2023 was something of a rollercoaster in the UK for litigation funders and their clients. Ever since the Supreme Court handed down its ‘bombshell’ decision in R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents), litigants, funders, the courts and Parliament have all been grappling with its ramifications.
In this article, we consider the fallout of the decision in PACCAR and the likely direction of travel for litigation funding in the UK in 2024 and beyond.
Commercial litigation funding agreements (“LFAs”) typically provided for a return based on a percentage of damages awarded. That model, which can potentially be highly lucrative for funders and has contributed to the significant rapid growth of the UK funding market, has not been without controversy.
Nevertheless, the role funding can play in promoting access to justice, by enabling litigants to prosecute claims that would otherwise founder for want of support, is apparent. Notable examples include the lengthy Kazakhstan Kagazy litigation (Kazakhstan Kagazy PLC & Ors v Baglan Zhunus & Ors,  EWHC 3374 (Comm),  EWHC 369 (Comm),  EWHC 3462 (Comm)), a significant fraud case in which most of a corporate claimant’s wealth and assets had been misappropriated by dishonest former directors and shareholders, or in large-scale group litigation such as the recent Post Office Scandal, in which the former sub-postmaster and lead claimant Alan Bates acknowledged justice would never have been achieved without funding.
How the courts reacted to PACCAR
We have previously considered the decision in PACCAR, here.
In summary, the Supreme Court found that LFAs providing funders with a percentage of damages upon the success of a claim constituted damages-based agreements (“DBAs”) within the meaning of s. 58AA(3) of the Courts and Legal Services Act 1990 and were, therefore, unenforceable in both (i) opt-out collective proceedings pursuant to s. 47C of the Competition Act 1998 and (ii) any other proceedings unless they complied with both s. 58AA CLSA 1990 and the Damages Based Agreement Regulations 2013 (which they did not).
Unsurprisingly, the initial fallout from PACCAR was considerable, with many funders left in the unenviable position of their LFAs being unenforceable despite having already released funding.
The plight of the litigation funder
In Therium Litigation Funding A IC v Bugsby Property LLC, a funder sought an asset preservation/freezing order, pursuant to s. 44 of the Arbitration Act 1996, against a litigant who had sought to avoid payment to the funder of its share of the damages awarded, on the basis that PACCAR rendered the LFA unenforceable.
In a decision dated 20 October 2023, granting the order, Mr Justice Jacobs ruled that the question of the enforceability of the LFA was a serious issue which could not be determined by the Court at an interlocutory stage, but instead needed to be resolved by arbitration, as provided for under the LFA.
The LFA provided for recovery as a multiple of the original funding amount plus a percentage of damages. As such, there were complex questions around whether the entire LFA was unenforceable, or only those elements that constituted a damages-based agreement under PACCAR (as in the recent Court of Appeal case Zuberi v Lexlaw Ltd  EWCA Civ 16, referred to but not overturned by PACCAR), and whether the offending provision was severable such that the (enforceable) alternative recovery method (the multiple of original funding) could survive.
Bugsby’s attempt to avoid payment was perhaps unsurprising given the funder’s anticipated recovery (together with outstanding lawyers’ fees and insurance premiums) would exhaust the entire damages awarded, which were substantially lower than those that had been claimed. Nevertheless, funders will be reassured by the court’s willingness to impose an interim asset preservation order to ‘hold the ring’, and by the Judge’s comments on Zuberi and his observation that it was appropriate to “tread carefully” given PACCAR is a very recent decision, in a developing area of law, and was subject to powerful dissent (see §48 of the Judgment).
Funder and funded align
Bugsby is certainly a warning, but the parties to an LFA will often be aligned in desiring enforceability. Following PACCAR, Alex Neill, lead claimant on behalf of 9 million UK users of Sony PlayStation’s Store, renegotiated her LFA to allow the funder to recover a percentage of damages “only to the extent enforceable and permitted by applicable law”. InSony, the Competition and Appeals Tribunal (“CAT”) held that “as a matter of freedom of contract, it is open to [Ms Neill] 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.”
Although the CAT did not consider a further question on severance, it confirmed it would have been prepared to sever the clauses in question as that would not result in a major change in the overall effect of the LFA.
How Parliament reacted to PACCAR
The Government did, ostensibly, move quite fast in seeking to address PACCAR, albeit with a somewhat ambiguous statement from the Department of Business and Trade at the end of August 2023, that it “is looking at all available options to bring clarity to all interested parties”.
Nevertheless, by mid-November 2023, the Government had moved substantively to nullify PACCAR – at least in relation to ‘opt-out’ competition claims in the CAT – by tabling an amendment to the Digital Markets and Consumers Bill (“DMCB”) removing the words “claims management services” from s. 47C(9) of the Competition Act 1998. Although positively received, the amendment does not address other types of proceedings, and as Lord Sandhurst noted in a House of Lords debate on 5 December 2023, “the key issue is that the Supreme Court’s PACCAR ruling affects LFAs in all courts, not just in the CAT… While the [amendment] goes a little way, it will put matters right for so-called opt-out cases, but will not help in opt-in cases, nor in conventional bi-party litigation … The small company fighting Apple will, effectively, not be able to go to a funder.”
Further, the issue has clearly remained on the legislative agenda. Earlier this month, Justice Secretary Alex Chalk was reported stating his intention to, “at the first legislative opportunity,” reverse “the damaging effects” of PACCAR; though he was short on specifics.
So, what next?
Despite the rollercoaster, the direction of travel from both the courts and Parliament seems clear and – from the perspective of funders – positive: there is no appetite to curtail litigation funding in the UK.
The court has shown itself willing to use its injunctive powers to prevent a party escaping the contractual bargain without a proper consideration of the ramifications of PACCAR, and in Sony, the CAT set out how LFAs may be amended or drafted going forward to protect a funder’s right to damages-based recovery; it is reasonable to consider that reasoning will extend beyond just opt-out collective proceedings. Sony has been granted permission to appeal the CAT’s decision but, in the meantime, funders should look to apply this ruling to their LFAs.
Similarly, the legislative developments and the Government’s reported intention to reverse the effects of PACCAR in relation to all funded claims are reassuring, albeit the speed and extent of any further legislation remains uncertain given the upcoming election and potential change of government. Nevertheless, funders and those that rely upon their services will be cautiously optimistic going into 2024.