The end of litigation funding?

This article was authored by Sorcha Whyte, Trainee Solicitor, London. 

In a significant ruling for future group actions, the Supreme Court handed down its decision in the PACCAR Truck appeal on 26 July 2023. The court found that Litigation Funding Agreements (LFAs) which allow the funder to receive a percentage of any damages received constitute a damages based agreement (DBA) within the meaning of section 58AA Courts and Legal Services Act 1990 (the CLSA). In order for such LFAs to now be enforceable, they will have to comply with section 58AA of the CLSA and the Damages Based Agreements Regulations 2013 (DBA Regulations).

What does this mean for future actions?

The court’s finding will have far-reaching implications, particularly in respect of group actions and claims in the Competition Appeal Tribunal (CAT), where historically there have been economic barriers to pursuing legal action which LFAs sought to remove.

Many LFAs in their current form will not comply with the CLSA and DBA Regulations and are therefore unenforceable as a result of this judgment. However, LFAs which simply calculate the funder’s return as a multiple of sums invested in the legal action (the Multiple Approach), will not be considered to be DBAs and so will remain enforceable.

Funders may therefore need to consider a transition to adopting just the Multiple Approach when calculating their fee.

A number of LFAs which have already been drafted may state the funder’s fee to be the higher of the Multiple Approach and a percentage of the damages received. Careful consideration will need to be given as to any express severance clause and whether this can be utilised in order to remove the percentage of damage provision, making the funder’s fee calculated by the Multiple Approach alone.

Consumer impact

The implications of this are that the ‘cost’ to consumers of an LFA may be higher and there may be a lack of clarity as to the proportion of damages a consumer can expect to receive after the funder’s deduction.

Those whose action is being funded under an LFA, will likely need to agree to an alteration to the wording of the LFA to ensure it is enforceable and any group action allowed to proceed. It is expected that funders may well cease to contribute any further to litigation until their position is secured and so those being funded should consider early agreement to a variation in the LFA wording in order to minimise the impact on the litigation itself.

Opt out proceedings

Perhaps one of the greatest implications of this judgment is in respect of opt out proceedings in the CAT, which cannot have a DBA in place. The court was told that the vast majority of opt out proceedings do indeed have LFAs, where the funder’s return is calculated as a percentage of damages. Such LFAs are now to be classed as DBAs and so are not permitted.

This is problematic for ongoing litigation which previously was allowed to proceed in the CAT. Any Collective Proceedings Orders granted in such cases will have to be revisited, with funders modifying the calculation of their return, in order for funding to be permitted.

Comment

The Supreme Court’s decision has largely come as a surprise and inevitably will result in a shake-up to the current system. LFAs have widely been heralded as allowing, in particular, classes of claimants to pursue action that otherwise would have been uneconomical. We can perhaps expect to see further conversation as to the future of LFAs within parliament in the coming months and years, and possibly the introduction of further legislation to minimise the impact of this judgment and support the pursuit of justice in group litigation scenarios.

Related item: Disclosure of litigation funding arrangements in collective proceedings: a balancing act