The Ministry of Justice has today (17 December) announced plans to regulate the litigation funding sector, bringing an end to more than two years of uncertainty following the 2023 Supreme Court judgment in PACCAR – but uncertainties over the nature of the reforms remain.
The plans will see the government legislate to allow funding agreements that offer returns as a percentage of damages, amid a raft of other measures that the government says will aim to make funding ‘fair and transparent’ for claimants and help maintain the competitiveness of English and Welsh courts.
The moves will undo the decision in PACCAR, in which the Supreme Court found that third-party litigation funding agreements (LFAs) that allowed funders to recover a percentage of damages were prohibited under the damages-based agreements (DBA) regulations, and therefore unenforceable.
Justice minister Sarah Sackman said in a statement: ‘this government intends to take action to mitigate the impact of the 2023 Supreme Court judgment in PACCAR and implement proportionate regulation of third-party LFAs.’
The government proposal has two limbs. First, ‘to legislate to clarify that LFAs are not damages based agreements, with prospective effect.’ And second, to ‘introduce proportionate regulation of LFAs.’
The PACCAR judgment saw funders race to renegotiate their agreements as multiples-based agreements, in which funders agree returns as multiples of their investment, rather than as a percentage of the eventual damages awarded.
While this process was largely smooth, some have since noted that the experience left the litigation funding market chilled, as well as providing opportunities for ‘bad actors’ to contest their LFAs – as in Bugsby Property’s failed attempt to use PACCAR to invalidate an agreement it held with Therium Litigation Funding.
‘The very fact that this government has now committed, which it had not done before, is very welcome to see,’ said Susan Dunn, co-founder of Harbour Litigation Funding and chair of industry body the Association of Litigation Funders (ALF).
‘I don’t remember a more turbulent time than the last couple of years for funders’
Funders were frustrated after earlier plans to overturn the ruling put together by the previous Conservative government were shelved ahead of the 2024 general election, and not picked up by Labour after.
Earlier this year, the Civil Justice Council (CJC) published its review of litigation funding, which recommended the government take action.
Dunn pointed to the ongoing effects of PACCAR, in particular on activity in the Competition Appeals Tribunal (CAT): ‘The statistics have clearly shown that the number of claims issued in the CAT has fallen off a cliff since PACCAR. There was a clear, evidence-based, negative impact from this ruling. It wasn’t just funders having a moan – the stats speak for themselves.’
Richard Swallow, head of the disputes and investigations group at Slaughter and May, said that the main concern looking ahead is the nature of the proposed regulations.
‘The key issue for businesses will be the proposed safeguards and regulation around the use of funding to avoid speculative litigation that rewards funders (not consumers) and deters investment,’ he told Legal Business.
Addleshaw Goddard disputes partner Richard Wise took a middle position. ‘A reversal of PACCAR would provide welcome certainty and would be a recognition of the important role funding can play as one of the options available to claimants,’ he said.
He continued: ‘It will be interesting to see which of the CJC’s proposals the Government envisages should form part of its intended “new framework.”‘
Still, despite the uncertainties, funders welcome the announcement.
‘I’ve been funding for 23 years, and I don’t remember a more turbulent time than the last couple of years for funders,’ said Dunn. ‘Removing one of the big factors driving that instability is only a good thing.’
Additional reporting by Eliza Winter.
