For big ticket defendants that often find themselves the target of claims backed by
litigation funding, Wednesday 26 July must have been a very good day. It was the
day that the Supreme Court lobbed a giant spanner that sailed through the air and
lodged itself firmly in the works of litigation funders.
I’m talking, of course, about R (on the application of PACCAR Inc and others)
(Appellants) v Competition Appeal Tribunal and others (Respondents) [2023] UKSC
28, in which the Supreme Court ruled by a majority of four against one that litigation
funding agreements (LFAs) should be classed as damages-based agreements
(DBAs).
The effect of this is huge. Firstly, it is a big blow to opt-out competition claims,
because under the Competition Act 1998, DBAs are not enforceable in such
proceedings. That poses an immediate problem for the financing of these claims.
Secondly, it may affect many other LFAs more broadly, depending on how they are
drafted.
Everything hinges on how litigation funders get paid according to the LFA in
question. By its very nature, a DBA involves a payment being made by reference to
the client’s damages. So an LFA can avoid being treated as a DBA, by calculating
payment in another way.
The bad news is that at the moment, the vast majority of LFAs do provide for
payment as a percentage of damages; which now makes them DBAs. The good
news is that most of them also allow for another option, payment as a multiple of the
amount invested (often three times the sum invested). In fact the normal practice is
that an LFA will provide for payment to be whichever is the higher amount, the
percentage or the multiple.
So where litigation funders want to ensure that their LFAs are not DBAs, they can
renegotiate these agreements to sever out the percentage payment and leave the
multiple in place. And in the run-up to the PACCAR ruling, I spoke to funders who
had certainly been going through their agreements with a view to doing just that.
It’s worth noting, however, that not all LFAs will actually need to be changed. While
funders in opt-out competition claims do need to ensure that their LFAs are not DBAs
– by removing the percentage element – for other LFAs, being classed as a DBA is
only a problem if they fail to tick all the boxes needed for the agreement to be valid
under the DBA Regulations 2013.
In the PACCAR litigation, the parties had agreed that the LFAs as drafted would not
comply with the DBA regulations – although the judgment doesn’t say why. But most
LFAs probably would comply with the regulations; in which case, the litigation
funders will not need to change them, and they will still be valid.
Probably the most significant requirement in the DBA regulations is that the payment
should not amount to more than 50% of damages. It is rare for a funder to take more
than half of damages. But it’s worth noting that the requirement for payments not to
go above 50% may also include lawyers’ success fees; which could potentially tip
some payments over the line.
If LFAs do need to be amended, will clients agree to this? Where a case is ongoing
and more funding will be needed, it will be in the client’s interests to do so. But where
a client is at the end of their claim, will they be as ready to oblige? Or will they argue
that they do not need to pay the funder anything at all, because the LFA they signed
is now invalid? And will previous clients, whose cases have completed and who have
already paid their funder, now come a-knocking, claiming that the agreement
breached the DBA Regulations and so was unenforceable?
The PACCAR ruling came as a surprise to many, partly because, whatever technical
arguments you might have about the precise wording of the DBA Regulations and
the definition of a DBA, it was always clear that damages-based agreements, as
created by Lord Justice Jackson, were an instrument intended for use by solicitors –
not litigation funders.
This entire problem has stemmed from the Ministry of Justice’s poor drafting of the
DBA regulations back in 2013; which created an area of vulnerability for litigation
funders that has now been understandably seized upon by defendants.
Given the far-reaching effect this has now had on the ability of claimants to bring opt-
out competition claims, and potentially many other claims, the government is surely
under a duty to act quickly to take whatever legislative action is needed to put right
the mess it has made.
- Sentry’s Rapid Raise funding is calculated on an interest basis, based on the length of time that capital is deployed. Sentry is therefore unaffected by the Supreme Court’s ruling in PACCAR
August 16, 2023
Insights
