The High Court has rejected the first bid to use the Supreme Court’s PACCAR ruling by a company looking to invalidate a litigation funding agreement (LFA) it had signed up to.
Mr Justice Jacobs said there was a serious issue to be tried over whether Therium Litigation Funding’s LFA survived PACCAR and so he granted it an injunction to preserve the proceeds of the case which it backed pending an arbitration over the issue.
This included the £7m that has already been released to Bugsby Property by its solicitors, Candey, on top of the £20.6m the London law firm continues to hold on trust.
The judge found that there also a serious issue to be tried on whether the offending part of the LFA could be severed.
In July, the Supreme Court held that LFAs were damages-based agreements (DBAs) and unenforceable if they failed to meet the formal requirements for DBAs, as most LFAs at the time did.
The application in the Bugsby case was made pursuant to section 44 of the Arbitration Act 1996 as the LFA required that disputes over it were referred to arbitration.
Jacobs J heard it together with the return date of an injunction obtained by another funder that had backed the claim, Omni Bridgeway. But Bugsby accepted that certain of Omni’s arguments did raise a serious issue to be tried and gave undertakings that preserved £13m of the funds in question.
Bugsby’s former solicitors, Stewarts Law, have also issued an application for a similar order, but on a different basis, the judge noted. It claims to be owed £2m.
Bugsby won its High Court claim against two entities in the Legal & General Group. “Therium’s evidence… describes how Bugsby was dissatisfied with the level of damages it had obtained,” Jacobs J recounted.
“The damages were insufficient to afford Bugsby any return on the litigation, since the damages would be exhausted by payments due to the funders, its former solicitors and its insurers.”
It compromised the appeal, leading to a payment of approaching £27.6m into Candey’s client account. Therium argued that, under the LFA, the money should be held on trust for the funders pending completion of the contractual mechanism distributing the proceeds.
Last month, Candey transferred £7m to Bugsby and, on 2 October, indicated to the funders that it anticipated instructions to transfer the rest of the money.
But in the 24 hours’ notice Candey gave, Omni made an urgent without-notice application for a proprietary injunction, which Mr Justice Cotter granted.
Therium’s disputed calculation is that it is due £16.4m from the proceeds, Omni £9.6m, an after-the-event insurer £1m and Stewarts Law £650,000.
Bugsby argued that there was no serious issue to be tried because the LFA was unenforceable as a result of PACCAR.
The Therium LFA provided for the return of what it had spent plus a multiple of three times that amount, and 5% of any recovery excess of £38m. It was accepted that the latter would be unenforceable as a result of PACCAR but in any case was not triggered.
Jacobs J said there was a serious issue to be tried as to whether or not the entire LFA was unenforceable rather than just the DBA element, in light of the 2021 ruling in Zuberi v Lexlaw Ltd, in which the Court of Appeal urged a narrow definition of a DBA.
He noted that Bugsby’s counsel did not dispute that, had the LFA been confined to payment of the funds advanced and the multiple, it would not have been unenforceable. This meant it was arguable that these provisions did not form part of the DBA.
The judge added that this appeared to be the first case to address the ramifications of PACCAR. “This is a developing area of the law and also one which is not straightforward and where different conclusions are possible.”
He stressed that he was not expressing “a view one way or the other as to who has the better of the argument”.
Jacobs J added that there was also a serious issue to be tried on severance in light of this month’s Court of Appeal ruling that rejected a bid to sever the offending part of an unenforceable conditional fee agreement (CFA).
He said a non-compliant CFA “may well present a more difficult case for severance than a LFA which includes a DBA… That will include the central question of whether the character of the agreement would be changed by severance.”
Finally, the judge rejected Bugsby’s argument that the injunction should only cover the £20.6m still held by Candey and not the £7m it has released.
Jacobs J also said the balance of convenience favoured an injunction because “there is evidence that Bugsby is insolvent, and therefore the release of the settlement monies to Bugsby (if no injunction were granted) would in practice mean that any award by the arbitrators in favour of Therium might well be of no practical utility”.