Legal finance in the DACH region

Legal finance remains a relatively nascent but increasingly important industry in Germany, Austria and Switzerland (referred to as the DACH region). While local courts have yet to rule on all aspects of legal finance, case law and legislation are generally and increasingly favorable.  

Legal finance was originally introduced in the region to bridge the gap between security-based credit facilities provided by banks and the desire of law firms and their clients to access risk-sharing solutions, given that conditional fee arrangements were (and mostly still are) prohibited. These were largely limited to single case financing for impecunious clients. In recent years, more sophisticated legal finance providers have entered the market and now offer a range of more tailored legal finance solutions for top law firms and Mittlestand companies.

There are very few specific rules regarding the practice of legal finance in the DACH region:

• Austria: The Supreme Court approved the use of legal finance in a 2013 decision¹ following precedents from the Vienna Commercial Court. Litigants also have no obligation to disclose the involvement of a legal finance provider or the details of any funding agreements.
  

• Germany: Legal finance is largely unregulated in Germany because legal finance providers do not qualify as banks or insurers, and there are no designated rules for the industry. Legal finance agreements are confidential as a matter of principle and are not disclosed to the opponent unless a party deems that it is advantageous to do so, for example in settlement negotiations.
  

• Switzerland: The legality of legal finance in Switzerland was clarified by the Swiss Federal Court in 2004.² The court ruled that freedom of contract rules applied to legal finance agreements. Under Swiss civil procedural law, parties can seek disclosure and the production of documents only if the information is directly relevant to the outcome of the case. But generally, respondents are not permitted to conduct a fishing expedition into the opposing party’s finances.
  
  

Legal finance in the DACH region has progressed significantly over the last couple of decades. It continues to be used frequently in situations where there is economic asymmetry between parties, but there are signs that this will become the exception, rather than the norm.

This is because there is an increasing uptake in the use of legal finance by Global 100 law firms and blue-chip companies that, far from being in distress, recognize the inherent cash flow and liquidity benefits of shifting risk and cost of disputes to a third party.

Businesses are increasingly working with legal finance providers to advance or “monetize” their litigation recoveries. Often the desire to monetize pending claims and awards arises at the end of the fiscal year and allows claimants to immediately secure financial benefit without delay and improve cash flows for their businesses.

Legal finance has also been commonly used in the Austria and Germany for the financing of collective actions in public interest class actions against the likes of Volkswagen, the trucks cartel, General Information Services Inc. (GIS) and financial services provider AWD. Recent case law in Germany has affirmed the permissibility of an assignment model in which a third-party special purpose vehicle (SPV) is used to bundle claimants’ damages together. This model has become a popular mechanism through which collective redress claims can be funded by a legal finance provider.

A number of German sawmill owners had antitrust claims totalling hundreds of millions of Euros collectively that would have been prohibitively expensive to bring individually.

Burford worked with an international law firm to identify, structure and fund appropriate vehicles (wholly owned by Burford) to aggregate and bring the claims collectively. Burford provided funding to withstand root and branch challenges to the claims, continuing to support the project in the face of adverse rulings by the Federal Court of Justice (regarding the underlying cartel decision) and the lower courts (regarding certain forms of collective redress). At the same time, Burford worked with the stakeholders to identify and execute a contingency plan should the adverse rulings be upheld on appeal.

Working closely with the law firm, Burford was able to help in successfully resisting the challenges by the defendants, with several supportive appellate decisions in favor of collective redress and the use of assignment models in 2021 and 2022.  As a result, the claims will now be decided on their merits.

^{1 OGH, 6 Ob 224/12b.
2 Bundesgericht, Dec. 10, 2004, 2P 4/2004}