This article was first published by Insol World Magazine in Q1 of 2024.
Insolvency office-holders in the UK and elsewhere frequently rely upon litigation funders to finance their legal proceedings and, accordingly, developments in the funding market are of keen interest to insolvency professionals.
As was widely reported at the time, in July 2023 in the Supreme Court held (by a majority) that litigation funding agreements (LFAs) which provide for the funder to be paid as a percentage of the damages awarded in the case constitute damages-based agreements (DBAs) and will therefore be unenforceable unless they meet the statutory conditions for a DBA to be valid: R (on the application of PACCAR Inc & Ors) v Competition Appeal Tribunal & Ors [2023] UKSC 28 (commonly referred to as PACCAR).
It was not generally considered by the market that LFAs were DBAs or needed to meet the conditions applicable to DBAs in order to be enforceable. The Supreme Court's decision therefore came as an unwelcome shock and potentially rendered numerous active and ongoing LFAs unenforceable. Giving the leading speech in PACCAR, Lord Sales noted:
"The court was told that if LFAs of this kind, whereby the third party funders play no active part in the conduct of the litigation, but are remunerated by receiving a share of any compensation recovered by their client, are DBAs…the likely consequence in practice would be that most third party litigation funding agreements would be unenforceable as the law currently stands".
The full ramifications of PACCAR are still being worked through but decisions subsequently suggest that the courts will be sympathetic both to steps taken by the industry to mitigate the effects of PACCAR and to legal arguments contending that PACCAR should not be given a broader effect than necessary. There is a recognition that the Supreme Court's decision in PACCAR was not driven by policy considerations but, rather, it was a decision based upon the interpretation of specific legislation.
In Therium v Bugsby [2023] EWHC 2627 (Comm), in the context of an application by a funder for an interim injunction over the proceeds of a settlement, Mr Justice Jacobs held that it was seriously arguable that the LFA in that case was enforceable notwithstanding that it provided for the funder to receive a share of the proceeds. First, he held it was seriously arguable that the provisions which amounted to a DBA as a result of PACCAR should be viewed as an "agreement within an agreement" (similar to an arbitration agreement) so that if the LFA contains provisions which allow for payment of the funder on an alternative basis (as there was in this case) then, arguably, those provisions remain enforceable notwithstanding the invalidity of the DBA element. Secondly, he held that it was seriously arguable that the provisions allowing for a share of the proceeds could in principle be severed by the court, leaving the remainder of the LFA valid and enforceable.
In Alex Neill Class Representative Limited v Sony Interactive Entertainment Europe Limited [2023] CAT 73, the Competition Appeal Tribunal (the CAT) heard an application by Sony seeking to strike out a class action brought in relation to its PlayStation product. The claim was financed by a LFA which provided for the funder to receive a share of the damages. The hearing took place in June 2023, just before the Supreme Court's decision in PACCAR. Following PACCAR, and before judgment had been handed down by the CAT, the claimant and the funder agreed amendments to the LFA which they contended had resolved any issues relating to its enforceability as a result of PACCAR. In post-hearing submissions, Sony claimed that notwithstanding these amendments the LFA remained invalid as a result of PACCAR but its arguments were rejected by the CAT. In particular:-
- Sony submitted that the Supreme Court was laying down a broad approach to assessing whether LFAs were DBAs and had "effectively imposed a requirement to assess the proportionality of returns to funders which might, in reality, be DBAs in disguise." The CAT did not agree: "In our view, the exercise carried out by the Supreme Court was…an exercise in statutory interpretation, in which the majority expressed no view on the public policy considerations."
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The revised LFA had retained the provision for payment of the funder by way of a percentage of the damages (if greater than the alternative set out above) but this was now qualified by the words "only to the extent enforceable and permitted by applicable law". Sony contended that "To allow the wording to have the intended effect would be to circumvent the public policy reasons which have led to the regulation of DBAs". The CAT disagreed: "As a matter of freedom of contract, it is open to the [claimant] and the funder to agree on such a provision, and we see no reason of public policy or otherwise to make that objectionable. The drafting expressly recognises that the use of a percentage to calculate the Funder's Fee will not be employed unless it is made legally enforceable by a change in the law, which appears to us to be an entirely proper position to take."
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Sony contended that terms in the revised LFA which (according to Sony) constituted a DBA were not capable of being severed from the remainder of the LFA because it would fundamentally change the character of the agreement. Again, the CAT disagreed, holding that "…we do not consider it can be said that there is a major change in the overall effect of the LFA if the relevant clauses are severed."
In January 2024 the CAT granted Sony permission to appeal, but notably this was not because the CAT considered that the appeal had any real prospects of success but, rather, because "…we recognise that the decision in PACCAR (SC) has resulted in funders and class representatives in a number of collective proceedings amending their funding arrangements so as to avoid the consequences of that decision, which in turn has led to those amended funding arrangements being challenged by defendants in those cases. This is creating uncertainty and consuming the resources of [the CAT] and the parties, and that is unlikely to cease until there has been a conclusive decision on these points by the Court of Appeal."[1]
Whilst we await appellate level consideration of the steps taken by funders and claimants to revise their LFAs it seems that legislative changes may also be on the way. The indications are that policy-makers in the UK continue to regard a healthy litigation funding market as being essential to ensure access to justice: only a month after the Supreme Court's judgment was handed down, the Department for Business and Trade released a statement that it was "aware of the Supreme Court decision in Paccar and is looking at all available options to bring clarity to all interested parties"[1] and in January 2024, the Justice Secretary, Alex Chalk, told the Financial Times that he planned "at the first legislative opportunity" to reverse "the damaging effects" of PACCAR.[2]
Further developments will continue to be closely watched by litigation funders and those who regularly work with them, including insolvency professionals.
Update to the original article (June 2024):
On 19 March 2024, the Government published the Litigation Funding Agreements (Enforceability) Bill, designed to reverse PACCAR with retrospective effect. With Parliament having been dissolved on 30 May, the future of the Bill will be decided after the General Election.
[1] Alex Neill Class Representative Limited v Sony Interactive Entertainment Europe Limited [2024] CAT 1
[2] Department for Business and Trade statement on recent Supreme Court decision on litigation funding - GOV.UK (www.gov.uk)
[3] UK government vows to protect litigation funding that helped sub-postmasters (ft.com)