Litigation Funding and Success Fees: A Risky Combination

In an earlier post, I had said that the regulatory environment for litigation funding in Germany is pretty straight forward. However, success fees remain by and large illegal in this country, a certain liberalization in 2008 not withstanding. Which makes for a potentially dangerous combination. A recent judgment (paywalled) by the Court of Appeals (Oberlandesgericht) Munich dealt with the intersection of litigation funding on the one hand and success fees on the other hand.

From the facts of the judgment, it appears the partners in the law firm handling matters funded by a litigation funder were, at the same time, silent partners (stille Gesellschafter) of the litigation funder. As a result, the lawyers benefited, albeit indirectly, from the success-based remuneration of the litigation funder and hence from the success of the matters they were handling in their professional capacity as lawyers.

The Court of Appeals Munich held that this was a circumvention of the law, and hence a violation of Sec. 49b BRAO (Federal Lawyers’ Act), which prohibits a success fee or quota litis. The court was not persuaded by the argument that the silent partnership had been set up in a fashion that did not give the lawyers as silent partners any say in the running of the litigation funder’s business. As a result, in the specific circumstances of the Munich case, the entire funding agreements were found to be void (Sec. 134 German Civil Code), as they violated a statutory provision, namely the prohibition of success fees.

So even if the litigation funding agreement as such under German law is pretty straight forward contractually, it remains extremely difficult, and most likely illegal under German law, to implement success fee arrangements for lawyers that are customary in other jurisdictions, and that are sometimes found in complex funding arrangements.

Briefly on success fees under German law: A ruling of the Federal Constitutional Court (Bundesverfassungsgericht) in 2006 had found it to be unconstitutional to outlaw success fees entirely. In 2008, the law thus was changed and a very narrowly worded exemption implemented in Sec. 4a RVG. In essence, this exemption is based on an access to justice argument: The lawyer would need to document that his or her client would, in the absence of a success fee arrangement, unable to bring the action, for the success fee to be legal. The availability of third party litigation funding may, ironically, rule that out.

 

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