Is there light at the end of the PACCAR shaped tunnel?

With further spotlight being shone on the litigation funding industry following the depiction of the Post Office scandal in the must-see ITV drama, Bates v. The Post Office, will the government finally address the implications of the PACCAR judgment?

In what is often described as a nascent industry, July 26th 2023, will go down as a date to remember for litigation funding in the UK. In the case of R (on the application of PACCAR Inc. and others) v. Competition Appeal Tribunal and others [2023] UKSC 28, the Supreme Court held by a four-to-one majority that litigation funding agreements (LFAs) in which funders are entitled to a percentage share of damages fall within the statutory definition of damages‑based agreements (DBAs). In those circumstances, should an LFA fall foul of the requirements for a valid DBA, as detailed in Section 58AA of the Courts and Legal Services Act 1990 and the Damages Based Regulations 2013, they will be unenforceable. The implications of the decision are still not truly clear, with market commentators and players at odds as to the ramifications. What is clear is that funded deals in the UK are still being concluded. Both funders and funded parties have been working behind the scenes to review existing LFAs as well as LFAs that are close to being signed that are or were at risk of being unenforceable. In the context of the considerations applicable to funded parties, I believe it prudent to consider the past (concluded LFAs), the present (existing LFAs), and the future (LFAs that are being negotiated or on matters being considered for funding).

The question of enforceability arose in the context of the applications for collective proceedings orders (CPOs) of two claimants, UK Trucks Claim Ltd. (UTCL) and the Road Haulage Association (RHA). To obtain the relevant CPO, the applicants had to show that they had adequate funding arrangements in place; they chose to do so by relying on LFAs in which the maximum return to the funder was calculated as a percentage of the damages ultimately recovered from the litigation. The truck manufacturers, who were the respondents in the underlying competition claim, contended that the funding agreements could not be accepted as the LFAs were DBAs under Section 58AA (3) of the Courts and Legal Services Act. They further asserted that, as the LFAs did not meet the regulatory requirements for DBAs, they were unenforceable. Both UTCL and the RHA conceded that the LFAs did not satisfy the requirements, and the argument turned on whether LFAs, as drafted in this case, were to be construed as DBAs. The central issue in the appeal heard by the Supreme Court focused on whether litigation funders as capital providers offered ‘claims management services’. With reference to statute, the Supreme Court ultimately concluded that the role of a litigation funder does constitute a ‘claims management service’ given the reference to providing ‘financial services or assistance’ even when not directly involved with the management of a claim. Therefore, by extension, LFAs as drafted in the present case would be unenforceable.

The LFAs

Litigation funding in the UK has been prevalent for over a decade. The relationship between funder and funded party has been governed by LFAs throughout. The pricing methodology utilised during that period primarily falls within three categories:

1. Basing it on a multiple of the invested capital;
2. Taking a direct percentage of damages;
3. A combination of both, known as a 'greater‑of' model.

The Courts and Legal Services Act refers to ‘claims management services’ being paid by 'reference to the amount of financial benefit obtained,’ so pricing an investment based off the multiple of the invested capital alone would seem to fall outside of the scope of the definition.

This conclusion has now been given further support following the granting of a CPO in the case of Alex Neill Class Representative Ltd. v. Sony Interactive Entertainment Europe Ltd. [2023] CAT 73. Here, the Competition Appeal Tribunal rejected arguments that a revised LFA following negotiations post PACCAR was still unenforceable despite it including a multiple of the invested amount as the success fee. Interestingly, the tribunal also allowed a contingent success fee based on a percentage of damages ‘only to the extent enforceable and permitted by applicable law’. While this is a positive development, funded parties must appreciate that there is a risk of appeal and that this decision is specifically in relation to opt-out collective proceedings in the Competition Appeal Tribunal.

The past

As a consequence of the PACCAR decision, it will be prudent, as I am sure many funded parties have done so already, to take legal advice on what action, if any, should be taken with respect to LFAs that have historically concluded. The quandary, perhaps, will be one relating to the moral argument. The recoveries made in many instances would not have been possible without the involvement of a litigation funder. With respect to business integrity, while the offending LFAs have been found to be unenforceable, they are still, in principle, valid contracts. Funders voluntarily complied with the terms of the contract, provided capital, and allowed for the relevant recoveries to be made. Funded parties will need to carefully consider the advice received, as funders will certainly look to strongly defend their position.

Such a defence has manifested itself in Therium Litigation Funding A IC v. Bugsby Property LLC [2023] EWHC 2627 (Comm). Therium applied for an asset freezing/preservation order over monies received by Bugsby following the settlement of a piece of litigation that Therium and another funder, Omni Bridgeway, had funded. Therium argued that their LFA remained enforceable despite providing for both a multiple of the invested capital and a percentage of damages. They did so on the basis that the whole LFA did not constitute a DBA; instead, only the percentage of damage returns should be construed as such, per Zuberi v. Lexlaw Ltd. [2021] EWCA Civ 16. Further, and in any event, the percentage return element of the LFAs could be severed. Bugsby argued that there was no serious issue to be tried as the LFA was unenforceable because of PACCAR, and therefore it owed the funders nothing. Justice Jacobs agreed with Therium insofar as judicial precedent afforded a principled argument and therefore constituted a serious issue to be tried. The judge also agreed that there were points to consider with respect to the law of severance. Litigation funders will likely take some solace from the judgment. While not conclusive, it does give merit to the arguments they are likely to raise in defending their position. The judge, however, made it clear that he was not expressing a view as to the better argument, simply conveying that the issues were serious enough to be tried. The judge therefore granted the asset freezing/preservation order pending the conclusion of the arbitration of the substantive dispute.

The present

There is clearly a very commercial driver for both funded parties and litigation funders to rectify any potential issues in existing LFAs to ensure monies can still be drawn down and recoveries made. It is therefore imperative to ensure a line of communication between the parties to remedy the situation. As touched upon in the Bugsby judgment, one avenue that had been viewed as a potential solution is to simply rely on the severability clauses contained in many LFAs. This should be applicable to LFAs where a greater‑of model had been agreed and would see the percentage of damages calculation severed from the agreement, with the multiple of invested capital remaining. In Zuberi, the Court of Appeal determined that, in accordance with common law principles, severance is permissible. The court further noted that the DBA was not the entire contract but only those provisions that dealt with the percentage-based payment. However, more recently, in Diag Human v. Volterra [2023] EWCA Civ 1107, the Court of Appeal found that part of an unenforceable conditional fee agreement with Section 58 of the Courts and Legal Services Act cannot be severed (i) on the basis it would change the character of the contract as a whole and/or (ii) for public policy reasons. While the latter judgment is fact-specific and arises in the context of CFAs, it does perhaps form the basis of arguments that parties may make against offending LFAs.

It certainly poses the question: what is the purpose of severability clauses, if not exactly for scenarios such as these? While one can appreciate the inability to rely on a severability clause should the proposed terms that are being 'severed' from the contract be vital to its performance, removing the application of the greater‑of calculation to the multiple of investment does not however detract from either party’s ability to comply with the underlying terms. Of course, price plays a vital role in the consideration of any contract; however, reverting to a multiple on the investment, if anything, gives clarity to the contracting parties on price. Interestingly, in the case ofBugsby, Jacobs J.did not consider the arguments based on Diag Human to be so persuasive as to preclude there being a serious issue to be tried on severance. The judge acknowledged that a non-compliant CFA may well present a more difficult case for severance than an LFA that includes a DBA, as ‘[…] That will include the central question of whether the character of the agreement would be changed by the severance.’ In practical terms, however, it may be more sensible to simply amend and reinstate the LFA with the offending clauses removed, provided the parties are willing to do so.

The future

The ramifications of PACCAR are still relatively unclear. It is perhaps unsurprising that many believe the judgment of the Supreme Court simply prompted more questions than it ultimately answered. While the consensus from the profession is that the decision only impacts LFAs that include a reference to an entitlement to a percentage of damages rather than a multiple of the deployed capital or total investment amount, debate still ensues as to whether that position is correct. It seems we will get clarity shortly.

In the meantime, for applicants for funding considering an LFA, it is likely funders will simply deploy a multiple of invested capital calculation as the basis of their returns. In the short term,it would be unsurprisingif the multiple attached is higher than historic agreements. Litigation funders have sought capital investments from investors on the basis of structured returns. Doing away with a percentage of damages return and greater‑of model will of course detract from those returns, and higher multiples, at least in the short term, would be one way they may choose to mitigate that issue. It is important to remember that the decision in PACCAR is in part due to the UK Government not introducing the draft Damages-Based Agreements Regulations 2019. These draft regulations expressly provide that an LFA is not a DBA. Lobbying by the Association of Litigation Funders and funders themselves will be essential in bringing about much-needed legislative clarity and certainly seems to be having the desired effect.

Following the Department for Business and Trade’s acknowledgment of the issue, we have recently seen rushed government proposals for amendments to the Digital Markets, Compensation, and Consumers Bill. However, while seemingly a step in the right direction, not only were the proposed changes only addressing issues in relation to opt-out collective proceedings, but the government also ultimately blocked the progress of the bill on the basis that the issue was outside of the scope of that item of legislation. It does, however, seem that there will be some further governmental input that aims to bring clarity to the market.

Following the renewed attention that the Post Office scandal has enjoyed since the release of the must-see ITV drama Bates v. The Post Office, a spotlight has once again shone on the litigation funding industry. In what has been described as one of the largest miscarriages of justice in British legal history, with the lives of many sub-postmasters destroyed by the actions of the Post Office, litigation funding played a vital role in allowing those affected to access justice and hold the Post Office to account. The genesis of litigation funding was premised on a means to level “David v. Goliath” scenarios in which well-financed defendants could simply drain the funds of credible claimants rather than deal with the merits of the claim itself. Alan Bates, former sub-postmaster and the lead claimant against the Post Office, threw his support behind funding, describing it as an “essential financial tool” that supported the sub-postmaster's own “David v. Goliath” case. Following this public support, Justice Secretary Alex Chalk has stated that he plans to reverse the “damaging effects” of the Supreme Court ruling at the “first legislative opportunity." What that means, however, is not certain. Perhaps this renewed impetus will persuade the government to relook at the proposals contained within the Digital Markets, Competition, and Consumers Bill and also implement some wider proposals. This would seemingly be the “first legislative opportunity” available. Time will, of course, tell.

It is an interesting time for the litigation funding industry in the UK. Evidently, litigation funding plays an important role in unlocking credible claims. It will be for solicitors and advisers to keep an eye on how this area of law develops and take the appropriate steps, where necessary. However, following what many called a catastrophic judgment for the industry as a whole, it seems as though the government is keen to ensure that funders, lawyers, and funded parties will have the much needed clarity that enables funding to continue to assist in filling the financial void in access to justice.