This article was originally published on 23-Aug-2024 by Thomas Reuters Practical Law. Reproduced from Practical Law with the permission of the publishers. For further information visit www.practicallaw.com
A year on from Paccar: what’s happened
Litigation funding is not exactly a hot topic of conversation beyond the legal industry, but all that changed for a while last year when the everyday impact of the UK Supreme Court’s decision on funding agreements in R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal and others [2023] UKSC 28 was illustrated by the outcome of the civil litigation related to the Post Office Horizon scandal.
Alan Bates and the group of wronged postmasters were only able to pursue their civil claim in the courts with the assistance of litigation funding, yet due to paying the funders when their case successfully settled, their own compensation was significantly reduced. Alan Bates himself concluded that funding had been essential to his claim and would be for others to come in the future. He became a strong advocate for the funding industry and the need for the PACCAR judgment to be reversed. Other commentators widely discussed the particular dynamics of that case and its funding and (without repeating them here) drew their own conclusions as to whether that makes litigation funding a “good thing” or a “bad thing”.
The answer is, of course, far more nuanced but what has become clear is that funding has grown to have a vital role in the UK legal industry and the uncertainty brought about by cases such as PACCAR does funders and claimants no favours.
It’s probably no coincidence that at the same time, litigation funding has been further put under the spotlight after the research into litigation funding published by the Legal Services Board in May 2024 (which should be of note to anyone wanting to understand the dynamics at play in funding at the moment) and by the Civil Justice Council’s review of litigation funding whose interim report is expected in summer 2024 (but has not been published at the time of writing). We know the CJC review (whose final conclusions are due in 2025) will consider and make recommendations for reform of funding, potentially including regulation and capping of funder fees, but where it will land is yet to be seen.
Prior to the General Election, funders had widely expected the Litigation Funding Agreements (Enforceability) Bill to become law and reverse the effects of PACCAR. But in August it became clear, following a written question to the Ministry of Justice, that the government will not address PACCAR before the CJC’s full report is concluded, suggesting that “following the PACCAR judgment, concerns have been raised about the need for greater regulation of litigation funding agreements, or greater safeguards for claimants.”
All of this leaves the funding industry in the UK in limbo.
Is the current state of limbo damaging for the funding industry?
Some commentators welcome a chance to have a holistic review and a properly informed outcome, rather than reversing PACCAR first and thinking about any other reforms later. For example, there may be an opportunity to reverse or mitigate the consequences of the Jackson Reforms which removed recoverability of certain funding costs (specifically after-the-event insurance premiums and conditional fee arrangement success fees). Some argue that without some recoverability of funding costs, adequate compensation for victims of wrongdoing is far from guaranteed where larger defendants can escalate costs as a tactic to frustrate claimants. The sub-postmasters are the perfect example of a claimant group that should have benefitted from some form of recoverability.
Others cite the number of collective, opt-out Competition Appeal Tribunal (CAT) actions which have been issued or which have obtained a collective proceedings order (CPO) in the last year as evidence that the PACCAR judgment has not hindered the funding industry at all. But whilst those collective actions may attract much attention (and capital) in the funding space, they are not representative of the work done by the funding industry as a whole and the type of claims which funding can assist with. Outside the world of CAT claims (where damages might reach £100s of millions), there are bilateral, private and commercial claims where appropriate redress may be the key to the survival of a business, and where funding might provide the only means of access to that redress. For those cases, the ability of a funder to charge a percentage of damages would mean the fee is kept proportionate and, thus, viable for claimants. These are the type of claims which are simply less likely to get off the ground while PACCAR remains law.
So claimant choice is likely hindered by this period of limbo – there will be fewer deals available or less flexibility on the commercial terms offered, which may have unintended financial consequences. If a funder can only base its return on a multiple of its investment into legal costs, a successful claimant may well be exposed to disproportionate funding fees. For example, where damages are less than expected.
The wider uncertainty may have adverse effects for the UK funding industry too:
- Investments in litigation and arbitration cases can be very long term. Where there is uncertainty regarding the legislative framework which may be in place by the time a case is concluded, a funder might exercise caution now.
- Funders invariably have their own investors behind them seeking returns on their capital. If funding becomes more difficult or simply more uncertain, will appetite to invest dwindle?
- Given the uncertainty in the UK, will funders seek to diversify their portfolio and include a greater balance of non-UK cases? We have seen, for example, the European market for funding growing rapidly, albeit that market is not immune from scrutiny and calls for regulation.
None of the above can be good news for claimants, their lawyers or the UK legal industry as a whole. The funding market has come to underpin a significant part of the UK disputes industry. It has proved adaptable and flexible, which bodes well for funding to thrive in the long term but during periods of uncertainty, where funders are at a loss as to what strictures they may be operating under in 2 years time, we can probably expect some cautious behaviour.
Sarah Breckenridge, Investment Manager
sb@ersocap.com
Sarah is an Investment Manager at Erso Capital and an English-qualified solicitor-advocate. Sarah has a unique combination of practice at a senior level as a corporate/commercial litigator and as a director-level dispute knowledge lawyer. Before joining Erso, she led the team of dispute knowledge lawyers at the global law firm Bryan Cave Leighton Paisner LLP. A significant part of her role involved forging the firm’s policy and practice around litigation funding, insurance and alternative fee arrangements. She knows how lawyers approach questions of funding and costs with their clients and understands the impact of funding on the process and outcomes of disputes.