Access to justice: UK government seeks to protect litigation funding after PACCAR judgment

Jonathan Watson, IBA Finance CorrespondentWednesday 29 May 2024

In April the UK government introduced a litigation funding bill that, if adopted, will reverse a Supreme Court ruling from July 2023. The judgment in question, in R (on the application of PACCAR Inc) v Competition Appeal Tribunal, found that litigation funding agreements (LFAs) amounted to damages-based agreements and must comply with the relevant regulatory regime.

Litigation funding, where a finance company bankrolls a lawsuit for a percentage of any damages recovered, is increasingly used to back civil suits in England and Wales. The judgment in PACCAR would have the effect of making many existing LFAs unenforceable. ‘We were all taken somewhat by surprise,’ says Martyn Day, co-founder and Senior Partner of law firm Leigh Day in the UK.

‘The judgment caused a lot of uncertainty in the funding world as it made funders much more nervous about existing projects,’ explains Day. ‘They were concerned that claimants could potentially tear up their funding agreements and they would end up with nothing, even in a case that succeeded.’

Funders were also worried about entering into new agreements in case they too were found to be contrary to the ruling in PACCAR. ‘The judgment threw many things into disarray for quite a lot of funders,’ says Lucinda Orr, Digitalisation and AI Officer for the IBA Litigation Committee and a partner with Enyo Law in London. ‘Initially there was a belief that it would only be relevant to competition cases, but that turned out to be inaccurate. It definitely had a chilling effect on funders. They became a lot less confident.’

PACCAR threw many things into disarray for quite a lot of funders

Lucinda Orr
Digitalisation and AI Officer, IBA Litigation Committee

The government’s response, the Litigation Funding Agreements (Enforceability) Bill, has now been published and introduced in the House of Lords. ‘The speed with which government has sought to turn this around has been quite impressive,’ says Day. ‘Once the legislation becomes law, we will be pretty much back where we were pre-PACCAR. The judgment will probably then be seen as just a blip, and nobody will make reference to it ever again.’

'We look forward to the bill making its way through the parliamentary process and being in place by the summer recess’, said Susan Dunn, Chair of the Association of Litigation Funders. However, with a general election now called and the UK Parliament on the verge of dissolution, that might not happen.

Announcing the legislation, Lord Chancellor and Secretary State for Justice Alex Chalk claimed it would make it ‘easier for members of the public to secure funding for their legal fights against powerful corporations – such as those caught up in the Horizon scandal’.

This was a reference to a civil claim brought against the Post Office. Between 1999 and 2015, more than 700 local managers, or sub-postmasters, were prosecuted because Post Office executives believed money was being stolen from branch accounts. Many sub-postmasters went to prison for false accounting and theft, and several were financially ruined. A High Court judge later found that there was a ‘material risk’ that faulty accounting software known as Horizon, which was used by the Post Office, instead caused the shortfalls.

The successful case brought by the sub-postmasters against the Post Office was made possible by litigation funding. Alan Bates, Founder of the Justice for Subpostmasters Alliance, said the PACCAR judgment would make a legal challenge much more difficult if a similar situation were to arise.

A drama based on the Horizon scandal, broadcast on national TV in early 2024, received a strong public reaction. This means the litigation funding bill stands a good chance of becoming law even if there’s a change of government. ‘The notion of litigation funding enabling the “little guy” to take on a big corporation against the odds captured the public’s imagination and I can’t imagine any government wanting to go against that,’ says Orr.

One of the most significant problems in the last 20 years has been that justice is now out of reach for most people, says Orr. ‘You need insurance, you need funders. That’s why the litigation funding market has developed.’

Chalk also wrote to the UK’s Civil Justice Council (CJC) to ask it to conduct a review of litigation funding and assess the need for regulation. An interim report is due this summer and a final version by 2025. The CJC review ‘hopefully will see a sound public policy-based outcome which balances the rights of all stakeholders and increases the efficiency and cost-effectiveness in this market,’ says Robert Johnston, Co-Chair of the IBA Class Actions Committee and a partner at Australian law firm Johnson Winter & Slattery.

‘Too often we are seeing satellite disputes, often about procedural matters, resulting in significant delays and increased expense,’ he says. ‘This just operates to undermine the public’s confidence in the rule of law. It is beyond doubt that there is support in all quarters for litigation funding and appropriate collective address regimes in circumstances where the vindication of individual rights is simply too prohibitive to pursue in many legal systems.’

The CJC’s working group will be considering whether there should be a cap on litigation funding fees. There are concerns that these fees can sometimes eat up a significant portion of the compensation awarded to claimants. In the Horizon case, 80 per cent of the damages awarded were reportedly immediately payable to litigation funders.

Recent research into litigation funding published by the Legal Services Board (LSB) found that while it offers claimants their day in court, once costs and the funder’s return are taken, ‘the ultimate compensation may sometimes be too small to address the detriment a claimant has suffered, especially where rectification costs are involved’. On the other hand, the LSB says, where used, litigation funding ‘frequently facilitates litigation that otherwise would not be possible to fund via other means’. Day says a cap on fees ‘may well mean there are cases that funders just won’t touch, because they can't make the maths work. And that means the claimants end up with no access to the courts’.

Orr is in favour of a wide-ranging review of the sector. ‘The Jackson review [of civil litigation costs] was over ten years ago,’ she says. ‘A lot has changed since then. It’s a much more sophisticated market now. There are a lot of players, but it’s still slightly impenetrable for the average person.’ She believes the market needs to be examined given potential future cases. ‘There could be many more group actions over climate change, and the litigation funding market will have a part to play in that kind of dispute’, she says.

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