principle of freedom of contract applies. For example, when the parties have agreed that the assignor will receive a contingent payment (ie, “if and when” the claim is successfully enforced), the courts may not question the validity of the assignment by arguing that the percentage held by the assignee (eg, 30%) is too high. For the same reason, when the parties have agreed that the assignor should receive an upfront payment (ie, at the time of the assignment and independently of the outcome of the enforcement proceeding), the courts may not question the validity of the assignment by arguing that the assignor has been paid too little (eg, 10% of the estimated value of the claim).

Rules Against Usury Do Not Apply

Even though this issue has never been addressed by the Italian courts, the rules against usury should be excluded from applying to litigation funding. Indeed, under Italian Law, lenders and borrowers are not free to agree on the highest rate of interest that the borrower is willing to pay, but must agree on a rate of interest that is lower than the threshold calculated by the Bank of Italy every three months on the basis of the average rates of interest applied by Italian banks to the different kinds of loan (eg, secured, unsecured, revolving, leasing, factoring).

If the parties to a loan agreement of any kind agree to a rate of interest that is higher than the usury threshold, no interests are due and the borrower may claim restitution of all interests paid (Article 1815, paragraph 2, Italian Civil Code). However, litigation funding is not equivalent to any kind of loan agreement. This is due to the fact that the LFA is an aleatory contract, where the funder does not merely assume the risk of the insolvency of the borrower (as in a traditional loan agreement), or of the insolvency of the debtor that has been assigned to them (as in certain factoring agreements), but rather assumes the risk of the non-existence of the claim that has been funded by or assigned to the funder. In other words, even if it may not be disputed that to a certain extent the litigation funder provides finance to the claimant, the credit component of the LFA does not, as such, characterise the agreement.

Apart from funding contracts with consumers, there are no legal provisions against specific contractual terms in LFAs. In particular, there is no requirement that the funder should not interfere with the most relevant decisions of the case. A “hands-on” or active approach would be consistent with Italian law.

There is no general disclosure requirement of TPLF under Italian law. Disclosure of litigation funding is required only for representative actions on behalf of consumers and arbitration proceedings where the applicable arbitration rules so require. For obvious reasons, if the funder uses the assignment of claim model, the tribunal will be informed of the existence of the funder, because the claim will be enforced in court by the assignee (ie, by the vehicle used by the funder to purchase the claim).

Adverse Costs in Traditional TPLF

Under Italian law, a litigation funder may not be held liable for any adverse costs. This follows from the fact that under Italian law, only parties to the proceedings may be held liable for adverse costs, and litigation funders are not parties to the proceedings. In general, the courts are not even informed of the existence of a third-party litigation funder.

Adverse Costs in the Assignment/Purchase of Claim Model

The scenario is different if the litigation funder purchases the claim to be enforced in court. In this case the litigation funder (or the vehicle used by the funder to purchase the claim) is a party to the proceedings and may therefore be held liable for adverse costs.

How Adverse Costs Are Calculated

In Italy, adverse costs are calculated according to a tariff. This tariff is established by regulation (Decree of the Ministry of Justice No 55/2014), is periodically updated (most recently in 2022), and is mandatory for all Italian courts. Adverse costs liquidated by the courts on the basis of the tariff depend on several factors – that is, the kind of proceedings, the value of the claim, the activities actually performed by the lawyers, and the complexity of the case. For example, for an entire first instance individual proceeding, for a case with a value between EUR8 million and EUR16 million, the court may award legal expenses in favour of each defendant ranging from a minimum of EUR41,691 to a maximum of EUR125,071. These values may be further increased or decreased on the basis of additional factors.

Costs of Independent Expert Appointed by a Tribunal

In evaluating the costs and risks of litigating in Italy, funders should consider, in addition to the costs of the expert appointed by the party that is funded, the costs of any independent expert appointed by the tribunal. Italian courts will typically appoint an independent expert each time they have to take a decision on a technical issue. For example, they will appoint an independent expert to establish the amount of the overcharge caused by a cartel, the effect on stock prices of a fraud, if a certain product is defective, if the defective product has caused the harm for which the claimant seeks compensation, the pecuniary and non-pecuniary damage suffered by the claimant, and so on. The court may order that the costs of the independent expert are anticipated by the claimant (or by the other party that has the burden of proving the relevant fact), but they are finally borne by the losing party. The costs of the independent expert are calculated by the court on the basis of a tariff and may be doubled in cases of exceptional importance, complexity or difficulty (see Article 49 ff. Presidential Decree 30 May 2002, No 115; and Decree of the Ministry of Justice, 30 May 2002, No 132).

As a general rule, Italian courts may not order security for costs. This is true for all kinds of civil actions: individual, collective or representative.

To date, the Italian market for “after the event” (ATE) and capital protection insurance is not well developed.

Funders investing in Italian litigation typically purchase ATE and capital protection insurance from UK-based insurers.

In Italy, pure contingency fees (“no win, no fee”) are not allowed. Therefore, Italian lawyers are prohibited not only from purchasing the claim (Article 1261 of the Italian Civil Code), but also from financing the claim by accepting to be remunerated for the work performed only if the case turns out to be successful. For judicial matters, Italian lawyers may ask for an hourly fee or for a fixed fee for each activity performed, along the lines set out in the judicial tariff. In addition to the hourly fee or fixed fee, a “success fee” may be agreed.

There are no restrictions preventing third-party funders from sharing fees with lawyers.

Non-lawyers may own shares in law firms only to the extent that the law firm is structured as an STA, which stands for Società Tra Avvocati (ie, company between lawyers).

STAs are governed by Law No 247 of 31 December 2012, which establishes that lawyers – or lawyers and professionals registered in other registers – must hold at least two-thirds of the share capital and voting rights, and that the governing body must consist only of shareholders and, in its majority, of lawyers (see Corte di Cassazione United Sections, 19 July 2018, No 19282).

There are some exceptions to the two-thirds rule, in particular:

• regarding the two-thirds vote requirement, deliberative quorums can be strengthened statutorily by providing for unanimous consent, thereby strengthening the position of the non-lawyer minority; and
• regarding the two-thirds capital requirement, the right to profits can be disengaged from the percentage of capital; therefore, for example, the non-lawyer partner may have a 10% shareholding but an 80% right to profits.

Despite the exceptions to the two-thirds rule, lawyer partners must outnumber non-professional and professional partners registered in other registers.

This majority presence of lawyers is important in terms of governance and the deliberative quorums required for decision-making in the assembly. The structure of the STA must fundamentally reflect the consensus of its lawyer members.

Governance is based on the principle that the governing body must be composed of a majority of lawyer members. The equity partner, therefore, can be part of the governing body as long as a position of primacy is maintained in the hands of the lawyer partners.

In Italy, taxes such as VAT (22%), if applicable, and the National Pension Fund for the Legal Profession (4%) are charged on legal fees.

Recoverability of Taxes Paid by the Client

Clients who pay for legal services may be able to reclaim VAT paid, depending on the circumstances. In many cases, companies and professionals can treat the VAT they incur on expenses, including legal fees, as input tax and offset it against the VAT they collect on their sales. Consumers, on the other hand, are typically not able to reclaim the VAT paid.

In the assignment-of-claim model, where claims are purchased and enforced by a special purpose vehicle (SPV), taxes are charged on the proceeds distributed by the SPV to the noteholder (ie, the funder) only by the country where the noteholder is based.

If the noteholder is not based in Italy, no tax is charged by the Italian government. Withholding tax is also not applied.