The PACCAR decision and the future of litigation funding

Answer

Background: Bates & Others v Post Office Ltd

Bates & Others v Post Office Ltd was a group legal action involving 555 sub-postmasters who filed a claim against the Post Office. The sub-postmasters alleged that the Post Office’s accounting software, Horizon, was unreliable, leading to unexplained shortfalls and discrepancies in their branch accounts. As a result of the purported faults in the software, more than 900 sub-postmasters were convicted of fraud and theft between 1999 and 2015. This case has gained substantial public attention as a result of the ITV series Alan Bates v The Post Office and the ongoing public inquiry.

The legal action was financed by Therium, a third-party litigation funder, which Alan Bates (the leader of the group action) deemed crucial for bringing their claim before the courts. However, a recent UK Supreme Court decision has overturned the long-established position on litigation funding, potentially hindering access to justice and prompting calls for legislative reform.

What’s litigation funding?

Litigation Funding Agreements (LFAs) are where a third party, generally an independent financial institution, agrees to cover all or part of the legal costs in return for a fee from any damages awarded if the case is successful. This arrangement allows individuals or small businesses, who might not otherwise afford legal representation, to bring cases against larger, wealthier entities. It was because of LFAs that the 555 sub-postmasters were able to bring their claim.

Litigation funding can be combined with other products and services that can constitute litigation funding themselves. One common type of arrangement is called a ‘damages-based agreement’ (DBA). A DBA is a type of ‘no win, no fee’ arrangement between a representative and a client, which provides that the client will make a payment to the representative if the client obtains ‘a specified financial benefit’ (ie, damages from the opposing side). The representative is paid a percentage of the damages if the claim is successful. If the case is unsuccessful then the representative doesn’t get paid for the work done under the DBA.

The PACCAR decision

On 26 July 2023, the UK Supreme Court gave judgment in the case of R (on the application of PACCAR Inc and others) v The Competition Appeal Tribunal and others. This case held that where a litigation funders’ fee under a LFA is based on a percentage of the damages received in the claim, these are considered to be DBAs as defined by section 58AA of the Courts and Legal Services Act 1990. This reversed the commonly held view that LFAs weren’t DBAs and consequently means that such agreements need to comply with the requirements under the Damages-Based Agreement Regulations 2013. Previously, LFAs generally didn’t comply with these regulations and therefore, as a result of this ruling, most LFAs are suddenly deemed unenforceable.

This decision has raised significant uncertainty for litigation funders, and the individuals and businesses relying on them. Lady Rose, in her dissenting judgment, highlighted that this ruling would massively impede the access to justice of parties that rely on litigation funding as the consequences of this ruling will extend to most LFAs.

Impact on group litigation

Group litigation claims are particularly affected by the PACCAR decision. Many of these claims are complex and expensive, and litigation funding is often crucial for these cases to progress. To avoid the consequences of the PACCAR ruling, funders began renegotiating agreements in ongoing cases such as switching to alternative models including fees being based on a multiple of the sums invested rather than as a percentage of damages recovered. However, it remains unclear whether such arrangements would effectively circumvent the PACCAR ruling.

Future of litigation funding

In light of the PACCAR decision, the UK government recognised the need for legislative reform. In March 2024, the Ministry of Justice announced the introduction of the Litigation Funding (Enforceability) Bill (the bill), which is currently at the committee stage in the House of Lords, having made it past the first and second readings. The goal of this new bill is to effectively reverse the PACCAR decision and return to the previous position in permitting LFAs to continue without falling under the restrictive DBA regulations.

The bill proposes several key changes. Firstly, it amends the definition of DBAs in the Courts and Legal Services Act 1990, clarifying that LFAs aren’t DBAs. Secondly, it defines LFAs separately from DBAs, ensuring that they’re not subject to the same regulations. Thirdly, the bill may have retrospective effect, meaning it’ll apply to existing LFAs and effectively nullify the impact of the PACCAR decision on cases that were already in progress.

However, some commentators have raised concerns about the bill having retrospective effect as for example, a party may have agreed to an alternative funding agreement in light of the PACCAR decision. If the original LFA hadn’t been replaced then the litigant could potentially find themselves with two funding agreements on different terms. The government will need to carefully consider the practical application of the bill having retrospective effect to ensure this works sufficiently in practice.

This bill is seen as essential for maintaining access to justice, especially for individuals and small businesses facing large corporations with significant financial and legal resources. The bill also addresses concerns raised by the Civil Justice Council (CJC), which is currently reviewing the litigation funding sector to make recommendations for long-term reform. The CJC said it’d produce an interim report by summer 2024, which is still awaited, and a full report by summer 2025.

Concluding thoughts

The future of litigation funding in the UK will largely depend on the outcome of the bill and the ongoing review by the CJC. However, the general election earlier this year has delayed the Bill’s progress and, in the meantime, litigation funders, lawyers and claimants are eagerly awaiting further developments, as the impact on access to justice is potentially significant. In any event, PACCAR will leave a lasting impact on the funding community.

William Kellet is a trainee solicitor in the commercial dispute resolution team at TLT LLP.