On 19 March 2024, the Ministry of Justice published draft legislation to reverse the Supreme Court’s controversial July 2023 decision in R (on the application of PACCAR Inc) v Competition Appeal Tribunal [2023] UKSC 28 (PACCAR), where it was held that litigation funding agreements (LFAs) can be damages-based agreements (DBAs) in circumstances where the funder plays no part in the conduct of the litigation but their remuneration is based on a percentage of any damages recovered.

Crucially, DBAs are rendered unenforceable if they do not comply with the relevant regulatory regime. This regime imposes various restrictions and caps on what a DBA can require a funding recipient to pay to a funder in the event that their claim is successful. A DBA will also always be unenforceable in opt-out collective proceedings in the Competition Appeal Tribunal (CAT), even if the agreement complies with the DBA regulatory regime.

The publication of the Litigation Funding Agreements (Enforceability) Bill (LFA Bill) follows increased publicity on this topic, including comments from former sub-postmaster Alan Bates, the head of the campaign group Justice for Sub-postmasters Alliance, who has highlighted the role litigation funding played in allowing a case to be brought against the Post Office which exposed the Horizon IT scandal. Mr Bates also called for action to be taken to protect the enforceability of such arrangements.

In its first attempts at resolving issues raised by PACCAR, the Government initially proposed an amendment to the Digital Markets, Competition and Consumer Bill (DMCC Bill) which provided that a DBA will only be unenforceable in opt-out collective proceedings before the CAT if the agreement has been entered into with a provider of advocacy or litigation services. However, this amendment was widely viewed as not going far enough given PACCAR’s wide ranging impact beyond CAT proceedings. By comparison, the LFA Bill is designed to completely reverse PACCAR and explicitly provide that LFAs are not DBAs.

However, although the LFA Bill may appear on its face to resolve all concerns raised by the PACCAR decision, it is notable that the Government has not placed this new legislation on its priority list. The chances of its coming into force before the end of this Parliament are therefore questionable and it is not clear what a new government would decide to do on this topic going forward. We may, therefore, be required to continue to grapple with the impact of PACCAR for the foreseeable future and it would be unwise to view the LFA Bill as being the end of the story.

The potential impact of the PACCAR decision

The Supreme Court’s decision in PACCAR brought huge uncertainty and concern to the litigation funding world.

The impact of the decision in PACCAR is immediately obvious in the context of opt-out cases in the CAT, in which it is extremely common for proceedings to be funded by LFAs providing for a percentage return, which would now be considered to be prohibited DBAs. Parties to funding arrangements supporting such claims have now been revisiting agreements to ensure that any right of a funder to receive a percentage-based payment is removed to reduce the risk of the entire agreement being found to be unenforceable. However, although the decision in PACCAR was given in the context of opt-out cases in the CAT, the impact of this ruling is not limited to the confines of CAT proceedings.

In PACCAR itself, the court observed that the consequences of the decision could be extensive. In her dissenting judgment, Lady Rose quoted Ms Dunn, chair of the Association of Litigation Funders, in saying that “these consequences will extend to all or most litigation funding agreements that have been agreed since litigation funding began in England and Wales. This would be massively damaging both for the administration of justice in relation to the existing cases which involve funding by litigation funders, and the future access to justice of parties who would otherwise have employed litigation funding agreements to fund their cases. It would bring to an abrupt end hundreds of funded claims with potentially catastrophic financial consequences for all involved in the case. It would have a major impact on the development of group litigations before the English Courts…”

Theoretically, the PACCAR decision could mean that parties who have received millions of pounds worth of funding from litigation funders may now be able to pocket all proceeds in their litigation, whilst owing their funders nothing, due to the LFA previously in place no longer being enforceable.

This also leads to questions relating to whether those claimants who have previously paid huge percentages to litigation funders under LFAs may be entitled to reclaim those amounts on the basis that the funder was never entitled to anything under an unenforceable agreement.

Recent cases grappling with the implications of PACCAR

Since the PACCAR decision was given in July 2023, both the Commercial Court and the CAT have heard cases (Therium Litigation Funding v Bugsby Property and Alex Neill v Sony) in which they have considered whether an LFA can be enforceable so long as the unenforceable part (the provisions entitling the funders to a percentage-based payment) can be severed without changing the nature of the agreement. Based on these cases, it is thought that an LFA would be enforceable where the provisions for payment of the litigation funder provide for repayment to be calculated as a rising multiple of the invested capital over time, as opposed to a percentage return.

More recently, it has been held in the case of Mark McLaren v MOL that a litigation funding agreement which provided for a payment calculated by reference to a fixed fee (as opposed to damages) was not a DBA. The funding agreement also provided for an alternative basis of calculating the payment by reference to a percentage of any damages, settlement or interest awarded but this provision was crucially contingent upon it being enforceable and permitted by law.

In the case of Gormsen v Meta the CAT has also subsequently certified proceedings as collective proceedings where there was a funding arrangement which allowed for a damages-based payment “were the law to change to permit this.” It should be noted, however, that the CAT emphasised that it was not “approving or endorsing or expressing any kind of approval of the terms on which these proceedings are funded.”

These cases may offer some hope to litigation funders by suggesting that, even in the absence of any legislative change yet in force, the courts are trying to find a solution to the issues presented by the PACCAR judgment. We may therefore be faced with an increased number of agreements providing for alternative basis of calculating payment fees contingent on enforceability and potential changes in the law going forward. If the LFA Bill does come into force, for example, funding arrangements drafted on this sort of basis will likely prove extremely valuable to funders.

Importantly, however, this case law will not resolve concerns in relation to the enforceability of LFAs entered into prior to PACCAR, which cannot now be retrospectively amended by the parties to provide for alternative payment structures. The LFA Bill proposes retrospective effect and funders in previous cases will therefore be anxious to see it come into force and provide some additional peace of mind.

Professional Negligence

As the law currently stands, where recipients of funding for litigation may be entitled to reclaim payments made under unenforceable LFAs or keep all damages received going forward, a question also arises as to whether there could be potential claims brought against the solicitors advising litigation funders for professional negligence in failing to advise that such agreements may be held unenforceable.

Given the previously held industry wide understanding that LFAs were not DBAs, it is arguable that those who, prior to PACCAR, had advised in accordance with this understanding will not have fallen below the standard of care owed to clients in doing so. However, following the PACCAR judgment and potentially since these questions started to be raised in the case, the advice given by solicitors on this topic may be at higher risk of scrutiny and of being subject to claims of professional negligence. Certainly, any solicitor giving advice whilst the current uncertainty still exists would be unwise not to include a full explanation of the risks associated with a LFA being held to be an unenforceable DBA.

Calls for more regulation

In the aftermath of the PACCAR decision, some who were already of the view that regulation is required for the litigation funding industry have been renewing their calls for change. As reported by Neil Rose, an editor and legal journalist for Legal Futures, whilst considering the DMCC Bill as a vehicle for undoing the impact of PACCAR in its entirety, members of the House of Lords have raised concerns about the level of damages being taken by funders, their control of cases and a claimant’s exposure to costs. These concerns were met by assurances from business minister Lord Offord that the government was “already considering options for a wider review of the litigation funding market and its regulation.”(1)

Subsequently, the Ministry of Justice has indicated that a wider review into how third-party litigation funding is carried out will be conducted(2) on 11 March 2024. Lord Hodgson suggested that he had been provided with a draft terms of reference for this review.(3) These updates will be welcome news to those wishing to see more regulation in a sector in which large profits can be made by those funding successful claims but again offer little by way of a substantive update on a complicated and quickly developing issue.

Since the publication of the LFA Bill, further concerns have been raised regarding the continued un-regulation of the litigation funding industry, particularly in the light of proposed legislation designed to overrule a Supreme Court decision providing regulatory protection for consumers. It would therefore seem that the LFA Bill is very much not the end of the PACCAR story and caution should be had by those involved with litigation funding in any way.

  1. HL Deb (31 January 2024). vol. 835, col 385GC. Available at Digital Markets, Competition and Consumers Bill – Hansard – UK Parliament (Accessed: 19 March 2024)
  2. Press Release, New law to make justice more accessible for innocent people wronged by powerful companies, 4 March 2024. (Accessed 26 March 2024)
  3. HL Deb (11 March 2024). vol 836, col. 1878. Available at Digital Markets, Competition and Consumers Bill – Hansard – UK Parliament (Accessed: 19 March 2024)

The material in this article is provided for guidance and general information only and is not intended to constitute legal or other professional advice upon which you should rely. In particular, the information should not be used as a substitute for a full and proper consultation with a suitably qualified professional. Please do contact the Bates Wells team if you require further information.