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Litigation financing and the prohibition of pacta de quo-ta litis



Under Austrian law, the losing parties in legal proceedings must compensate the prevailing parties for the entire legal costs; in addition to the lawyers’ fees, said costs also comprise court fees which, by international comparison, are quite high in Austria. Hence, each party to a legal dispute bears a significant cost risk. This is why, in the past years the system of litigation financing known from the USA has found its way into Austria, too. In a recent decision, the Austrian Supreme Court set out the prerequisites to be met for litigation financing to be admissible under Austrian law.

Litigation financing means that a litigation funder assumes the funded party’s entire risk related to legal costs in exchange for profit-sharing. If the relevant party prevails in the proceedings, the litigation funder receives a share of the money amount awarded by the court. However, when litigation financing is agreed, the question arises as to whether such financing is subject to the prohibition of pacta de quota litis, which would make it invalid as pursuant to section 879 (2) (2) Austrian Civil Code (Allgemeines Bürgerliches Gesetzbuch, ABGB) and section 16 (1) Austrian Attorneys’ Code (Rechtsanwaltsordnung, RAO) the sharing of profits with one’s legal counsel (i.e. attorneys, tax advisors, auditors, notaries and accountants) is qualified as contra bonos mores. These (not unquestioned) provisions serve two objectives: On the one hand, they are meant to prevent any compromising of the legal counsel’s independence; on the other hand, they are aimed at protecting clients, who are usually inexperienced in legal matters, from a legal counsel using the allegedly uncertain outcome of legal proceedings to their advantage.

In a recent ruling, the Austrian Supreme Court (Oberster Gerichtshof, OGH) declared that the prohibition of pacta de quota litis does not apply to litigation funders if the following prerequisites are met:

  •  The litigation funder does not provide comprehensive legal advice or any other services reserved for being provided exclusively by attorneys but merely evaluates the prospects for the outcome of the proceedings beforehand. 
  • The litigation funder passes the case on to an attorney and does not exercise any further influence on the proceedings so that the client remains in charge of the proceedings at any given time and their best interest always remains the top priority. 
  • The litigation funder’s active customer acquisition does not adversely affect the assessment at hand as it is in conformity with the nature of a profit-oriented enter-prise.
  • The Supreme Court has explicitly left the question of the free choice of an attorney unanswered as it was not the subject of the complaint.

As, in the case decided upon by the OGH, the above prerequisites had been met, the OGH found that the defendant litigation funder did not violate the prohibition of pacta de quota litis and hence also did not obtain an unfair competitive advantage within the meaning of section 1 of the Austrian Unfair Competition Act (Bundesgesetz gegen den unlauteren Wettbewerb, UWG) vis-à-vis the legal profession by way of a breach of law (the litigation proceedings against the litigation funder were conducted by the bar association).