Supreme Court ruling throws litigation funding into disarray

Guest post from Lucy Keane, counsel at City firm Signature Litigation

Keane: Access to justice under threat

Third-party litigation funding in the UK has been thrown into a state of uncertainty following the surprise decision of the UK Supreme Court on 26 July 2023 that litigation funding agreements (LFAs) that take the form of damages-based agreements (DBAs) are unenforceable if they do not comply with the relevant regulatory framework.

The appeal in the case of R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal and others [2023] UKSC 28 concerned an application to bring collective proceedings for breaches of competition law under section 49B of the Competition Act 1998.

Two of the respondents had obtained funding in Competition Appeal Tribunal (CAT) opt-out proceedings from third-party litigation funders and LFAs had been entered into under which the funder’s maximum remuneration had been calculated with reference to a percentage of the damages ultimately recovered in the litigation.

The appellants maintained that these LFAs constituted DBAs under the relevant legislation and that the DBAs were unenforceable because they did not comply with certain formality requirements.

In the leading judgment„ Lord Sales concluded that. the LFAs were properly to be construed as DBAs under the relevant legislative framework. In the circumstances, they were unlawful and unenforceable.

The significance of the decision was not lost on the court, which observed that participants in the third-party litigation funding market may have assumed that this form of LFA, which assigns a passive role to the funders in relation to the conduct of the litigation, did not constitute a DBA. The court acknowledged that “the implications of the issue in the appeal are significant”.

There is no doubt that this is right, not just in relation to opt-out cases before the CAT. It is feared that most, if not all, LFAs agreed since litigation funding began could be invalidated. The consequences for those already involved in cases could be catastrophic.

Reaction from funders has been mixed. Many in the funding industry have expressed frustration and disappointment at the decision. Having said that, most funders will not be deterred and many will be looking at the form of their funding agreements to see how best to restructure them to comply with the relevant regulations.

The economics of funding have not changed and, with careful legal input, it is widely believed that funding agreements can, and will, live to fight another day.

There is obvious anxiety that funds already advanced may well be lost if the funding agreement is unenforceable. There is no doubt that the impact of the decision will be felt most in funding arrangements where the funder’s interest or return is calculated as a percentage of the award made to the funded party.

While those practising in international arbitration initially expressed concern, the reaction has become more muted, with a belief that there is definite scope for restructuring of agreements to, for example, take the funding agreement out of the scope of English law. Funding arrangements in international arbitrations seated out of the UK would seem to be unaffected.

But, like other aspects of the fallout from the decision, much remains to be seen.

Some funders, such as Litigation Capital Management, are optimistic as their funding contracts, which are structured so that the return is calculated as a rising multiple of invested capital over time, will survive. Such arrangements seem to be unaffected by the judgment.

However, it only takes one defendant to argue that these arrangements are also DBAs to cause more uncertainty in the market.

There have already been calls from some funders for clarity from the government now that funding of opt-out cases before the CAT has been torpedoed. The costs of opt-out competition claims can run into many millions of pounds and small businesses and consumers are now on the back foot when it comes to pursuing these claims – PACCAR involved more than 18,000 claimants and was worth in excess of £2bn.

The Supreme Court decision puts public access to justice, already vastly under-funded, under threat. Simply looked at in the context of the CAT proceedings, there is concern that the decision will allow well-funded multinationals to gain an unfair advantage over small businesses and consumers.

Although reaction from funders has been mixed, there is no doubt that many will have to review and re-think their funding agreements and business models if third-party funding is to remain a viable option in the UK.

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