Winners and Losers in the UK Government's Review of Litigation Funding

By Lucy Keane, Counsel, Signature Litigation

There’s unlikely to be many in the litigation funding industry who have not heard of the PACCAR decision or are unaware of its profound consequences. The decision of the UK Supreme Court (“UKSC”) in that case, in July 2023, sent shock waves through the industry, when previously accepted views on the enforceability of litigation funding agreements (“LFAs”) were smashed to pieces. The UKSC decision, that LFAs that took the form of damages-based agreements (“DBAs”) might be unenforceable was a surprise and litigation funders were left wondering if their funding agreements, hitherto thought to be sound in law, might not be so.

The basic facts of the PACCAR case were that UK Trucks Claim Ltd (“UKTC”) and the Road Haulage Association (“RHA”) made an application to the Competition Appeal Tribunal (“CAT”) for a collective proceedings order (“CPO”) in relation to breaches of competition law by Paccar Inc, DAF Trucks NV and DAF Trucks Deutschland GmbH under section 49B of the Competition Act 1998. The purpose of the CPO was to enable UKTC and the RHA to bring proceedings on behalf of claimants who had acquired trucks from the Defendants.

UKTC and the RHA had to show that they had adequate funding arrangements in place to meet both their own costs and any adverse costs order if they were to obtain a CPO from the CAT. The Paccar claimants were many, numbering more than 18,000, with the claim itself worth more than £2 billion.

The relevant parties obtained funding from third-party litigation funders. In terms of the applicable LFAs, the funders' maximum remuneration was calculated by reference to a percentage of the damages ultimately recovered in the litigation.

The truck manufacturers’ position before the CAT was that the LFAs constituted damages-based agreements (“DBAs”) within the meaning of the relevant legislation (section 58AA of the Courts and Legal Services Act 1990, as amended). As such, they were unenforceable.

The case eventually came before the UKSC on appeal.  

By a majority of 4:1, the UKSC decided that the LFAs at issue were DBAs within the terms of section 58AA. They were therefore unenforceable and unlawful.

The assumption, commonly held in the industry, was that the LFAs in issue, which assign a passive role to the funders in relation to the conduct of the litigation, were not DBAs within the meaning of section 58AA. However, if they were DBAs, the UKSC was aware that the likely consequence of its decision would be that most third-party litigation funding agreements would be unenforceable as the law currently stands.

With public interest in the concept of litigation funding now very much piqued by the high-profile ITV documentary “Alan Bates v The Post Office” and the ongoing public inquiry into the fate of the many sub-postmasters who suffered, the UK Government recognised the need for urgent legislation to address the issue and avoid what the Chair of the Association of Litigation Funders, Susan Dunn, referred to as the “potentially catastrophic consequences” of many hundreds of funded claims being abruptly brought to an end.

The Civil Justice Council (“CJC”) was asked by Alex Chalk MP, the Lord Chancellor, to conduct a review of litigation funding in the light of the PACCAR decision. It has issued Terms of Reference and aims to provide an interim report by the summer of 2024 and a full report by summer of 2025. The reports are intended to provide advice to the Lord Chancellor and make recommendations for change.

In the meantime, the UK Government has introduced a Bill (the Litigation Funding Agreements (Enforceability) Bill) intended to address the fallout from PACCAR. However, despite having reached the report stage in the House of Lords, it has fallen foul of the General Election announced by Prime Minister Rishi Sunak that will take place on 4 July 2024. The Bill was not listed for consideration in the “wash-up” period where final bills that could become law are considered by Parliament. As a result, the bill will fall until a new government comes in and picks it up.

The CJC’s six-person working group will undertake the review based on the CJC’s function to make civil justice more accessible, fair and efficient. The scope of the review is to:

• Set out the current position of Third Party Funding (“TPF”) including the background to TPF’s development in England & Wales;

• Consider the current position concerning self-regulation;

• Consider approaches to TPF in other jurisdictions and how TPF sits within the broader context of funding options;

• Consider access to justice, effectiveness and regulatory options and whether the current arrangements for TPF deliver effective access to justice and identify possible alternatives and limitations.

The working group will set out clear recommendations for reform which will include a consideration of:

• Whether and how and, if required, by whom, TPF should be regulated;

• Whether and, if so, to what extent a funder’s return on any TPF agreement should be subject to a cap;

• How TPF should be best deployed relative to other sources of funding, including but not limited to legal expenses insurance; and crowd funding;

• The role that rules of court, and the court itself, may play in controlling the conduct of litigation supported by TPF or similar funding arrangements including:

• Whether and, if so, what provision needs to be made for the protection of claimants whose litigant is funded via TPF; and the interaction between pre-action and post-commencement funding of disputes;

• The relationship between TPF and litigation costs;

• Duties concerning the provision of TPF including potential conflicts of interest between funders, legal representatives and funded litigants;

• Whether funding encourages specific litigation behaviour such as collective action.

The CJC review, together with the now (temporarily) defunct bill are steps welcomed by both consumers and funders alike. The PACCAR decision, no doubt helped by Mr Bates and the Post Office, has brought the litigation funding industry and how it works into the public eye and public interest is generally favourable, indeed there seems to be much public enthusiasm for this form of funding. The cloud of PACCAR may yet have a silver lining.