Litigation Funding: A New Era?

The PACCAR Judgment 

The Supreme Court of the United Kingdom’s (Supreme Court) ruling in R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents) [2023] UKSC 28 (PACCAR), handed down on 26 July 2023, has been a subject of keen interest in the past six months by both litigation funders and their clients.

By a majority of 4-1, the Supreme Court held that litigation funding agreements (LFAs), which entitle funders to payment based on the amount of damages recovered, would be classified as damages-based agreements (DBAs). LFAs adopting this form of funding structure would therefore have to comply with the regulatory regime in place for DBAs (The Damages-Based Agreements Regulations 2013) or otherwise risk being deemed unenforceable. The practical effect of the ruling was that many LFAs could be unenforceable in their current form. 

Industry Reaction to PACCAR and Subsequent Litigation 

The initial reaction from the PACCAR defendants and some funders was that the decision could threaten the business model of the UK litigation funding industry. The decision opened the door to a potential sea of litigation against funders concerning past and current LFAs. 

Subsequent uncertainties also arose around the ability of funders to rely on severance clauses in existing LFAs to remove offending clauses. In one of the first High Court of Justice judgments to consider the implications of PACCAR, Therium Litigation Funding v Bugsby Property [2023] EWHC 2627 (Comm), Mr. Justice Jacobs considered the issues of severability and enforceability of existing funding arrangements. Therium and Omni Bridgeway had previously funded Bugsby’s £366 million lawsuit against Legal & General Group over the sale of the Olympia Exhibition Centre in London. Following an appeal, the case settled with Bugsby being awarded £27 million. 

In light of PACCAR, Bugsby argued that its LFA with Therium and Omni Bridgeway was unenforceable. The funders, meanwhile, applied to the Supreme Court for a freezing order in aid of arbitration (as the LFA contained provision for the resolution of disputes by arbitration). Under the LFA, the funders were to be paid (i) a sum equivalent to a multiple of the litigation costs paid out, and (ii) an additional sum being 5% of any damages awarded above circa £36 million (the DBA provision). 

Mr. Justice Jacobs held there was a serious question to be tried in respect of the funder’s argument that the DBA provision did not make the whole LFA unenforceable and granted the freezing injunction. It was further held that there was a serious question to be tried in relation to Therium’s alternative argument that any clauses that fell afoul of the DBA requirements could be severed from the remainder of the LFA. Bugsby had argued that that severance was not possible, relying on the Court of Appeal (CA) decision in Diag Human SE & Anor v Volterra Fietta [2023] EWCA Civ 1107—a case involving a Conditional Fee Agreement (CFA) where lawyers charged a success fee (a percentage on top of discounted fees) in the event of success at trial. In that case, it was held that the CFA was unenforceable because it failed to comply with legislation governing CFAs, and the solicitors sought to save their right to payment of the discounted fees by severing the rest of the agreement. The CA held that severance was not possible in that instance because that would have the effect of changing the character of the contract so that it becomes “not the sort of contract that the parties entered into at all.” Since the LFA in this case contained an arbitration clause, ultimately, the question of the extent of the LFA’s enforceability following PACCAR will be determined via confidential arbitration proceedings and will therefore likely not set a precedent on this issue for other cases. However, the decision does give an indication that PACCAR may not be entirely fatal to noncompliant LFAs.

The Government’s Reaction to PACCAR—What Does the Future Hold? 

Following PACCAR, the UK government attempted to deal with the fallout of the Supreme Court decision by making an amendment to the Digital Markets, Competition and Consumers Bill (DMCC Bill). The changes in relation to third-party funding provide that the Competition Act 1998 should be amended so that an LFA would not count as a DBA in the context of “opt-out” collective proceedings orders (CPOs—i.e., collective damages claims brought on behalf of multiple claimants) in the Competition Appeal Tribunal (CAT). At present, the Competition Act 1998 completely prohibits the use of DBAs in “opt-out” CPOs in the CAT. The change would mean “opt-out” mass actions could be funded by third-party litigation funders in competition law claims. In effect, this would allow claimant groups to have access to LFAs when bringing claims for damages for breaches of competition law. It would not address the PACCAR judgment’s categorization of third-party funding agreements as DBAs in any other context beyond opt-out CPOs in the CAT.

The UK justice secretary, Alex Chalk, has recently made statements that the UK government had plans to introduce legislation to undo “the damaging effects” of the Supreme Court’s decision. This pledge comes at a time where the UK headlines are focused on the Post Office/Horizon IT scandal, widely considered to be one of the most significant miscarriages of justice in English legal history, where hundreds of sub-postmasters were prosecuted and convicted of financial misconduct based on information generated by the Post Office’s computing software, Horizon. Alan Bates, the lead claimant for the sub-postmasters, praised the litigation funding sector in his Financial Times piece labelling it an “essential financing tool” for their legal battle and warning that the sector was in “jeopardy” due to the PACCAR ruling. 

Mr. Bates went on to say that the government should fix this urgently and that “all it would take is a minor tweak in the proposed [DMCC Bill] which is currently being reviewed in the House of Lords, to unwind the impacts of the PACCAR judgment.” Lord Sandhurst has been arguing for a wider anti-PACCAR amendment to the DMCC Bill in the House of Lords since December, discussing the matter most recently in a House of Lords Grand Committee debate that took place on 31 January 2024.

The jury is out on whether the government simply focuses on addressing the PACCAR decision and any perceived negative impact of the decision on the litigation funding sector or takes this opportunity to address funding regulation in a wider sense—for example, encompassing the regulation of funders, law firm CFAs, and alternative funding arrangements. The expected timeline for passage of the DMCC Bill could see it coming into force in the spring of 2024.

For the time being, therefore, LFAs will be entered into as if they are DBAs, potentially with the opportunity to renegotiate as and when the law changes. 

K&L Gates regularly assists clients in obtaining litigation funding and is presently representing clients pursuing claims before courts and arbitral tribunals with the support of litigation funding.