News & Commentary

UK Supreme Court: many litigation funding agreements unenforceable

On 26 July 2023 the UK Supreme Court handed down its decision in the PACCAR case, [2023] UKSC 28.

The Supreme Court held that litigation funding agreements (LFAs) which entitle funders to remuneration based on a proportion of the damages recovered constitute damages-based agreements (DBAs). LFAs are therefore unenforceable unless they comply with the 2013 regulations governing DBAs.

Typically, an LFA is an agreement between a litigation funder and a claimant under which the funder agrees to cover the claimant’s legal costs in exchange for a share of the damages recovered and/or the right to be re-paid a multiple (often 2.5 or 3 times) the amount invested in the claim.

Section 58AA(3) of the Courts and Legal Services Act 1990 defines a DBA as “an agreement between a person providing advocacy services, litigation services or claims management services and the recipient of those services” (emphasis added) where the provider of those services has an entitlement to a share of the proceeds of the claim.

The meaning of “claims management services” was the key issue for the Supreme Court. The 1990 legislation cross-refers to section 419A of the Financial Services and Markets Act 2000, which defines such services as “advice or other services in relation to the making of a claim”, with “other services” expressed to include “financial services or assistance”. The Court decided that litigation funding is a form of “financial services or assistance”, so an LFA can be a DBA.

The decision has the commercially bizarre result that any successful claimant who paid their funder a share of damages under an LFA which was not compliant with the DBA regulations (which will be many) may be entitled to claim back the paid sum from the funder.

Those with existing LFAs will be looking to amend them to ensure that they do not qualify as DBAs, for example by moving from a proportion-of-damages model to a multiple-of-investment model.

Alternatively existing LFAs could be altered to comply with the DBA regulations, but in most cases this will be difficult or impossible as the DBA regulations were drafted to address solicitor-client agreements, not funding arrangements.

It remains to be seen whether the Ministry of Justice will now (finally) implement the changes to the DBA regulations which Nicholas Bacon KC and Professor Rachael Mulheron have worked on for years as part of the Government-sponsored DBAs Reform Project. Their proposed replacement DBA regulations, published in 2019, would expressly provide that LFAs are not DBAs.

Robert Wright, the Head of Civil Litigation Funding and Costs at the Ministry of Justice, said at a Reform Project event in 2019: “the biggest question for the MoJ is why make these changes now, when so many other things require their attention”. The PACCAR decision has surely answered that question

For more questions on the matter please contact our partner, Shimon Goldwater at Shimon.Goldwater@asserson.co.uk  

 

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