The penalty system for conflicts of interest in third-party litigation funding

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Publié le 09/09/2025 par Jérôme Goy

INSURANCE LAW

On April 30, 2025, France adopted a law (2), which for the first time regulates third-party litigation funding (currently limited to class actions, though without prohibiting funding in other types of disputes). This legislative framework is accompanied by procedural rules, in particular with respect to conflicts of interest, which are sanctioned through the inadmissibility regime.

Article 16 I.-D. of the DDADUE Act, although it authorizes third-party litigation funding, nevertheless requires that the third-party funder should not interfere in the litigation in such a way as to create a conflict of interest that would harm the interests of the persons represented (to quote the text: ‘provided that such financing does not have the purpose or effect of enabling such third parties to exert influence over the initiation or conduct of class actions that could harm the interests of the persons represented’).

It is also the responsibility of the claimant to ensure that the persons represented are not in a conflict of interest situation (Article 16 I.-E of the DDADUE Act), in which case the judge will sanction such conflict of interest (“In the event of a dispute over compliance with the obligation set out in the first paragraph of this E by the claimant in a class action for damages, the judge may order the latter to produce documents proving the absence of a conflict of interest.”).

But what happens in practice in the event of a conflict of interest? In the absence of an implementing decree at this stage, a circular dated 1 August 2025 clarifies the rules on penalties for conflicts of interest in relation to third-party litigation funding.

It should be noted that this circular – like all other circulars – has no normative value, but rather an internal educational value within the administration to instruct its subordinates on how to apply certain legislative or regulatory provisions. However, in light of a recent legislative adoption, this circular is welcome for the practical implementation of third-party litigation funding in class actions.

The circular of 1 August 2025 states that in the event of an established conflict of interest, the judge will declare the class action inadmissible pursuant to Articles 122 et seq. of the French Code of Civil Procedure (FCCP). This sanction, which is a dismissal, entails a refusal to ‘approve any agreement between the parties’ (Article 16 I.-E of the DDADUE Act).

This sanction for conflict of interest therefore follows the standard rules for inadmissibility, meaning that it may be:

• raised in any case (Article 123 FCCP);
• raised ex officio by the judge (Article 120 FCCP) – the circular emphasises that this is possible but not mandatory;
• regularised (Article 126 FCCP);
• upheld without the need to demonstrate prejudice (Article 124 FCCP).

Furthermore, it is possible for the parties to raise a plea of inadmissibility, in which case, if contested, the judge may ask the claimant to produce documents proving the absence of a conflict of interest.

Inadmissibility is not the only sanction in the event of conflicts of interest; it is accompanied by a refusal to approve an agreement between the parties, thus targeting amicable dispute resolution procedures, for example in the context of arbitration. This sanction has serious consequences: given the large number of investment funds specializing in litigation financing, arbitration is common practice for major and often international disputes.

This raises the question: how will the judge assess the degree of third-party involvement in the financing of a dispute? The DDADUE Act specifies that third-party financing must be disclosed (although the terms and conditions for this are currently unknown, pending an implementing decree), but on what basis will the judge assess the conflict of interest?

This is all the more difficult to imagine given that it is hard to envisage a conflict of interest with the third-party funder, since the latter is, in a sense, betting on the outcome of a lawsuit (in the practice of litigation funding and not class actions) to obtain a percentage in the event of victory. It is therefore in the funder’s best interest that the lawsuit proceed smoothly, and the major risk is that the funder may become too invested in the lawsuit, when its role is simply to finance it. The economic interest of the third-party funder is therefore aligned with the legal interest of the funded party.

However, this interference is all the more difficult to assess given that litigation funding practices may vary depending on the parties’ choices. Foreign contracts distinguish between active funding contracts and passive or pure funding contracts:

• In pure or passive funding contracts, the third party merely finances the proceedings;
• In active funding contracts, third parties finance and control the proceedings.

This is why the French judge’s refusal to approve the contract proves complex, since in other legal systems, the third-party financier plays a more or less important role. In this case, how can we assess the interference, which is a potential breeding ground for conflicts of interest?

Finally, if this new regime applies only to litigation financing covered by the law, i.e. that related to class actions, will judges not be tempted to apply the same conflict-of-interest control regime to cases of ‘common law’ litigation financing, i.e. all other cases? It would not be the first time that a law covering a specific area has been extended by the judge’s discretion…

This circular of 1 August 2025, which seeks to clarify the application of the new legislation on third-party funding (the DDADUE Act, transposing Directive (EU) 2020/1828), is indeed an innovation but also reflects different approaches to third-party litigation funding. While the European Union tends to focus on avoiding conflicts of interest in third-party funding and on harmonizing national laws, other jurisdictions, such as the United Kingdom, had already admitted this practice and considered that litigation funding is compatible with the interests of justice.

However, ethical considerations remain a central concern, and the issue of conflicts of interest is intrinsically linked to them. If France has chosen to address the problem through a procedural sanctions regime, whereas other countries, such as the United States, rely more on ethical rules developed and applied by lawyers to regulate these conflicts.