Litigation Finance: Legal Framework in Spain (I)

Spain is an attractive market for litigation funders, and proof of this is the growth in competition of the last five years. In fact, an increasing number of funds seek to increase their presence in Spain through satellite offices. Notwithstanding the foregoing, the market is at a point of saturation, fact that does not come as a surprise.

Spain is a very advantageous country for litigation funding because it offers a friendly regulatory framework. Spain is not restricted by the medieval figures of maintenance and champerty, typical figures of common law jurisdictions, and offers a lot of flexibility. Furthermore, art. 1255 of the Civil Code allows the parties involved to establish the agreements that they deem convenient as long as they do not violate the law, morality or the public order; and art. 1535 also of the Civil Code allows the withdrawal from a litigious credit and understands that it exists once the claim has been answered, and not before. This, added to the provisions included on the Commercial Code, creates a very favorable framework for third-party funding in Spain.

Spanish lawyers are subject to the highest ethical and professional standards when advising clients regarding litigation funding, including the Code of Conduct of the Spanish National Bar Association. They must always be careful and avoid any conflict of interest, which could arise when a lawyer also advises a client on the terms of a litigation funding contract from which the lawyer is going to benefit. Having a strategic ally like Stonward would avoid any conflict.

The need for a specific regulation of third-party financing in Spain has often been raised. In our opinion, a specific regulation is not necessary, as it could pervert the nature of this tool in which the parties must have the flexibility to establish the clauses they deem pertinent to each case. Every litigation funding contract would always be subject to the provisions of the Civil Code and the Commercial Code, in addition to other laws that may apply depending on the clauses of the contact. Third party funding must be a tool that the market offers to claimants and defendants, and both parties should be able to adapt it to each case. This has also been defended by numerous Spanish authorities. However, in general terms we do consider that the need to reveal the existence of funding and the identity of the funder could be established in the framework of international arbitration proceedings, in order to preserve the independence and impartiality of the arbitrators and thus avoid any conflict of interest, but not revealing the terms of the financing contract. This has been recommended by the Spanish Arbitration Club in its 2019 revision of its Code of Best Practices in Arbitration.

Any litigation funding agreement must be based on high ethical and professional standards in order to offer the best service, because in this market, reputation is one of the most important elements to take into consideration and professionals must take great care of it. In fact, according to Bloomberg Law’s 2020 Litigation Finance survey, 86% of those who turn to litigation funders do so based on their reputation.

*Ideas taken from the interview in LawyerPress to Carolina Bayo, Senior Director – Head of Legal Assets, and her article published in Expansión.

*Picture by Miguel Ángel García.