Clifford Chance
Litigation funding: legislation to reverse PACCAR remains in political limbo but have funders' concerns materialised?
Legislation addressing third-party litigation funding now awaits the Civil Justice Council's final report (expected summer 2025). But have funders' concerns post-PACCAR regarding the enforceability of litigation funding agreements materialised?
The Bill: from panacea to limbo
The PACCAR decision in July 2023 held that litigation funding agreements ("LFAs") typically used in UK group actions entitling funders to recover a percentage of any damages recovered are "damages-based agreements" ("DBAs") pursuant to the Courts and Legal Services Act 1990 ("CLSA"). That meant that, unless the LFAs complied with the requirements of the CLSA and corresponding regulations, they were unenforceable.
The decision raised eyebrows amongst funders and claimants because, as recognised by the Supreme Court, the likely consequence of its decision would be that most LFAs would be unenforceable.[1] The Litigation Funding Agreements (Enforceability) Bill ("Bill") was introduced in March 2024 to restore the pre-PACCAR position by amending the definition of DBAs in the CLSA so that LFAs are not DBAs and are therefore enforceable.
The Bill was dropped during the 'wash-up' process before the general election on 4 July 2024. The new Government has since confirmed the Bill will not be reintroduced until summer 2025 when the Civil Justice Council ("CJC") is scheduled to publish its final report following its wider review of third-party litigation funding. The Government will then "take a more comprehensive view of any legislation to address issues in the round"[2], which is likely to include regulation of the funding industry. The possibilities for regulation were highlighted in the CJC's interim report last week, with the CJC inviting consultation on the topic.[3]
The delay in legislating to reverse PACCAR may be unwelcome news to the litigation funding industry which claims that uncertainty will remain until the issue is formally addressed. However, it raises questions of whether funders' concerns about the enforceability of LFAs have materialised and, more broadly, whether new legislation will usher in wider regulation of what is currently a self-regulated industry.
Case law post-PACCAR: funder workarounds
Since PACCAR, many litigation funders have simply agreed amendments to their LFAs in order to avoid the ambit of the CLSA and corresponding regulations.
In Alex Neill v Sony,[4] the funder revised its LFA so that its fee was calculated by reference to the greater of:
- a multiple of the funding which the funder was contractually obliged to provide; or
- a percentage of the proceeds, but only to the extent that such recovery is enforceable and permitted by law.
The Competition Appeal Tribunal ("CAT") held the revised LFA was not a DBA within the meaning of the CLSA and was therefore enforceable. Sony has obtained leave to appeal the judgment; whilst the CAT considered Sony had no real prospect of succeeding on appeal, it recognised that PACCAR had created "uncertainty" and thus appellate authority on LFAs amended to avoid PACCAR's consequences would be desirable.[5]
The CAT reached the same view in Mark McLaren v MOL (Europe Africa),[6] an action involving the same funder as Alex Neill and a materially similar LFA.
Similarly, in BSV Claims Ltd v Bittylicious Ltd,[7] the CAT held that a LFA in which the funder's fee was only calculated by reference to a multiple of the total funding commitment did not fall foul of the CLSA or corresponding regulations.
Discussion
This case law indicates that, despite PACCAR and the absence of consequential legislation, LFAs continue to be enforceable.
The decisions in Alex Neill and Mark McLaren are particularly interesting. By viewing the percentage of proceeds clause as having no legal effect unless and until Parliament passes legislation reversing the effect of the PACCAR decision, the CAT appears to have dodged the ambit of PACCAR. But such reasoning begs the question: how can the percentage of proceeds clause be "enforceable" when it has "no legal effect"?The Alex Neill appeal is scheduled to be heard in December 2024, so we will find out soon enough.
In the meantime, parties across the litigation funding industry have written an open letter to the Government urging it to enact the Bill to protect the sector in the interests of access to justice. In support, one party stated that, immediately following PACCAR, they saw a clear downturn in the domestic market (particularly in commercial litigation before the CAT), citing internal transaction data showing "a decline in anticipated funding activity of greater than 75% in the second half of 2023."[8]
However, the actual impact appears less stark than that letter would suggest, at least when one considers the trends of CPO applications filed in the CAT since 2022. In fact, there has been no appreciable drop in such applications since PACCAR (see graph below) and the only noteworthy dip was after the February 2023 hearing, which reflects short-term uncertainty whilst the industry awaited the Supreme Court's decision. Since PACCAR, approximately 11 group claims have been filed in the CAT, all financed by third-party litigation funding.
We are yet to see certification decisions on post-PACCAR filed claims, but with three CPO hearings in September 2024[9] and more scheduled for early 2025,[10] there is no indication that PACCAR has had any significant chilling effect on group claims in the CAT.
Closing remarks
Funders will not be missing the opportunity to participate in the CJC's consultation process (which closes on Friday 31 January 2025), aware the final report will be a crucial influence when the Government considers third-party litigation funding in summer 2025.
With the pending appeal of Alex Neill, the CJC's review into third-party litigation funding, and the prospect of legislation to address the PACCAR decision, there is clearly uncertainty in the class action space. However, this uncertainty does not appear to have impacted the appetite of claimant groups to bring claims, or funders to fund them.
Funders may well be concerned that, even if they get the legislation they want to reverse PACCAR, the consequence may be far greater regulation of the funding industry than the funders may want. The lobbying has only just begun.
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- R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal and others [2023] UKSC 28 ("PACCAR") at [13].
- Justice Minister Lord Ponsonby's response to a Parliamentary written question on 1 August 2024.
- Courts and Tribunals Judiciary "Litigation Funding: Civil Justice Council review of litigation funding" <https://www.judiciary.uk/related-offices-and-bodies/advisory-bodies/cjc/current-work/third-party-funding/>
- Alex Neill Class Representative Ltd v Sony Interactive Entertainment Europe [2023] CAT 73.
- Alex Neill Class Representative Ltd v Sony Interactive Entertainment Europe [2024] CAT 1 at [18].
- Mark McLaren Class Representative Ltd v MOL (Europe Africa) Ltd [2024] CAT 10.
- BSV Claims Ltd v Bittylicious Ltd [2024] CAT 48.
- Hash Dave, 'Exton Advisors comments on uncertainty in the litigation funding sphere, in The Guardian'' (Exton Advisors, 8 October 2024) <www.extonadvisors.com/exton-advisors-comments-on-uncertainty-in-the-litigation-funding-sphere-in-the-guardian> accessed 14 October 2024.
- Judgments pending in respect of: Nikki Stopford v (1) Alphabet Inc.; (2) Google LLC; (3) Google Ireland Limited; and (4) Google UK Limited (18-20 September 2024); Christine Riefa Class Representative Limited v Apple Inc. & Others (24 September 2024); Professor Carolyn Roberts v (1) Severn Trent Water Limited and (2) Severn Trent PLC (and related cases) (23-25 September 2024).
- Certification hearings scheduled for: Bulk Mail Claim Limited v International Distribution Services Plc (formerly Royal Mail Plc) (3 March 2025); Mr Justin Gutmann v Telefonica UK Limited (and related cases) (31 March 2025).
