Recent updates in relation to the enforceability of UK litigation funding arrangements

• The Competition Appeal Tribunal grants Sony and Apple permission to appeal judgments regarding enforceability of funding arrangements
• The Justice Secretary plans to reverse “the damaging effects” of PACCAR¹
• Wider amendments to the Digital Markets, Competition and Consumers Bill not accepted

Why should I read this?

Recent events indicate that either the Court of Appeal or Parliament is poised to address the recent ambiguity impacting the litigation funding market, arising out of the Supreme Court’s ruling in PACCAR last year, which found that Litigation Funding Agreements (LFAs) based on a percentage of the recovered damages would be considered Damages Based Agreements (DBAs). The decision is relevant to all funding arrangements in the UK, but had a particular impact on cases before the Competition Appeal Tribunal (CAT) where there is a statutory prohibition on “opt-out claims” (i.e. class actions) being funded on the basis of DBAs. The following updates regarding the enforceability of LFAs will be of interest to those involved in funded litigation across the UK courts (and not just in competition proceedings):

• As a consequence of PACCAR, the proposed class representatives (PCRs) in both the Sony and Apple collective actions in the CAT amended their LFAs. On 4 January 2024, the CAT gave Sony permission to appeal certain aspects of its judgment² which had held that the PCR’s amendments to its funding arrangements in light of PACCAR were enforceable. Whilst the Tribunal did not consider the relevant grounds of appeal to have any prospects of success, it did recognise that there was a compelling reason for the appeal to proceed, particularly so that the ongoing uncertainty and disputes surrounding the enforceability of LFAs in a number of cases could be resolved by the Court of Appeal. The CAT then also granted permission to appeal in relation to the funding arrangements in Kent v Apple on 19 January 2024, suggesting that it would be “expedient” for those appeals to be heard together.

• Meanwhile, there has been a surge in political attention towards litigation funding and the UK Government has signalled its intention to amend the law to safeguard the sector, recognising for example that litigation funding was instrumental in enabling hundreds of sub-postmasters to sue the Post Office. Speaking to the Financial Times, Justice Secretary Alex Chalk said he planned “at the first legislative opportunity” to reverse “the damaging effects” of PACCAR.
  
  
• Additionally, on 31 January 2024, the House of Lords considered proposed amendments to the Digital Markets, Competition and Consumers Bill (DMCC) in response to the PACCAR judgment. While those amendments were not accepted, it was reiterated during the debate that the Government intended to return to the pre-PACCAR position “across the whole of the justice system”, with Lord Offord of Garvel stating that:

“the Government are already considering options for a wider review of the litigation funding market and its regulation. The Civil Justice Council may be asked to undertake such a review, given the need to ensure access to justice and the attractiveness of the jurisdiction. Given its independence, it may be unhelpful to specify the scope and timing of such a review at this stage. However, I expect colleagues from the justice department to update this House once that review is agreed”.

Legislative clarity in relation to funding agreements would undoubtedly be welcome across the litigation and funding sectors. However, with a general election looming, it remains to be seen whether the issue will maintain its position on the political agenda. In the meantime, PACCAR continues to have effect and the forthcoming appeals in Sony and Apple will provide guidance on how LFAs can be structured.

What else do I need to know about the current state of the enforceability of LFAs?

• Dealing a significant blow to the litigation funding market last year, the Supreme Court held in PACCAR that an LFA which defines the funder’s return by reference to a percentage of any damages recovered is a DBA within the meaning of the relevant legislation. As the CAT Rules prohibit opt-out competition claims (equivalent to US class-actions) from being funded using DBAs, the decision prompted many to revisit their funding arrangements and consider amendments to deal with the ruling in PACCAR. See here our more detailed analysis on the impact of PACCAR.
  
  
• In Sony, the “Funder’s Fee” was amended to be the greater of a multiple of the funds committed by the funder “or only to the extent enforceable and permitted by applicable law, a percentage of the Proceeds” of the litigation. The CAT’s Judgment held that:
  
  
  • The LFA in that case was not a prohibited DBA, because the second half of that provision (which on its face may appear to offend PACCAR by providing for the calculation of the funder’s return by reference to a percentage of the damages) was contingent and would only take effect on a change of law to reverse the effects of PACCAR. 
     
  • The LFA also did not constitute a prohibited DBA simply because the damages in the litigation were a cap on the funder’s return: the LFA did not contain a provision to that effect, and the amount of the funder’s return would ultimately be determined by the CAT on either an award of damages or settlement.

• As noted above, the CAT granted Sony permission to appeal in respect of the above decisions on 4 January of this year.

• On 17 January 2024 the CAT handed down its decision in CICC, reaching a similar conclusion to Sony in respect of an apparently PACCAR-compliant LFA which contained a provision expressly limiting the funder’s return by reference to the litigation proceeds. The CAT warned of the “potential danger in taking too narrow an approach to the assessment of an LFA, by an overly forensic analysis of the causative effect of any particular factor that might affect the amount of the funder’s fee”, with the relevant DBA legislation requiring “the application of common sense and a focus on the real substance of the arrangements in question”. It remains to be seen whether permission to appeal will be granted in that case.

• On 19 January 2024 the CAT handed down its decision in Kent v Apple, which confirmed its approach in Sony and also held that a “ratchet” mechanism in the PACCAR-compliant LFA did not turn it into a prohibited DBA, while (as with Sony) granting the Defendant permission to appeal those points and stating that it would be “expedient for cases with similar features to be dealt with together in any hearing in the Court of Appeal”.
  
  
• Finally, on 7 February 2024 the CAT gave its funding ruling in the Ro-Ro collective proceedings brought by Mark McLaren Class Representative Limited, which followed the decision in Sony.

Further reading on the enforceability of LFAs

UK Supreme Court decision means many UK Litigation Funding Agreements where the funder receives a percentage of damages will be unenforceable (eversheds-sutherland.com)

UK Digital Markets, Competition and Consumers Bill moves one step forward to being adopted (eversheds-sutherland.com)

[1]R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents) [2023] UKSC 28
[2]Case 1527/7/7/22 Alex Neill Class Representative Limited v Sony Interactive Entertainment Europe Limited and ors [2023] CAT 73