PACCAR: Key issues for third party litigation funding agreements in England and Wales

The judgment in PACCAR raises important questions for third party litigation funding agreements. We explore the key issues, impact and consequences.

The case

R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents) [2023] UKSC 28[1] revolved around whether litigation funding agreements (LFAs) are Damages-Based Agreements (DBAs) for the purposes of Section 58AA(3) of the Courts and Legal Services Act 1990[2].

The judgment

The central issue of concern is that third party funding agreements were deemed by the Court to fall under the definition of 'claims management services' due to providing 'financial services or assistance'.

The implication is that LFAs in England and Wales fall under the definition of damages-based agreements, or DBAs, within the Courts and Legal Services Act 1990 (CLSA), making them unenforceable.

Specifically, the court held that the 'percentage of recovery' method usually agreed in a typical LFA constitutes a DBA under regulation. Thereby, post-PACCAR, funders must renegotiate and revisit their LFAs, or they become unenforceable.

The impact[3]

In the current economic environment, funders report that increasingly larger businesses are requesting third party funding as a financial tool to facilitate complex litigation, especially for urgent or time sensitive issues. Without funding, even the largest, most solvent businesses could face significant impediments to bringing claims.

There is also a widespread misperception that funders only finance claimants. In fact, funders finance defences through a portfolio-based strategy of spreading risk. This allows businesses which must defend claims but who lack available funds, to mount a full defence.

The ruling in PACCAR severely limits use of LFAs for businesses in England and Wales and affects UK based funders only.

UK nationals and businesses are most impacted, across both domestic and international disputes. Those in international disputes, in particular, will be required to look outside England and Wales for funding for their foreign seated disputes. But critically, as UK citizens, they may have to accept higher risk and less desirable terms to receive funding for international disputes seated in England and Wales, while international parties will have less restricted access to funding.

This could place businesses in England and Wales at a disadvantage, leading them to choose to seat their commercial disputes outside England and Wales whenever possible.

Mass litigation

The claimants in Bates v. Post Office[4], were funded by Therium and named claimant Alan Bates, has stated publicly that the PACCAR decision would have prevented his case from being brought today[5].

Third party funding can allow those who cannot bring a dispute on their own resources to receive justice[6]. But, there are concerns that third party funding facilitates the proliferation of spurious claims.

Third party funders decide whether to fund a claim based primarily on financial risk. 95% of all cases that request funding from a UK funder are refused after an evaluation of the merits of the claim. This has a gate-keeping effect and can reduce the number being filed since, after a refusal of funding, many of these claims are dropped or settled[7].

Restructuring LFAs

It is possible for funders and parties to restructure their LFAs to avoid falling under the definition of DBAs by changing the percentage of damages to a multiple of invested capital.

Many UK funders began to renegotiate their current LFAs to this multiplier method in advance of PACCAR as an emergency method of ensuring no disruption to services for their clients. Since PACCAR, others have followed suit, but the view is that this is a stop-gap measure.

The multiplier method is detrimental to funded parties in comparison to the percentage method, as it significantly raises the risk of potential losses. Under the multiplier method, the amount due back to the funder becomes a fixed multiple of the actual amount of cost invested in the case. This means the funded party bears more of the costs and, in some situations, may end up breaking even or have a net loss.

In comparison, the percentage structure allows both funders and funded parties to accurately reflect the risk involved and the varying probability of a winning outcome in their LFAs.

Parliamentary activity

In light of the concerns arising from Bates v. Post Office, the Lord Chancellor, Alex Chalk, stated that a legislative cure for the outcome of the PACCAR case is necessary and must be quick[8].

In the last few months, Parliament has been supportive of legislation to undo the outcome of PACCAR.

Two proposed amendments to the Digital Markets Competition and Consumers Connected Purposes Bill (DMCC)[9] are underway and expected to be complete by June 2024:

1. A “general amendment” which would have the effect of reversing the impact of PACCAR so as to ensure that LFAs are not considered as DBAs under the CLSA.
   
   
2. A “limited amendment” which would remove LFAs from the definition of DBAs only in Competition Tribunal cases. This amendment has been approved by the Lords Clerk.

If the limited amendment remains and the general amendment is not included, the situation will be further complicated and a two-tier system created, removing LFAs from the definition of DBA only in limited circumstances i.e. in Competition Tribunal cases.

Given the Bill contains enforcement provisions which could only be effective with funding, these provisions would be rendered ineffective without the general amendment.

If the general amendment is not included in the DMCC, there is a proposal to include a general amendment in the expedited Horizon Bill as an alternative[10]. However, this may unviable due to time constraints.

Urgent need

Meanwhile, there is a persistent high level of uncertainty for funders which is negatively affecting many parties. Hence the need for urgency in finding a solution.

It is important to note that while legislatively removing LFAs from the definition of DBAs in the CLSA will allow litigation funding of disputes to resume unimpeded, funding activities will remain unregulated.

Funders are supportive of discussions about regulation of the sector to safeguard this part of the legal services sector in terms of quality of service provision and competitiveness internationally. There remains concern about the imposition of caps on funding amounts.

This article was compiled by Ciarb’s Policy and ADR Development team.

Also of interest:

Ciarb members can read our case note in the Autumn 2023 issue of The Resolver. Log into your MyCiarb account and go to Kluwer Resources.

Read an article from Baptiste Rigaudeau MCIArb assessing the impact of the case.

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Footnotes

[1] R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents) [2023] UKSC 28.
https://www.supremecourt.uk/cases/uksc-2021-0078.html

[2] See The Resolver, Autumn 2023, Case Note.

[3] See Financial Times, 6 February 2024, “Head of judiciary warns of risks to England’s reputation for legal services.”
https://www.ft.com/content/82d06b81-ec17-4c45-bf2d-fbd6d9ce934c

[4] Alan Bates and Others v Post Office Limited, [2019] EWHC 3408 (QB).

[5] See Financial Times, 12 January 2024, “Alan Bates: Why I wouldn’t beat the Post Office today.”
https://www.ft.com/content/1b11f96d-b96d-4ced-9dee-98c40008b172

[6] The parties immediately benefited by the ruling in the PACCAR case were truck manufacturers and suppliers with known connections to a criminal cartel. The parties on the other side were a group of legitimate UK high street retailers who had been adversely affected by the suppliers’ criminal activities. The group of retailers had used litigation funding to bring their case. Instead, the result was a ruling that the tool they had relied on to seek redress was unenforceable.

[7] This risk does not occur in jurisdictions like the US where, not only is the legal threshold for mass litigations much lower than in England and Wales, legal fees may be sought only if the parties agreed contractually in advance or if individual states statutorily allow costs to follow the event.

[8] See Financial Times, 14 January 2024, “UK government vows to protect litigation funding that helped sub-postmasters.
https://www.ft.com/content/3d089314-eb97-4e21-9101-962876c7d480

[9] HL Bill 12 (as brought from the Commons).
https://bills.parliament.uk/bills/3453

[10] Post Office (Horizon System) Compensation Act 2024 (c. 1).
https://bills.parliament.uk/bills/3526