Prescriptive regulation of the litigation funding industry could curtail access to justice, the European Law Institute (ELI) has warned in a new report.

The study, Principles Governing the Third-Party Funding of Litigation, maintains that regulation “should either be to address an identifiable – and fixable – problem or to ensure consistency of best practice”, and therefore a light-touch approach is most appropriate.

Published earlier this month, the report is co-authored by a former head of London’s Commercial Court, High Court judge Dame Sarah Cockerill, and Professor Susanne Augenhofer, of Innsbruck University and a visiting professor at Yale Law School.

It is intended to constitute a “blueprint for guidance, decisions or light-touch regulation” of litigation funding internationally.

Noting the European Parliament’s call in September last year for the European Commission to introduce a directive regulating third-party litigation funding, it warns that prescriptive regulation “may well lead to funders ceasing to offer funding in the regulated territory – with consequent impact on access to justice issues”.

As well as being influential within the EU, the report is also likely to inform the ongoing Civil Justice Council (CJC) review into litigation funding in England and Wales, given that Cockerill is a member of a six-person working group currently reviewing funding amid calls by some legislators for it to be more tightly regulated.

The ELI report is the product of more than two years of investigative work to develop principles and guidance for litigation funders independent of claimant and defendant interests.

“It [funding] has to offer a return to funders, or it will not be offered,” the report argues.

The report adds that the commercial nature of funding is both a logical and practical disincentive to abusive litigation as it can help weed out unmeritorious claims, saying “almost inevitably, a funder’s due diligence process involves a merits review. The evidence suggests this is effective as a check to unmeritorious litigation”.

In a statement, the report’s authors said they had produced “something which… has looked to how, in practical terms, safeguards can be put in place without stifling the beneficial use of funding”.

The report is generally positive towards funding, arguing that funders play a vital role in facilitating access to justice in many jurisdictions thanks to class actions, where there may be many individual claimants, each with relatively small claims, on one side and a well-resourced defendant on the other.

However, it also outlines a set of principles designed to ensure the funding market benefits all.

These include suggested minimum content for funding agreements and sample wording for specific issues, such as promotion and marketing, transparency to all sides including courts, conflicts of interest, and capital adequacy.

It also addresses case management issues in general and offers specific advice on how litigation funding should apply to consumer litigation, arbitration and insolvency proceedings.

The report’s conclusions on regulation have been endorsed by the International Legal Finance Association. Its chair, Neil Purslow, said it “recognises that commercial legal finance increases access to justice for European businesses and consumers and provides vital improvement in access to justice when made available”.

Meanwhile, an interim report by the CJC review into litigation, which was scheduled for the summer, is expected imminently.

The review, which is due to report next summer, will inform the government’s approach to the regulation of litigation funding, which was thrown into uncertainty by the Supreme Court’s PACCAR ruling in 2023, which was considered to have rendered thousands of litigation funding agreements unenforceable by determining that they were damages-based agreements (DBAs).

Fast-tracked legislation to reverse the impact of PACCAR foundered before the UK general election in July and has not been revived.

Pending future legislation, disputes concerning the enforceability of funding agreements are expected to feature in ongoing proceedings. At the same time, funders have developed alternative structures and return formulae to ensure compliance with existing laws.

The CJC is reviewing the possibility of statutory caps on returns from funded cases, as well as regulation and judicial case management.

The report coincides with the start of a litigation funding-financed multi-billion-pound claim in the High Court brought by Goodhead’s against BHP on behalf of hundreds of thousands of alleged victims of a Brazilian environmental disaster.

The litigation over a burst tailings dam in 2015 is the largest class action lawsuit in English legal history and saw extensive preliminary litigation before finally being allowed to proceed by the UK Supreme Court in 2023. A separate hearing on damages is listed for 2026, absent a possible settlement.