Litigation Trending: Second reading in the House of Lords for legislation that reverses PACCAR

Earlier this week, the House of Lords discussed the Litigation Funding Agreements (Enforceability) Bill (LFA Bill) during its second reading. The Bill will be scrutinised in more detail at the Committee stage, however, it was generally welcomed by the Lords.

If passed, the LFA Bill would unwind the impact of the Supreme Court's ruling in R (PACCAR) v Competition Appeal Tribunal [2023] UKSC 28 by retrospectively confirming that any litigation funding agreements under which the funder's return is based on a percentage of any damages awarded (an LFA), are not Damages-Based Agreements (DBAs) and are therefore not unenforceable.

Key takeaways

• In PACCAR, the Supreme Court held that an LFA between a third party funder and a party to court proceedings is a DBA. As a consequence, many LFAs were rendered unenforceable as they did not comply with the Damages-Based Agreements Regulations 2013 (DBA Regulations).
• The Supreme Court's decision had a significant impact on funding across the entire UK funding market. It required funders to amend or restate their arrangements to provide for a return on an alternative basis to a percentage of damages, such as a multiple of legal costs.
• If passed, the LFA Bill will restore the "status quo" as it existed prior to the decision in PACCAR, that is that LFAs with a percentage-based return are not DBAs.
• The LFA Bill will have retrospective effect. In confirming that third party funding agreements with percentage-based returns are not DBAs, it will provide certainty, including by validating LFAs that may have become unenforceable due to PACCAR.
• Further reforms for litigation funding may be on the horizon as a result of a review of the sector by the Civil Justice Council.

Background

In July last year, the UK Supreme Court held that two LFAs entered into between third party funders and proposed class representatives were DBAs, as defined in s 58AA of the Courts and Legal Services Act 1990 (CLSA 1990) (read our briefing here). 

Each LFA provided that the funder's return would be based on a percentage of damages awarded in the proceedings. The Supreme Court concluded that the definition of "claims management services" in the CLSA 1990 was sufficiently broad such that third-party funding arrangements with a percentage-based return were DBAs. Since neither LFA complied with the DBA Regulations, the LFAs were unenforceable.

Impact of the Supreme Court's decision in PACCAR

The Supreme Court's decision had significant implications for the litigation funding industry (listen to our podcast discussing the fallout from the decision here). It was common industry practice for a funder's return to be based on the percentage of damages awarded in the proceedings and it was understood that LFAs were not DBAs.

As a result of the decision in PACCAR, such LFAs were rendered unenforceable and funders were required to put in place other (compliant) arrangements. Funders were required to amend and restate agreements to either ensure that they complied with the DBA Regulations; or that they fell outside the definition of a DBA by providing for a return based on a multiple of costs incurred.

Government response

Shortly after PACCAR, the Department for Business and Trade indicated that it was "looking at all available options to bring clarity to all interested parties". This was broadly understood to mean that the Government was considering options to reverse the PACCAR decision.

In November 2023, the Government introduced an amendment to the Digital Markets, Competition and Consumers Bill (DMCC Bill) (see our update here). This sought to mitigate the impact of the PACCAR decision. The amendments were a partial fix, as they would only retrospectively validate LFAs entered into for the purposes of bringing opt-out collective actions in the Competition Appeal Tribunal. LFAs entered into for other purposes were not impacted by the proposed amendments. Unsurprisingly, the amendments were criticised for being too narrow. 

On 4 March 2024, the Government announced that a new Bill would be introduced to restore the status quo for all LFAs, regardless of the proceedings in which they were deployed. The Government's announcement was driven, in part, by the ongoing Post Office scandal in which LFAs played a pivotal role in enabling the sub-postmasters to pursue their group litigation against the Post Office.

Litigation Funding Agreements (Enforceability) Bill

On 19 March 2024, the LFA Bill was presented to the House of Lords. The LFA Bill, which will be retrospective in effect, amends the definition of a DBA in s 58AA of the CLSA 1990 to expressly exclude LFAs. The Government has consequently withdrawn the proposed amendments to the DMCC Bill. The LFA Bill still needs to pass through the House of Commons, but it is expected to become law later this year.

Impact of the LFA Bill and potential for further reform 

In contrast to the limited amendments that were included in the DMCC Bill, the LFA Bill will restore the status quo that existed prior to the Supreme Court's decision. Funders will be able to continue using LFAs which provide for a percentage-based return. These LFAs will not be considered DBAs and therefore not be required to comply with the DBA Regulations.

While the LFA Bill will (once enacted) wind back the implications in PACCAR, at the time the Bill was introduced into the House of Lords, the Lords were informed that the Lord Chancellor had written to the Civil Justice Council inviting it to undertake a review of the litigation funding market as a whole and to consider whether any further regulation or safeguards are required.

The Civil Justice Council is due to publish its terms of reference (and related documents) shortly, with an interim report due by summer 2024 and a final report to follow within the next year. We will closely watch developments, as will the litigation funding community.

Authors: Hayden Dunnett and Brihadeesh Murali