The Litigation Funding Agreements (Enforceability) Bill has been abandoned following the announcement that the General Election will take place on 4 July 2024. The Bill had passed its first and second reading in the House of Lords and was at the Committee stage when the election was announced. If passed, the Bill would have restored the pre-PACCAR position for litigation funders; allowing funders to once again take a percentage of damages awarded to funded claimants as their return on investment. What form any new Bill will take post-election remains to be seen. In the meantime, litigation funders and funded claimants continue to operate in an uncertain regulatory landscape.
Impact of the Supreme Court decision in PACCAR
Litigation funding is an increasingly prominent feature of disputes in the UK. Industry sources estimate the size of the market in 2023 as being between £1.5bn and £4.5bn.
The Supreme Court's decision in R (PACCAR) v Competition Appeal Tribunal confirmed that litigation funding was subject to the Damages-Based Agreements Regulations 2013 ("DBA Regulations"). This means that litigation funding agreements ("LFAs") which allow for a funder's return on investment to be a percentage of the damages awarded to the claimant (previously the most common model for LFAs) are unenforceable in respect of opt-out proceedings before the Competition Appeals Tribunal ("CAT") and only enforceable for other litigation if the LFAs comply with the strict requirements of the DBA Regulations.
In response to PACCAR, many funders re-negotiated LFAs so that their return is calculated as a multiple of their capital outlay, rather than as a percentage of damages, with the multiple increasing as the litigation progresses. The CAT approved this approach but that decision is subject to appeal to the Court of Appeal, which means there remains uncertainty over the enforceability of LFAs.
Even if enforceable, capital outlay models are not ideal for funders or claimants. They are usually less lucrative for the funder which, in turn, makes it more challenging for claimants to obtain funding. It also creates a risk that the interests of the funder and claimant are not aligned. Meanwhile, the Government voiced concern that PACCAR may reduce the attractiveness of England and Wales as a jurisdiction for commercial litigation and arbitration (the UK legal sector contributes over £34 billion per annum to the UK economy) and impede access to justice for claimants who could not otherwise afford the cost of litigation.
The Litigation Funding Agreements (Enforceability) Bill
The Bill aimed to restore the pre-PACCAR position and was intended to have retrospective effect.
The Government argued this was necessary to prevent successful claimants in closed cases from clawing-back the funders’ share of damages on the basis that it was an unenforceable return on investment under PACCAR. The Government highlighted the risk to future investment, as litigation funders would have less capital to commit to future claims.
This is not a theoretical risk. At least one successful claimant has already sought to challenge its pre-PACCAR LFA on the basis that it is now unenforceable and the funders have no interest in the settlement sum (Therium Litigation Funding A IC v Bugsby Property LLC [2023] EWHC 2627 (Comm)).
However, the retrospective effect of the Bill was not without controversy. Concerns were raised about the possibility that claimants who negotiated new LFAs following PACCAR would be faced with two enforceable LFAs if the retrospective provisions of the Bill came into effect. There has also been a suggestion that the retrospective effect would contravene the government’s obligations under the European Convention on Human Rights. Whether the retrospective provision will be in the new Bill will be a consideration for the next Government.
Continuing uncertainty
The PACCAR saga has put a spotlight on litigation funding. The publicity associated with PACCAR, and other high-profile cases such as the Horizon IT scandal (recently dramatized in the ITV series "Mr Bates vs The Post Office") has highlighted the imbalance between the sums received by claimants and the returns realised by funders. The claimants in the Post Office case received 20% of the £56m award. However, the role of litigation funders in providing access to justice is equally at the fore. Mr Bates himself recently defended litigation funding, stating that it is difficult to see how the case would have gone ahead without it and that, in public interest cases, positive outcomes open the door to additional government compensation.
Funding serves economic interests and access to justice issues. Given the interests at stake, it appears likely that the new government will seek to progress changes which make the use of litigation funding more prevalent in England and Wales. This in turn may prompt an increase in claims, with associated consequences for D&O Insurers.
