Third party funding is a common feature of the UK class action landscape. As we wrote last year, third party funding (otherwise referred to as 'litigation finance') is an arrangement in which a third party, who has no direct involvement in a dispute, agrees to finance all or a proportion of the legal costs of the litigation in return for a fee which is met from any monies awarded to the litigating party.
Class action disputes are attractive to litigation funders as an investment opportunity; with a large enough class or group of claimants, the potential financial reward can be very large. Being backed by a funder can also provide reassurance to organisations who are being sued that, if the claimants are unsuccessful, there are sufficient financial resources available to meet any costs award in favour of the defendants.
Now, however, there is uncertainty over how a 2023 Supreme Court decision will impact the litigation funding industry in England and Wales, with a UK Government Bill designed to reverse the effects of the decision being lost due to the announcement of the UK general election.
The PACCAR decision
In R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal and others ([2023] UKSC 28) , the Court was asked to consider whether litigation funding agreements which provide for the funder to receive a percentage of any damages recovered by the claimants count as "damages-based agreements" ("DBAs"), which are regulated by existing legislation. The Supreme Court said that they were, with the result that litigation funding agreements will only be enforceable if they comply with the regime set out in the Damages-Based Agreement Regulations 2013. Prior to this decision, the view generally held in the litigation funding market was that litigation funding agreements were not DBAs, so there was no need to comply with the Regulations. The Supreme Court's decision left many funders requiring to change the terms of their litigation funding agreements.
The Litigation Funding Agreements (Enforceability) Bill
The Government introduced the Litigation Funding (Enforceability) Bill to Parliament on 19 March 2024. The Bill, if passed, would amend section 58AA of the Courts and Legal Services Act 1990 (which applies only to England and Wales) to specifically provide that an agreement where a funder funds a litigant’s legal fees or the payment of an adverse costs order in return for some form of payment to the funder will not be a DBA (and therefore will not be subject to the Regulations). If passed, the amendment would have had retrospective effect, removing a significant amount of uncertainty in the sector as to which litigation funding agreements are enforceable, and reversing the effects of the PACCAR decision.
The loss of the Bill in the legislative wash up
The Bill will not now be passed before the General Election. With the announcement on 22 May 2024 that the election would take place on 4 July 2024, the Government had only a couple of days to try to rush through certain "essential and non-controversial" Bills that had not yet completed their passage through Parliament, before it was prorogued on 24 May 2024. Bills which made it through this "wash up" process and became Acts of Parliament include the Digital Markets, Competition and Consumers Act 2024, which received Royal Assent on 24 May 2024, along with several other bills passed in the wash-up period. However, the Litigation Funding Agreements (Enforceability) Bill was not one of them. According to the Bill's page on the UK Parliament's website, the Bill had only reached the House of Lords report stage by the time of the prorogation.
It is possible that the next government will pick up the mantle of the Bill in either its current or a similar form, but that is by no means certain. Funders, claimants, defendants and those representing them will be hoping the position becomes clearer as soon as possible.
Contributors
Senior Associate
Chair & Partner
