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Litigation funding in Austria

 

Introduction

In recent years litigation funding has also evolved as an independent business sector in Austria.

The phenomenon of private litigation funding companies which finance their client's proceedings in return for a previously negotiated quota of the amount in dispute, developed as a repercussion of many private investors suffering losses due to the crisis of capital markets in the past years.

Two main factors made this new business sector commercially viable: First, aggrieved parties are often deterred by relatively high procedural costs to commence proceedings. Such costs include both court fees as well as lawyer's fees. Thus, financially less potential parties regularly shy away from commencing proceedings in order to reimburse their losses. Second, expectations of an aggrieved party to succeed in proceedings sometimes may be rather low. Litigation funding companies, however, may have an interest to finance such proceedings nevertheless. This is because such companies often finance a bundle of related claims. For that purpose a competent institution with legal standing– for example, the Association for Consumer Information ("Verein für Konsumenteninfor-mation") – brings a bundle of assigned claims before a court. For litigation funding companies, it is only relevant that the final balance results in a profit for the company. Therefore, some scholars also advocate that litigation-funding considerably contribute to the enforcement of the rule of law.

Admissibility of Litigation Funding under Austrian Law

Since the first litigation funding companies established their business in Austria, scholarly writing discussed the legality of such financing models.

The main issue discussed by a series of papers was the possible violation of Section 879(2)(2) Austrian Civil Code (ACC) by litigation funding agreements. Section 879(2)(2) ACC prohibits a party to promise to hand over to its legal representative a certain part of the (future) amount awarded by a court (Verbot der quota litis). The original wording of Section 879(2)(2) ACC, however, does not use the term legal representative. In fact, it refers to the antiquated term "legal friend" (Rechtsfreund), and may thus be interpreted in a much broader sense, including litigation funding companies.

The purpose behind the prohibition of quota litis is to save a client from being outsmarted by the attorney's edge of knowledge in regard to the possible outcome of a future proceeding.

Before litigation funding companies evolved in Austria, the notion "legal friend" was solely applied on attorneys at law. In 2002 the Austrian Supreme Court further argued that depending on how regular and intense the business relationship between a litigation fun-der and an attorney at law is organized, such a litigation funding construction could also be unlawful.

In a subsequent decision, the Supreme Court applied Section 879(2)(2) ACC to notaries, tax advisers and auditors as well. To the contrary, the question whether Section 879(2)(2) must also be applied to litigation funders remained an open issue until now.

Section 879(2)(2) ACC and Litigation Funding: The Austrian Supreme Court's view

In a rather recent decision (Austrian Supreme Court, 27 February 2013, docket no. 6 Ob 224/12b) the Austrian Supreme Court finally clarified that the agreement between an Austrian consumer organization, to which consumers assign their damage claims, and a litigation funding company is valid under Austrian law.

Hence, after years of uncertainty in regard to the legal admissibility of litigation funding under Austrian law, it is now clear that such financing models are permitted.