The Litigation Funding Agreements (Enforceability) Bill was introduced to Parliament this week, following the UK government’s announcement earlier this month that it would introduce legislation that would reverse the outcome of the UK Supreme Court’s recent decision in R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal and others.[1]
In PACCAR, a part of the well-known “Trucks” litigation in the Competition Appeal Tribunal (CAT), the Supreme Court held that litigation funding agreements (LFAs) that entitle funders to be paid a portion of any damages recovered (as opposed to a multiple of the investment made by the litigation funder) are “damages-based agreements” (DBAs), as defined in the Courts and Legal Services Act, and were therefore unenforceable unless they complied with the relevant regulatory regime (DBA Regulations 2013).
The ruling in PACCAR was set to have significant ramifications for litigation funders, claimants and claimant law firms in the UK which rely on third-party funding, potentially threatening the financial viability of swathes of the litigation funding industry. Typically, LFAs have been structured as the greater of a multiple of monies invested by the funder and a percentage of damages recovered. This percentage element is important, as it allows funders an upside if the case settles early (when a case settles relatively early, the multiple of monies invested by the funder would likely be low), and the possibility of a large return. It is also important because litigation funding is an unusual asset class – if a case is unsuccessful, the funder can lose its entire investment, so the recovery from successful cases needs to be large enough to offset the losses on others. This is why the ruling in PACCAR threatened the financial viability of the funding industry. If funders cannot break even across cases that win and lose, their business model may not be sustainable (and therefore the critical role they fill in access to justice may not continue). Indeed, and as noted in this previous blog post, some cases currently before the CAT have already seen the frantic renegotiation and revision of existing funding agreements impacted by the ruling in PACCAR to ensure they comply with the DBA Regulations 2013, and defendants have been challenging the enforceability of such funding agreements.
For a fuller discussion of the Supreme Court’s decision, see our previous article here.
However, if passed, this new law (which renders unnecessary the legislative amendment tabled by the UK government in November 2023 in response to the decision in PACCAR to the Digital Markets, Competition and Consumers Bill to allow the use of DBAs with litigation funders in opt-out collective proceedings in the CAT, discussed further in this blog post) alters the playing field yet again, this time entirely restoring the position that existed before the PACCAR decision. In essence, the Bill amends s 58AA of the Courts and Legal Services Act (i.e. the definition of DBAs) to insert a provision that “an agreement is not a damages-based agreement if or to the extent that it is a litigation funding agreement”. A litigation funding agreement is then further defined as, in essence, an agreement whereby a person providing claims management services is funding the whole or part of a person’s legal fees or adverse costs orders in return for a specified payment from that person. Importantly, the amendment is to have retrospective effect, and thus would bring an end to the various challenges to the enforceability of funding agreements, referred to above.
The new Bill has the principle of access to justice at its core. On 4 March, Lord Chancellor, Alex Chalk KC, said “It’s crucial victims can access justice – but it can feel like a David and Goliath battle when they’re facing powerful corporations with deep pockets”, “This important change will mean more victims can secure vital third party funding to level the playing field and support their fight for justice”.
Indeed, the announcement on 4 March also stated that the change will further bolster the UK’s thriving £34 billion legal services sector. As noted above, LFAs are often in practice a requirement for the effective pursuit of group and representative litigation. As such cases are rarely economical for individual claimants to fund themselves due to the individually small, but collectively large, damages that are usually claimed in such proceedings (and the prohibitively large legal costs associated with bringing such proceedings), such cases rely on litigation funding to bring and maintain the claim.
The 4 March announcement also noted that the government is considering options for a wider review of the litigation funding sector, including potentially considering whether there is a need for further regulations and safeguards for claimants. This will likely be welcome to claimants looking to bring claims with the help of litigation funding, as well as to defendants seeking certainty about their options when faced with such claims. Whether there is time, however, for this proposed legislation to be passed before the impending General Election remains to be seen.
[1] [2023] UKSC 28
