Litigation Funding is fast-growing in Italy. According to one of the most experienced Litigation funders operating across several jurisdictions including Italy, [1] the investment potential is equal to ~EUR 185 million and it is estimated to reach 325 million in 2027. Currently, the most relevant cases in Italy involve antitrust litigation, international arbitration, commercial litigation, and intellectual property disputes. In the future, those related to climate change and sustainability are also expected to increase significantly.

Due to the development of the practice, Italian Courts have started to issue the first decisions concerning the formal requirements that litigation funders are requested to meet under Italian law to enter a credit assignment transaction with the litigant. In this regard, the Italian Supreme Court took its view in the context of disputes arising from claims brought by the passenger against an operating air carrier under Article 7 of Regulation (EC) no 261/2004.

The Cases

By decisions no 4427 on 20 February 2024 [2], no 7375 on 19 March 2024 [3], no 7635 on 21 March 2024 [4]], and,more recently, no 13749 on 17 May 2024 [5], the Italian Supreme Court ruled on cases in connection with the validity of the credit assignment transactions entered between the passengers and the funder.

After purchasing the claim from the passenger, the funder sued the operating air carrier before the Court of first instance to obtain compensation of the credit assigned. In submitting its statement of appearance, the operating air carrier objected the validity of the credit assignment transaction entered between the passenger and the funder. The operating air carrier argued that the transaction was null and void since the funder should have enrolled in the special “Register of Financial Intermediaries” mentioned in Article 106 of the Consolidated Law on Banking, according to which the activity of granting financing in any form whatsoever is reserved to authorised financial intermediaries, which are required to register in a special register kept by the Bank of Italy.

In all the three cases, the Court of first instance rejected the claims on the basis that the assignment credit transactions were found to be entered in violation of Article 106 of the Consolidated Law on Banking. The funder appealed the first instance judgments before the Court of second instance, which reformed the first instance judgments and ordered the operating air carrier to compensate the damages originally suffered by the passengers.

The operating air carrier then challenged the second instance judgment before the Italian Supreme Courts. In the plaintiff’s view, the credit assignment transaction entered between the funder and the operating air carrier was to be null and void as it did not meet the requirements set out in Article 106 of the Consolidated Law on Banking. Assuming the financial nature of the credit assignment transaction, the funder was therefore requested to enroll in the special register.

The decisions of the Italian Supreme Court

The Italian Supreme Court rejected the plaintiff’s objection based on the following arguments:

• Article 106, para 1, of the Consolidated Law on Banking provides that the activity of granting financing vis-à-vis the public is reserved to authorised financial intermediaries, which are required to enroll in the special register kept by the Bank of Italy.
• Article 2, para 1, of the Ministerial Decree 2 April 2015, no 53 further clarifies that the lending activity includes any type of financing provided in the form of purchase of credit for consideration.
• The assignment of credit does not constitute an autonomous contractual type, and its cause can vary on a case-by-case basis, depending on the specific function that the contract aims to achieve (financing, sale, donation, guarantee an existing obligation).
• Therefore, an assignment of credit transaction will fall under the scope of Article 106 of the Consolidated Law on Banking if the provisions of the contract make clear that the cause is financing. In other words, it is necessary that under the contract the assignee is obliged to anticipate immediately the money or other benefit.
• In contrast, the cause is not financing if the contract provides that money will be paid only later and under condition that the claim will be successfully enforced.

In the present cases, the Supreme Court analysed the clauses contained in the assignment of credit transaction entered between the funder and the passenger and found that the cause of the contracts had no financial nature, based on the facts that the price agreed for the purchase of the claim to compensation would be paid only at a later stage on the assumption that the claim would be successfully enforced by the plaintiff, with no immediate benefit for the passenger.

Based on the above arguments, the Italian Supreme Court upheld the second instance judgments, thus confirming the validity of the credit assignment transactions and the inapplicability of Article 106 of the Consolidated Law on Banking to the cases.

Conclusion

The Italian Supreme Court decisions clearly paved the way to the development of third-party Litigation Funding in Italy as they finally shed light on a sensitive issue that raised interest among Italian legal practitioners in recent years, providing valuable insights on the absence of formal requirements for a litigation funding agreement to be validly entered under Italian law.

The Court decisions show the growing attention of Litigation Funding in Italy. Other Italian institutions have also made efforts in the attempt to develop Litigation Funding in Italy by introducing specific provisions to ensure transparency. In this respect, the Arbitration Rules applied by the Milan Chamber of Arbitration from 1 March 2023, included a specific section dedicated to Litigation Funding to assure that the party funded by a third party in relation to the proceedings and its outcome disclose to the arbitral tribunal the existence of the funding and the identity of the funder. [6]

Similarly, in 2023 the Italian legislator amended Legislative Decree 6 September 2005, no 206 (Consumer Code) by introducing a new set of rules in connection with third-party funding of class actions with the aim to balance transparency, fairness, access to justice, and address the ethical and legal concerns associated with third party litigation funding such as the influence of funders on legal strategies and the risk of conflicts of interest. In this respect, Articles 140-quinquies, para 2), of the Consumer Code provide that consumer associations entitled to bring class actions will have to comply with the following obligations: (i) to provide in their bylaws, among others, “appropriate measures to prevent and resolve conflicts of interest that may arise between the association, its funders and consumer interests”; (ii) to disclose on their website, “information on their sources of funding”; (iii) to indicate in the application to be filed with the Court any information concerning “the funding of the action brought, received or promised by third parties”.

Additionally, Article 140-septies of the Consumer Code provides that the application will be inadmissible “when the action is brought in a conflict of interest, if it appears that the person who financed the action is a competitor of the defendant or is dependent on the defendant”.

[1] See the article titled Lo studio di Deminor/ Il litigation funding avanza in Italia (https://ntplusdiritto.ilsole24ore.com/art/lo-studio-deminor-litigation-funding-avanza-italia-AFuoh1cB, last seen on July 23, 2024).

[2] Court of Cassation, 20 February 2024, no 4427 (https://www.italgiure.giustizia.it/xway/application/nif/clean/hc.dll?verbo=attach&db=snciv&id=./20240220/snciv@s30@a2024@n04427@tO.clean.pdf, last seen on July 12, 2024).

[3] Court of Cassation, 19 March 2024, no 7375 (https://www.italgiure.giustizia.it/xway/application/nif/clean/hc.dll?verbo=attach&db=snciv&id=./20240319/snciv@s30@a2024@n07375@tO.clean.pdf, last seen on July 12, 2024).

[4] Court of Cassation, 21 March 2024, no 7635 (https://www.italgiure.giustizia.it/xway/application/nif/clean/hc.dll?verbo=attach&db=snciv&id=./20240321/snciv@s30@a2024@n07635@tO.clean.pdf, last seen on July 12, 2024).

[5] Court of Cassation, 17 May 2024, no 13749 (https://www.italgiure.giustizia.it/xway/application/nif/clean/hc.dll?verbo=attach&db=snciv&id=./20240517/snciv@sU0@a2024@n13749@tD.clean.pdf, last seen on July 12, 2024).

[[6]] https://www.camera-arbitrale.it/upload/documenti/arbitrato/CAM%20arb%20rules%202023.pdf (last seen, July 23, 2024).

Giulio Marconcin contributed to this article