An update on the Litigation Funding Agreements (Enforceability) Bill and the consequential effect from the recent prorogation of Parliament and the general election.
The litigation funding industry is typically relevant to high-value commercial arbitration or litigation claims where funders assess that the value of a dispute is worth their investment and where it is perceived to have a high chance of success. In most instances, litigation funding is used because the claimant would otherwise not be able to pursue their claim.
This is particularly the case for claimants pursuing action against mid- to large-sized corporations and/ or well-resourced businesses. It is also an attractive means of funding courses of action as it enables claimants to spread the risk of litigation between themselves and the funders (even if a proportion of the claim proceeds is recovered by the funders).
The recent Post Office Horizon case is a high-profile example of a third-party funded claim that is unlikely to have been possible for claimants to pursue without such additional financial resources. We recently wrote about this case in the context of litigation funding in a two-part series, here and here.
Following on from our previous PACCAR-focused article, we seek to provide an update on the legal landscape concerning Litigation Funding Agreements (LFAs). Namely, we'll focus on the consequential effect of the recent prorogation of Parliament and the general election on the Litigation Funding Agreements (Enforceability) Bill, which sought to reverse the Supreme Court's decision in PACCAR.
Unenforceable agreements and uncertainty
In PACCAR, the Supreme Court ruled that LFAs under which funders are renumerated from a percentage of the damages awarded to the claimant are "damages-based agreements" (DBAs) and are unenforceable when used in opt-out collective group action claims.
Opt-out claims are those whereby a lead claimant brings the claim on behalf of a class and, if successful, all other persons who meet the established criteria for recovery are entitled to damages without an initial sign up. As such, the PACCAR Ruling rendered many existing third-party LFAs unenforceable. Funders were left scrambling to draft variations or renegotiate terms of current agreements to improve the chances of them being enforceable and unregulated, all while crucially avoiding risk to their investment.
As an interim solution, many funders have steered towards multiple-based structures of these damages-based models. Multiple-based LFAs calculate the funders' return based on a multiple of the amount initially funded (e.g. five pounds for every one pound invested) – which are still validly enforceable notwithstanding the PACCAR Ruling.
The Supreme Court's decision has also created an influx of cases being heard in the Competition Appeals Tribunal. They are required to rule on whether a number of existing LFAs are enforceable, some of which have been referred to the Court of Appeal for determination as to their validity. The industry seeks clarity and deferring to the Courts is currently the only means of gaining such clarification.
The PACCAR Ruling has led to lasting uncertainty and has resulted in an increase in satellite litigation, such as in the Alex Neill v Sony cases. This gave rise to further concerns that PACCAR will negatively impact access to justice. This access is a critically important constitutional principle that is heavily supported by both the Law Society and the Bar Council but also the Judiciary, who "acknowledge" that litigation funding plays "a valuable role in furthering access to justice."
More widely across the legal sector, law firms and funders themselves have justified concerns as to both the utility and possibility of wiping out a profitable area of their work (or in some cases, their business entirely). The funding sector has the backing of Parliament, who have expressed a desire for the Courts of England and Wales to be marketed by the legal sector as a "global hub for commercial litigation" and to retain its status as a "world-leading jurisdiction". This support is required simultaneously to encourage private third-party funding while also reinforcing a constitutional pillar of the rule of law.
Recognition by Parliament
The government declared that a wider review of the litigation funding sector will be carried out by the Civil Justice Council (CJC) with consideration of reform and regulation. The CJC aim to provide an interim report this Summer and we should expect to see a full report issued by Summer 2025 (see its key aims here).
Things were looking particularly promising for funders and law firms alike earlier this year, when the Ministry of Justice announced that the Government were set to introduce a new Litigation Funding Agreements (Enforceability) Bill to reverse the decision in PACCAR and return the law to the position of July 2023.
Initially, the Digital Markets, Competition and Consumers Bill (which received Royal Assent on 24 May 2024 and is expected to come into force this Autumn) had provisions which effectively proposed to reverse the PACCAR ruling. However, these specific provisions didn't make it into the final Act and were instead nudged along into the Litigation Funding Agreements (Enforceability) Bill (introduced in the House of Lords on 19 March 2024).
This short Bill sought to amend the definition of a DBA under s.58AA(3)(a) of the CLSA 1990 to clarify that LFAs are not DBAs.
The proposed features of the Bill included:
- Retrospective applicability – the Bill sought to apply to LFAs that were in place before the PACCAR Ruling in addition to LFAs entered into post-PACCAR.
- Applicability to all proceedings – the Bill would apply to all court proceedings brought within England and Wales.
The key benefits for implementing the legislation are as follows:
- Confidence in investment – funders would have more faith in their investment and the agreements which cover them.
- Providing clarity to industry – it would solve the current state of uncertainty that law firms, their clients, and funders are in, which is contributing to the risk of unnecessary proceedings and reliance on the Courts to answer what is or is not validly enforceable as a funding arrangement.
- Improving access to justice – encouraging the investment of funders means that more cases can be funded and, in doing so, would "restore a vital avenue to justice for all deserving claimants, not just those with the most resources."
- Certainty of law firms being paid – lawyers will have a much higher degree of certainty that their fees will be paid in cases where there is a third-party funder.
- Relief for the Court system – addressing the current ambiguity as to the enforceability of agreements would take the burden off an already-strained Court system.
Prorogation of Parliament
Following Rishi Sunak's call on 24 May 2024 for a snap general election on 4 July 2024, Parliament was prorogued, and as such all Parliamentary business stopped with immediate effect. At this time, the Bill was still very much in its infancy and had only reached the Committee Stage in the House of Lords.
On 29 May 2024, the House of Lords confirmed that the Bill would not make any further progress.
Parliament held its State Opening on 17 July 2024 following the general election. In line with Parliamentary protocol, Bills introduced in the House of Lords rarely continue into the next Parliamentary session unless specifically agreed or ordered by way of Standing Order. Incidentally, there have only ever been four bills carried over by the Lords since 2004 and it is therefore unlikely this Bill, in its current form, will be any exception.
It will only have a prospect of becoming statute if introduced as a new Bill entirely by either House in the new Parliamentary session. Notwithstanding this, Labour's appetite for access to justice and victims' rights is well known, and there is every chance Keir Starmer's Government may prioritise this reform.
Conclusion
Following the prorogation of Parliament and the historic reticence to pass Bills drafted by a predecessor government, it remains unlikely that the Labour government will seek to implement, in the same draft form presented by Sunak's cabinet, an overhaul of the PACCAR ruling.
However, the CJC's review of litigation funding due to be published in full by Summer 2025, along with Starmer's agenda to push access to justice, carries with it an optimistic prospect. Campaigners continue to fight for change in this area, citing inexhaustibly the importance of the access to justice that it would bring, along with greater clarity on a presently hazy subject matter. For now, the legal industry will continue to grapple with the difficulties created by PACCAR until Parliament legislate otherwise.
This article was co-authored by Trainees George Wilkinson and Megan Jenkins.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.