In Spain, third-party litigation funding is not specifically regulated by law, but it is permitted under general civil and commercial legal principles, if the funding agreements adhere to applicable laws, public policy and the professional conduct rules for lawyers. The Spanish Civil Code (Articles 1526 et seq) and Supreme Court case law provide a legal basis for the transfer of credit rights, including those associated with legal claims. This framework is interpreted as allowing third-party funding arrangements within the Spanish legal system.

Spain does not currently have specific legislative or regulatory provisions governing third-party litigation funding. However, it is regulated by general principles of contract law, particularly the Spanish Civil Code and Commercial Code, which apply to private funding agreements. These laws ensure that any funding agreement complies with contractual norms and respects public order and professional conduct requirements.

Future EU Regulation

On 13 September 2022, the European Parliament adopted a resolution calling on the European Commission to present a proposal for a Directive to regulate litigation funding. Among other relevant issues, the future Directive should address:

• the creation of national bodies for the authorisation and supervision of litigation funders;
• the establishment of capital requirements;
• transparency and the prevention of conflicts of interest; and
• a limitation on the remuneration that these entities can obtain.

This initiative could be an important step towards the regulation of an increasingly important industry in the EU legal sector, although the content must be adapted to the reality of the industry.

Consumer Class Actions

Although the transposition process is advanced, Directive 2020/1828 of the European Parliament and of the Council of 25 November 2020 on representative actions for the protection of the collective interests of consumers and repealing Directive 2009/22/EC has not yet been transposed in Spain. There is speculation as to how the Spanish legislation will transpose Article 10 of Directive 2020/1828 on the financing of representative actions to obtain compensatory measures, and whether it will finally include some kind of regulation on such relevant aspects of litigation financing as the obligation to provide the financing contract to the judicial proceedings, or on the remuneration that can be obtained by the financiers.

Codes of Conduct

For lawyers, professional conduct is governed by various ethical standards, including the General Statute of the Spanish Legal Profession, the Code of Ethics of the Spanish Legal Profession and the regulations set by local bar associations. These rules are not designed to regulate third-party litigation funding, but they do apply to lawyers advising clients in relation to third-party litigation funding, covering matters such as:

• legal privilege;
• independence;
• the avoidance of conflicts of interest;
• publicity; and
• relationships with clients, opposing parties and other legal professionals.

At the European level, the European Law Institute (ELI) recently published the Third-Party Litigation Funding Principles (ELI Principles), which provide a voluntary, non-binding ethical framework for third-party litigation funding. Although not legally enforceable, the ELI Principles are an important step towards harmonising practices across European jurisdictions, addressing key areas such as:

• the transparency of funding agreements;
• the independence of the funder and the lawyer; and
• conflicts of interest.

Rules of Arbitration Institutions

In the context of arbitration, institutional rules have started to incorporate provisions related to third-party funding. Notably, the Spanish Court of Arbitration Rules and the Madrid International Arbitration Center Rules require the disclosure of any third-party funding arrangements. These rules enhance transparency by mandating that parties inform arbitrators and other parties about any funding received, including the identity of the third-party funder. Such provisions are designed to avoid any potential conflicts of interest and ensure fairness throughout the arbitration process.

Regarding consumers, the future transposition into Spanish law of Directive 2020/1828 on representative actions for the protection of the collective interests of consumers will surely mark a turning point in class actions in Spain, and this future regulation is expected to regulate the participation of litigation finance funds in such actions.

In the meantime, any contract entered into with consumers (including contracts for the financing of litigation that may be entered into with them) must comply with Spanish consumer protection legislation (in particular the General Law for the Defence of Consumers and Users), which regulates the conditions that a contractual clause must have in order to be declared unfair and the consequences that such unfairness may entail, among other matters.

In Spain, certain terms commonly found in funding agreements in other jurisdictions may face heightened scrutiny or risk being modified or declared unlawful by Spanish courts or tribunals. This is due to the interaction between Spanish civil law principles, public policy considerations and the evolving legal framework surrounding third-party funding.

The main term that may be challenged is the sale of litigation credits, in accordance with Article 1535 of the Spanish Civil Code, which could apply to certain aspects of the industry. Under this article, if a litigated credit is sold to a third party, the debtor has the right to extinguish it by reimbursing the assignee the price paid, as well as the costs and interests.

Another term at risk is excessive control by funders. Clauses that grant funders significant control over litigation strategy, including decisions on settlement, procedural steps or litigation direction, could be contested for infringing the autonomy of the claimant and their legal counsel. Spanish law places a strong emphasis on the independence of both claimants and lawyers in conducting litigation. Provisions that appear to give undue influence to funders could be seen as contrary to professional conduct rules and public policy, potentially making them unenforceable.

Disproportionate profit-sharing is another term that may raise concerns. Agreements with consumers that allocate an excessively large portion of the litigation proceeds to the funder could be contested due to fairness and proportionality issues.

Penalty clauses and termination fees are additional terms that could face challenges. Clauses imposing heavy penalties or excessive termination fees on claimants wishing to exit or modify the funding agreement, or replace the funder, could be considered unenforceable. Spanish contract law prohibits clauses that create an unjust imbalance between parties or impose penalties disproportionate to the actual harm suffered. Such provisions may be struck down as they violate the principles of fairness and good faith.

Broad confidentiality obligations are another area of concern. Confidentiality clauses that are overly restrictive, preventing claimants or their lawyers from disclosing the existence of a funding agreement – even when required by law or court order – could be challenged.

Excessive control over settlement is another term that could be contested. Clauses granting funders the ability to dictate whether the claimant accepts or rejects settlement offers could undermine the claimant’s autonomy and the lawyer’s duty to act in the client’s best interests. Spanish professional conduct rules require lawyers to act in their clients’ best interest, free from external influences. Provisions that allow funders to control settlement decisions could violate these ethical obligations, rendering them unenforceable.

In addition, provisions allowing funders to support multiple claims against the same defendant or engage in funding with competing interests in related proceedings may create conflicts of interest. Spanish courts may closely scrutinise such provisions to identify potential ethical violations or procedural unfairness.

In Spain, there is no automatic obligation to disclose a third-party litigation funding agreement in civil court proceedings, nor is there a specific requirement to disclose it to the opposing party or to the court. Unlike jurisdictions such as England and Wales or the United States, Spain does not have an established practice of document disclosure or inspection. The parties involved in a case may only request the production of documents from the opposing side if these documents are directly relevant to the subject matter of the dispute or constitute essential evidence.

The Spanish courts typically exercise discretion when it comes to ordering document production, and are generally reluctant to compel the disclosure of documents unless such documents are deemed crucial for resolving the case. Based on this general approach, it would be unusual for a Spanish court to order the disclosure of a third-party funding agreement, particularly in the absence of any established judicial precedent on the matter.

However, this position may evolve with the transposition of Directive 2020/1828 on representative actions for the protection of the collective interests of consumers, which could introduce new obligations for transparency in cases involving consumers or collective redress claims. Specifically, courts may be required to review funding arrangements to ensure they are fair and transparent, thus potentially impacting disclosure practices in such cases.

In the context of commercial arbitration, the situation is different: the process is more flexible, and arbitrators generally have broader discretion to order the disclosure or production of documents. To promote transparency and avoid conflicts of interest, some soft-law instruments and institutional arbitration rules in Spain require the disclosure of third-party funding agreements. The Spanish Arbitration Club Code of Good Arbitration Practice, the Arbitration Rules of the Spanish Court of Arbitration and the Madrid International Arbitration Center Arbitration Rules explicitly state that a party that has received third-party funding must inform both the arbitrators and the opposing party about the existence of the funding arrangement and disclose the identity of the funder.

In Spain, there is no established legal framework or case law that holds third-party litigation funders liable for adverse costs. Under Spanish law, only the parties directly involved in the litigation are typically responsible for any adverse costs incurred.

The standard structure of a litigation funding agreement often aligns with the concept of a silent partnership under Spanish law, giving the funder (as the silent partner) significant protection against claims by third parties. According to Article 242 of the Spanish Commercial Code, silent partners are shielded from personal liability for the actions or obligations of the business or litigation, including adverse costs. Consequently, a litigation funder cannot be held liable for adverse costs awarded by the court.

This principle applies irrespective of the terms agreed upon in the funding contract. Even if the agreement specifies that the funder assumes the risk of adverse costs, the doctrine of privity of contract prevails. This means that only the parties to the funding agreement – ie, the claimant and the funder – are bound by its terms. The court cannot compel the funder to pay adverse costs because the funder is not considered a party to the litigation itself.

The adverse costs are generally calculated based on the actual costs incurred by the prevailing party, including legal fees, court costs and other litigation-related expenses. The determination of these costs is not governed by a fixed tariff but is instead subject to judicial discretion. Judges assess reasonable costs based on factors such as the complexity of the case, the time invested by legal professionals and the procedural actions required.

In some cases, courts may calculate adverse costs as a percentage of the claim's value, particularly in larger or more complex cases. However, there is no statutory or uniform percentage applicable across all cases. Courts are guided by the principle of proportionality, which ensures that the awarded costs are reasonable relative to the nature and scope of the dispute. This approach is further informed by non-binding guidelines issued by various Spanish bar associations, which provide recommendations to ensure fairness in cost assessments.

The Spanish Civil Procedure Law does not provide an automatic or explicit mechanism for ordering a claimant or a third party to provide security for the defendant's costs. In particular, the Spanish Civil Procedure Rules lack provisions allowing a defendant to apply for security for costs in civil litigation. Furthermore, the application of interim injunctions – which could potentially be used to secure costs – is typically limited to claimants rather than defendants.

As a result, ordering security for costs is not a standard or generally available option in Spanish civil litigation. Courts are unlikely to require a claimant or a third-party funder to provide such security unless exceptional circumstances warrant it. However, such circumstances are rare under the current procedural framework.

In contrast, the landscape is more flexible in the context of commercial arbitration seated in Spain. The Spanish Arbitration Act grants arbitrators discretion over procedural matters, including the authority to order security for costs. Whether such an order is made depends on various factors, such as the parties' agreement, the applicable institutional arbitration rules and the arbitrator's discretion.

In practice, however, security for costs is not a common or standard procedure in Spanish arbitration. The lack of settled case law or a uniform approach means that decisions are typically made on a case-by-case basis. Although some international arbitrators may assume they have the authority to decide on security for costs, such applications remain rare in Spanish arbitration proceedings.

Given that the Spanish Civil Procedure Rules do not contemplate security for costs, the involvement of a third-party funder generally does not influence the court’s approach in this regard. Third-party funding remains a relatively new concept in Spain, and its effect on procedural issues such as security for costs has been minimal thus far. Courts are unlikely to view the presence of a third-party funder as a justification for deviating from their established practice of not ordering security for costs in civil litigation.

After-the-event (ATE) insurance is legally permitted in Spain, although it has not yet achieved widespread adoption. This type of insurance, which protects claimants from the financial risk of adverse costs in litigation, is available for those who wish to mitigate the potential impact of losing a case. Despite its availability, ATE insurance has not become a standard tool in Spanish litigation, although it is developing in a positive way. One key reason is the relatively moderate risk of adverse costs in the Spanish legal system, which makes such insurance less cost-effective for most claimants.

However, there is growing interest in ATE insurance, particularly in high-value or complex disputes. This trend is especially apparent in areas like international arbitration, portfolio litigation and mass litigation, where the financial stakes and the risk of adverse costs are higher. In addition, as third-party litigation funding becomes more prevalent in Spain, the use of ATE insurance is increasingly being explored as a complementary mechanism to enhance financial security for both funders and claimants in the event of an unfavourable outcome.

In Spain, lawyers have the flexibility to adopt various alternative fee structures instead of the standard hourly billing model. One commonly used structure is fixed fees, where a predetermined amount is agreed upon for the entire case or a specific legal service, regardless of the time and effort involved. This approach is typically applied in cases where the legal work can be clearly defined from the outset, such as drafting contracts or handling straightforward disputes. Fixed fees are especially favoured in transactional or administrative matters where the scope and complexity of the case are predictable.

Another alternative is success fees, which are not as prevalent in Spain as in other jurisdictions but still play a role. Lawyers often combine a fixed or hourly fee with a success fee, which is a pre-agreed fixed amount or a percentage of the recovery (eg, damages awarded or settlement). This structure is designed to incentivise lawyers to achieve favourable outcomes, and is often tied to specific milestones or defined successes rather than simply increasing hourly rates.

Spanish law imposes certain restrictions and requirements on fee arrangements to maintain fairness and ethical standards. One key principle is the prohibition of excessive fees. Lawyers must ensure their fees are reasonable and proportionate to the services provided, avoiding situations that could create an imbalance of power between parties, particularly in cases involving vulnerable or unrepresented clients.

Ethical considerations also play a significant role in shaping fee structures. Lawyers are bound by the ethical standards of the Spanish Bar Association, which require them to maintain independence and prioritise their clients’ best interests. Fee arrangements must not compromise these principles nor create conflicts of interest that could affect the lawyer’s professional judgement.

Finally, transparency and informed consent are essential in any fee arrangement. Lawyers must ensure that clients are fully aware of the terms, conditions and potential financial implications of the chosen fee structure. This is particularly important in cases involving success or contingency fees, as clients must understand their obligations and the possible outcomes of their cases.

In Spain, third-party funders that are not regulated law firms face significant restrictions when it comes to sharing fees with lawyers. These restrictions are set forth in the Code of Ethics of the Spanish Bar Association and are designed to protect the independence of legal professionals and ensure ethical standards are upheld in the practice of law.

According to the Code, lawyers cannot divide or distribute fees with non-lawyers, except in certain prescribed circumstances, such as collaborations between lawyers, or when lawyers work within authorised professional associations. Third-party funders, which are typically non-lawyers, are therefore prohibited from sharing in lawyers' fees.

Although this rule does not have the force of law, it is of paramount importance that lawyers adhere to it, as compliance with the code goes beyond mere professional ethics. Deliberate and repeated non-compliance with these ethical rules may lead to warnings, reprimands and disciplinary sanctions of varying severity, including suspension or expulsion from the respective bar association.

Both the national regulations governing professional companies and the General Statute of the Spanish Legal Profession accept the grouping of professional and capitalist partners for the practice of law.

However, these regulations establish specific requirements for this type of grouping. Firstly, at least the majority of the capital and voting rights, or the majority of the company assets and the number of partners in the case of non-capitalist companies, must belong to professional partners. In addition, the decisions made by the administrative bodies must be made with a majority participation of professional partners.

Although the regulations allow for the existence of non-professional partners, their participation in the company is strictly limited. These partners cannot control the company nor interfere in the practice of the profession. Their participation is subordinate to compliance with the established majority rules, guaranteeing that professional ethics and deontology are not compromised.

In Spain, legal fees are subject to 21% VAT (Value Added Tax) on the total amount payable by clients for legal services. All legal services provided by lawyers are taxed at this standard rate, which applies to the full amount charged for the work performed. This makes VAT a significant consideration for both lawyers and their clients when calculating the total cost of legal services.

Businesses that are VAT-registered have the advantage of being able to reclaim the VAT paid on legal fees, provided the services are related to their taxable activities. This is managed through the input tax mechanism, allowing businesses to offset the VAT they pay on legal services against the VAT they collect from their own customers. This ensures that VAT does not become an additional financial burden for businesses using legal services as part of their operations.

VAT is non-reclaimable for private clients and entities that are not VAT-registered, such as individuals. This means that the tax is added to the total fee, and they bear the full burden of the 21% VAT as an additional cost. This distinction makes legal services relatively more expensive for non-business clients compared to VAT-registered businesses.

The withholding on payments to offshore jurisdictions will depend on the investment structure. Case-by-case analysis is needed.