Share
The global third party litigation funding (TPLF) market has grown considerably in recent years, mostly owing to the popularity of group litigation and the potential for funders to make substantial returns on their investment. In the UK, TPLF is well established and self-regulated through the Association of Litigation Funders although there is also some judicial oversight during the course of the litigation.
The Post Office Horizon litigation recently thrust the issue of TPLF into the fore when it became apparent that funders representing the claimants pocketed 80% of the damages awarded. Whilst TPLF was instrumental in enabling the case to be advanced, the funders’ significant return on the damages has raised questions as to fairness and the integrity of the industry.
TPLF also became a significant talking point following the UK Supreme Court’s landmark ruling in July 2023 in R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal and others [2023] (PACCAR), a competition action brought against truck manufacturers. The ruling shook the UK TPLF market as it rendered the majority of litigation funding agreements (LFA) unenforceable. This was because (i) it ruled that the LFA was a Damages Based Agreement (DBA) which are not permitted in competition proceedings brought in the CAT; and (ii) most LFAs are not drafted in a way that is compliant with DBA regulations. This led to funders working with their legal teams to review existing funding agreements as well as entering into new, bespoke arrangements.
In this article, we examine the post-PACCAR landscape, including:
- The ongoing scrutiny of funding arrangements by the Competition Appeals Tribunal (CAT);
- The impact of the new Litigation Funding Agreements (Enforceability) Bill [HL] which was introduced to the House of Lords on 19 March 2024;
- The potential for TPLF regulation; and
- The outlook for group actions.
Scrutiny of funding arrangements post-PACCAR
Claimants’ funding and after-the-event (ATE) arrangements have continued to come under scrutiny by the CAT, resulting in further uncertainty over their enforceability more broadly. This has led to the CAT granting permission for the cases summarised below to be heard before the Court of Appeal. In all cases, the LFAs had been modified to align with the ruling in PACCAR.
Alex Neill Class Representative Ltd v Sony Interactive Entertainment Europe Ltd [2023]
The CAT found that a modified LFA which calculated the funder’s return as:
- The greater of the “multiple of the Costs Limit” – being the amount of funding which the funder is contractually obliged to provide; or
- A percentage of the damages proceeds only to the extent enforceable and permitted by applicable by law,
did not constitute a Damages Based Agreement (DBA) and was therefore enforceable. The CAT did not accept Sony’s argument that the sums paid in damages acted as a natural cap on the funder’s return.
The approach in Sony was subsequently endorsed by the CAT in Kent v Apple [2024].
Commercial and Interregional Card Claims I Limited v Mastercard Incorporated and others [2024]
Similarly, the CAT found that an LFA (modified post-PACCAR) which calculated the funder’s return by reference to a multiple of the funder’s capital outlay, did not have “the character of a DBA” and was therefore enforceable.
The LFA in Mastercard also included a provision whereby the funder’s return was capped by the proceeds awarded by the CAT. Despite arguments that this rendered the LFA a DBA, the CAT found that this was a “subsidiary factor which may or may not have an effect in any given situation” and therefore cannot be said to be a material factor by reference to which the funder’s fee is determined.
The Litigation Funding Agreements (Enforceability) Bill [HL] (the Bill)
The Bill aims to:
- Restore the pre-PACCAR position;
- Ensure that TPLF remains a viable funding method for claimants, thereby improving access to justice for individuals wishing to bring an action against large corporations for alleged wrongdoings; and
- Enhance the attractiveness of the UK as a global hub for commercial litigation and arbitration.
The government initially sought to address the concerns relating to the PACCAR ruling through the tabling of an amendment to the Digital Markets, Competition and Consumer Bill in November 2023. However, this amendment only applied to opt-out collective proceedings brought in the CAT. The Bill will apply to all proceedings and seeks to enable individuals to secure TPLF to support their legal action, regardless of the forum in which the action is brought.
The Bill contains just two provisions:
- An amendment of the legal definition of a DBA in section 58AA of the Courts and Legal Services Act 1998 so that it does not include LFAs, restoring the pre-PACCAR The amendment will apply retrospectively to DBAs and LFAs made before the Bill is enacted.
- That the Act will extend to England and Wales only.
The Bill was further debated at its second reading on 15 April at which it was clarified that it is a “one-purpose Bill”, with its scope closely connected to the enforceability of LFAs only. It was noted that the Public Bill Office does not think that amendments relating to the wider category of DBAs would be in scope, nor would be more general litigation funding issues.
Is TPLF regulation on the cards?
While the Bill has been welcomed by lawyers, consumer groups and funders who view it as a means by which claimants can access justice, it has also raised questions as to the need for independent regulation of the UK TPLF industry as a whole.
In November 2023, the Law Gazette reported that four out of five London litigators are involved in cases where one or both parties are financed by a third party funder and that nine out of ten litigators believed that TPLF should be regulated. At the Bill’s second reading, the Lords broadly agreed that a form of regulation is needed with sufficient safeguards to protect the consumer, although some cautioned against overregulation that could hamper or restrict the market.
Some US funders consider that concerns around transparency and foreign influence are an “overblown red herring” orchestrated so as to lead to greater industry regulation.
More broadly, there are reports that broader macroeconomic factors, such as higher interest rates, have resulted in a reduction in investments by third party litigation funders. At the end of last month, Reuters reported that US commercial litigation funders committed approximately 14% less capital to new deals in 2023, indicating that the industry was “in a state of flux”, with some litigation funders even exiting the market.
Alex Chalk, Lord Chancellor and Secretary of State for Justice, has asked the Civil Justice Council to conduct a review of the sector. His interim report is expected to be published this summer, with the final report due in 2025.
After a decade of staggering growth for this multibillion-pound industry, which has prioritised access to profit over access to justice, I look forward to the Civil Justice Council reviewing the litigation funding industry.
Seema Kennedy OBE, Executive Director of Fair Civil Justice, said: “After a decade of staggering growth for this multibillion-pound industry, which has prioritised access to profit over access to justice, I look forward to the Civil Justice Council reviewing the litigation funding industry. Safeguards are long overdue and will ensure that claimants are protected and introduce much needed transparency and accountability to the industry.”
The UK’s approach is similar to that of the EU where the European Commission has conducted a mapping study of the TPLF market across Member States before deciding whether to implement a regulatory framework for TPLF. The EC’s final report is expected to be published in November 2024.
Outlook for group actions
If enacted in its current form, the Bill is expected to fuel the ongoing growth of group actions, which are increasingly being funded by way of TPLF.
Appetite for environmental actions brought against multinationals remains high, particularly in the High Court which is currently entertaining the largest class action in the English court. In Municipio De Mariana v BHP Group UK Ltd & Ors, over 730,000 claimants are pursuing BHP regarding the collapse of the Fundao Dam in Brazil in 2015. The action is reported to have received in excess of £70m of funding by third party investors. In Municipio, the claimants asserted that TPLF is unavailable in Brazil although the defendants’ evidence was that it is merely uncommon, as opposed to being unavailable.
The High Court also continues to manage group actions brought by thousands of claimants against diesel car manufacturers in relation to allegations concerning the use of ‘defeat devices’ to bypass emissions tests. Most claims are funded by TPLF. To date, 13 Group Litigation Orders have been granted.
Outside of the High Court, opt-out consumer-led collective actions are increasingly being brought in the Competitions Appeals Tribunal (CAT). Although the CAT is available for competition claims only, the industries impacted by these actions are broadening. Global financial services and technology companies continue to be a target, often faced with allegations of abuse of dominance. More recently, actions with an environmental aspect have been filed, with consumers pursuing water companies for alleged failures to report sewage spills and consequential sea and river pollution. If successful, claimant lawyers have reported that claims could lead to compensation payments totalling £800m – offering a fair return for funders.
Related items:
Insurance and reinsurance
United Kingdom