Last month, the Litigation Funding Agreements (Enforceability) Bill (“the Bill”) was introduced into the House of Lords. If passed, this Bill will overrule a recent Supreme Court decision which held that litigation funding agreements constitute “damages-based agreements” and are therefore unenforceable.
About Litigation Funding:
Litigation funding is an arrangement in which a third-party agrees to help finance the legal costs of a claim, in return for a fee payable from any proceeds recovered.
Until July 2023, the litigation funding market was largely unregulated and considered to be outside the scope of the Courts and Legal Services Act 1990 (“CSLA”).
Section 58AA(3) of the CLSA provides that a “damages based agreement” (“DBA”) will be unenforceable unless it complies with certain regulatory requirements. In R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal and others [2023] UKSC 28, the Supreme Court addressed whether litigation funding agreements (“LFAs”) under which the funder is entitled to recover a percentage of any damages recovered fell within the definition of a DBA.
Writing for the majority, Lord Sales held that LFAs, which entitle the funder to a proportion of any damages recovered, are DBAs. As these LFAs do not comply with the prescribed regulatory requirements (which they seldom do), they will be unenforceable. In doing so, his Lordship acknowledged that the likely consequence of this decision would be that “most third-party litigation funding agreements” would be rendered unenforceable.
The Litigation Funding Agreements (Enforceability) Bill 2024 – A swift Parliamentary response
The Government publicly lamented the decision in PACCAR and quickly announced its intention to overrule it. The newly introduced Litigation Funding Agreements (Enforceability) Bill 2024 does just that. It will amend the definition of a “Damages Based Agreement” in s 58AA(3)(a) of the CLSA to state:
“an agreement is not a damages-based agreement if or to the extent that it is a litigation funding agreement.”
The Secretary of State for Justice, Alex Chalk KC, announced that the Bill will “restore the position to that which prevailed before the decision of the Supreme Court, that LFAs are not DBAs and hence are enforceable” and confirmed that the changes will have retrospective effect.
Introducing this new Bill, the Government highlighted the virtues of litigation funding agreements, stating that:
Access to justice is a core pillar of our legal system and key to our jurisdiction’s world-leading position. Litigation funding agreements have enabled claimants to seek redress over unequal pay, faked diesel emissions and overcharging by mobile phone networks, as well as the sub-postmasters’ heroic fight.
The Bill passed its second reading on 15 April 2024 and proceeded to the Committee stage.
Comment:
There has been a rapid growth in the volume and variety of litigation funders in recent years. This has been a welcome development. It has improved access to justice and enabled individuals to bring important claims against deep-pocketed defendants.
While this Bill is a welcome and necessary response to the PACCAR decision, it does not deal with wider issues surrounding litigation funding and DBAs. For this, attention will now turn to the Civil Justice Council, which has recently announced its review of third-party litigation funding. This review, established at the request of the Lord Chancellor, will explore whether the current arrangements for third-party litigation funding “deliver effective access to justice and identify possible alternatives and limitations.”
The Review will consider and provide recommendations on:
- Whether and how and, if required, by whom, third-party litigation funding should be regulated.
- Whether and, if so, to what extent a funder’s return on any third-party litigation funding agreement should be subject to a cap.
- How third-party litigation funding should be best deployed relative to other sources of funding, including but not limited to; legal expenses insurance, and crowd funding.
- The role that rules of court, and the court itself, may play in controlling the conduct of litigation supported by third-party litigation funding, or similar funding arrangements, including whether and, if so, what provision needs to be made for the protection of claimants whose litigant is funded via third-party litigation funding; and, the interaction between pre-action and post-commencement funding of disputes.
- The relationship between third-party litigation funding and litigation costs.
- Duties concerning the provision of third-party litigation funding, including potential conflicts of interest between funders, legal representatives, and funded litigants.
- Whether funding encourages specific litigation behaviour such as collective action.
The team at Edmonds Marshall McMahon eagerly away the Review’s interim report, which is expected in in the Summer of 2024.
Oliver Fredrickson – May 21st 2024
