The aftermath of PACCAR: what next for the future of litigation funding?

The government has moved to try and bring stability to the litigation funding market following the Supreme Court decision in PACCAR[1] last July, which led to uncertainty about the future of the burgeoning funding market and disputes about the status of existing arrangements. 

Litigation funding is the provision by a third party of finance to a party to litigation or arbitration, which is used to pay for the legal costs of the dispute in exchange for the funder taking a share of the proceeds in the event of a successful outcome[2].

It was not allowed under common law historically, but this changed gradually in the last 30 years and the law had been developing in a practical and sympathetic way to allow the litigation funding market to develop.

In his review of civil litigation costs in 2009[3] Lord Justice Jackson took the view that litigation funding was beneficial and promoted access to justice, deciding regulation was not then required, but the question of regulation should be revisited if and when the market expanded.

The growth of litigation funding

In the time since, the litigation market has developed. Whilst it continued to be used in standalone commercial disputes, with the growth of group actions it found a new market. The court rules now allow for groups of claimants to bring claims with common aspects together in one action: for example, think of the action brought by Mr Bates against the Post Office on behalf of a group of sub–post masters[4], with the help of litigation funding.

The law also now allows for claimants affected by competition law breaches to bring claims as part of a group in the Competition Appeal Tribunal (CAT). Some of these claims are huge; such as in the claim brought on behalf of consumers by Walter Merricks against Mastercard, comprising a class of claimants said to number just under 46.2 million.

Claims of this sort are only possible where litigation funding is available. Law firms specialising in handling group action claims have sprung up, using sophisticated advertising to attract clients to potential actions in a similar way to that seen in the USA where class actions have been a long-established feature of their system.

The proposition to potential clients is often along the lines that the client will get in the region of 60% of the money recovered, with the law firm retaining the balance to cover its fees, funders fees and after-the-event insurance. This can be attractive, with the client not having to pay any fees and being protected from the risk of adverse costs by insurance. Without litigation funding, class actions of this sort cannot be run.

PACCAR: the end for litigation funders?

It was in the context of group action that the Supreme Court decision in PACCAR arose. It concerned two collective actions brought in the CAT arising out of the European Commission’s finding that five European truck manufacturing groups had effectively been guilty of a cartel. In light of the European Commission’s finding, two applications for a Collective Proceedings Order under s47B of the Competition Act 1998 were made by proposed class representatives seeking to bring claims backed by litigation funders who were to be paid by reference to a share of the damages ultimately recovered.

The Supreme Court decided that a litigation funding agreement under which the funder receives a percentage of any damages recovered by the funded party is a damages-based agreement (DBA) within the meaning of the Courts and Legal Services Act 1990. As such, to be enforceable it would need to comply with the Damages-Based Agreements Regulations 2013 (the Regulations). This was problematic because it is difficult to see how a funding agreement could ever comply with the Regulations, and it would make it more difficult to fund opt out collective proceedings because a DBA cannot be used in such proceedings. 

This decision was surprising; it had been widely expected that the Supreme Court would not allow the appeal and hold that such funding was not a DBA. The impact was that it meant that funders would need to take action to try and bring existing agreements into line with the law by re–negotiating or restructuring them, and would need to deal with disputes arising where this was not possible. The clarity and simplicity of funding charges being calculated by reference to a share of damages recovered was no longer available. This unsettled the market and quickly gave rise to disputes about whether or not litigation funding agreements were enforceable in light of PACCAR[5].

The legislative solution

In order to address these problems, the government introduced the Litigation Funding Agreements (Enforceability) Bill into the House of Lords where it has had its second reading. In a model of legislative brevity, in one clause it overturns PACCAR – meaning that a litigation funding agreement is not a damages based agreement. It goes further and has retrospective effect, providing that the amendments made by the Bill are treated as always having had effect.

The retrospective aspect has been criticised by claimant lawyers acting in cases challenging the validity of funding agreements in light of PACCAR as contravening the Human Rights Act.

The government has also announced terms of reference for a review of the litigation funding market by the Civil Justice Council, with the terms including whether regulation is required. They are due to deliver a final report by summer 2025.

Hopes for the future

Litigation funders will take heart that public policy continues to be behind litigation funding. The biggest threat to the Bill passing into law is it not progressing before the election. Otherwise, the days of PACCAR look numbered. Whilst the Civil Justice Council review is encouraging, funders are likely to hope that like Lord Justice Jackson in 2009, it takes the view that regulation is not necessary.

This article was first published in in European Financial Review and can be accessed here.