General Permissibility of TPLF

Italian law does not contain any statutory prohibition against third-party litigation funding (TPLF). Therefore, it is generally accepted that litigation funding is, in principle, permissible under Italian law.

This general permissibility has been implicitly confirmed by the Italian legislature in the context of implementation of Directive 2020/1828/EU on representative actions for the protection of the collective interests of consumers (“Representative Actions Directive”). This Directive requires EU member states to introduce specific safeguards regarding litigation funding only insofar as TPLF is permitted under their national legal systems. By incorporating such rules in Law no. 28 of 10 March 2023, which transposed the Directive into Italian law, the Italian legislature implicitly acknowledged that TPLF is generally admissible within the Italian legal framework.

General Permissibility of the Assignment/Purchase of Claims Model

Under Italian law, a litigation funder may also perform its activity through the assignment of claims model, namely by acquiring ownership of the claim (the so-called “res litigiosa”). According to well-established case law of the Italian Supreme Court (among the many cases, see Cass., 10 January 2012, n. 52; Cass., 13 May 2009, n. 11095; Cass., 5 November 2004, n. 21192; Cass., 21 April 1986, n. 2812), the assignment/purchase of a claim for compensation of damages constitutes a perfectly valid and enforceable contract, irrespective of whether the damages claimed are pecuniary or non-pecuniary in nature.

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

Under Italian law, in order for the assignment/purchase of a claim to be effective and enforceable against the defendant, it is sufficient that the defendant be informed of the assignment/purchase by any appropriate means (eg, by registered mail or email).

Conversely, for the assignment/purchase to be effective against third parties (eg, competing assignees/purchasers of the same claim or creditors of the assignor/seller), it is necessary that the assignment/purchase be served to the defendant, either by introducing the proceedings (the so-called “litis contestatio”) or by extrajudicial service carried out by a bailiff.

If claims are assigned to/purchased by a securitisation company “in block” (eg, the claims held by a batch of cartel victims), publication of a notice of the assignment/purchase in the Italian Official Journal is sufficient to render the assignment/purchase effective against both the defendant and any third party.

The effects of such publication are, however, limited to the Italian territory. Therefore, if a claim assigned/purchased in Italy is to be enforced in another jurisdiction (eg, Germany), it may be necessary to serve the defendant of the assignment/purchase by alternative means capable of producing equivalent legal effects under the relevant applicable national law.

Purchase of Claims on a Recurring Basis

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 (Art. 106 of the Italian Banking Act). This activity may also be performed by alternative investment funds (AIFs), directly or indirectly supervised by the Bank of Italy or another EU supervisory authority (Art. 1, lett. k, of the Italian Financial Act and Art. 4, lett. 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 claim contract concluded by a subject not duly authorised, which performs its activity on a professional basis, is null and void. As a consequence, the defendant may successfully challenge the legitimacy of the assignee on the grounds that it did not validly acquire the title to the claim. In addition, purchasing claims on a professional basis without being duly authorised constitutes an illegal activity that exposes the assignee to administrative and criminal sanctions.

Is TPFL on a Professional Basis a Reserved Activity?

Some argue that engaging in litigation funding on a professional (ie, recurring) basis is an activity exclusively reserved for financial intermediaries, AIFs and 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), litigation funding is equivalent to the purchase of a portion 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 those entities (financial intermediaries, AIFs and securitisation companies).

Therefore, even though the Italian Supreme Court has 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.

TPLF of Representative Actions

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 of 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 him/her (Art. 140-septies, par. 8, lett. e, of the Italian Consumer Code, implementing Art. 10 of the Representative Actions Directive);
• 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 the Representative Actions Directive).

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 provides 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 for the funder to share in the share of the award of the lawyer and of the “representative of the class”. However, these shares are too limited, 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 is more attractive to funders in consumer cases too.

Industry Association Codes of Conduct

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 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 Funders Association, provided that such codes are not in contradiction with Italian mandatory rules.

Rules by Arbitral Institutions

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

This disclosure requirement is aimed at safeguarding the fundamental principles of independence and impartiality of arbitrators, since a third-party funder has, by its very nature, a direct economic interest in the outcome of the dispute comparable to that of the parties themselves.

The CAM approach is fully consistent with the position adopted by other leading arbitral institutions at international level, such as the ICC Arbitration Rules (Art. 11) and the HKIAC Administered Arbitration Rules (Art. 44), which require or encourage disclosure of third-party funding arrangements in order to allow arbitrators to assess potential conflicts of interest and ensure the integrity of the arbitral process.

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 Council Directive 93/13/EEC must be considered. In this respect, the LFA must not include any contractual term that, contrary to the requirement of good faith, creates an excessive imbalance between the rights and obligations of the parties to the detriment of the consumer. For example, a contractual term that reserves to the funder the exclusive right to decide whether and on what terms to settle the case 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 upon by the consumer.

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

The Representative Actions Directive 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 an assessment of the remuneration of the funders, and in particular to their share of the award. In implementing the Representative Actions Directive, the Italian legislature excluded the possibility of national courts also verifying the fairness of the settlement and limited the verification to 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, where 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, the fairness 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 receives a contingent payment (ie, “if and when” the claim is successfully enforced), 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 receives an upfront payment (ie, at the time of the assignment and independently of the outcome of the enforcement proceeding), 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 the issue of usury has never been addressed by 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 a 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 interest is due and the borrower may claim restitution of all interest paid (Art. 1815, par. 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, under which 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 whose claim has been assigned (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 prohibiting specific contractual terms in LFAs. In particular, there is no requirement that the funder does not interfere with the most relevant decisions of the case. A “hands-on” or active approach is generally considered to be consistent with Italian law.

There is no general disclosure requirement for TPLF under Italian law. Disclosure of litigation funding is required only for representative actions on behalf of consumers and in arbitration proceedings, where the applicable arbitration rules so require. For obvious reasons, if the funder uses the assignment of claims 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).

Under Italian law, litigation funders are not subject to specific statutory transparency or capital adequacy requirements tailored to litigation funding. Funders operating through corporate vehicles are subject to general corporate and financial regulations, including anti-money laundering obligations and disclosure of ultimate beneficial ownership under Legislative Decree no. 231/2007 and the relevant EU directives, where applicable based on the nature of their activities and regulated status.

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Adverse Costs in Traditional TPLF

Under Italian law, a litigation funder may not be held liable to pay 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, 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 courts on the basis of the tariff depend on several factors, including 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 ordinary civil proceeding, in 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 the 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 funded party, also the costs of the 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 or the effect on stock prices of a fraud, to determine whether a certain product is defective, to assess whether the defective product has caused the harm for which the claimant seeks compensation, or to quantify the pecuniary and/or 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 Art. 49 et seq of Presidential Decree no. 115 of 30 May 2002 and Decree of the Ministry of Justice, no. 132 of 30 May 2002).

Generally, 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 (Art. 1261 of the Italian Civil Code), but also from financing the claim by accepting to be remunerated for the work performed solely if the case turns out to be successful. For judicial matters, Italian lawyers may request an hourly fee or a fixed fee for each activity performed, in accordance with the judicial tariff. In addition to the hourly fee or fixed fee, a “success fee” may be agreed, provided that the lawyer’s remuneration is not made entirely conditional upon the outcome of the case.

There are no restrictions preventing third-party funders from sharing fees with lawyers, provided that such arrangements do not compromise the lawyers’ independence or compliance with professional ethical rules.

Equity Ownership, STAs and the Two-Thirds Rule

Non-lawyers may own shares in a law firm only if the law firm is structured as an STA, which stands for società tra avvocati (ie, a company between lawyers).

STAs are governed by Law no. 247 of 31 December 2012, which establishes that lawyers – or lawyers and other professionals registered in different professional public 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 Cass., United Sections, 19 July 2018, no. 19282).

Exceptions to the Two-Thirds Rule

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.
• Regarding the two-thirds capital requirement, the right to profits can be detached from the percentage of capital; therefore, for example, a non-lawyer partner, may hold a 10% shareholding but an 80% right to profits.

Governance

Notwithstanding the flexibility under the two-thirds rule, lawyers must always remain the majority of partners and maintain control over the governance structure.

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. Consequently, the equity partner can be part of the governing body as long as a position of primacy is maintained in the hands of the lawyer partners.

Under the Italian Code of Ethics (Art. 24), lawyers must maintain independence and avoid conflicts of interest. This includes ensuring that any arrangements with third-party funders or non-lawyer investors do not compromise a lawyer’s professional independence or duty of loyalty to the client.

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