Having overcome initial scepticism and historic public policy concerns, third party litigation funding has emerged in England as an increasingly popular vehicle through which parties opt to finance and manage risks arising from legal disputes. The involvement of litigation funding in recent headline cases, such as the Post Office/Horizon scandal and Mariana Dam litigation, as well as record levels of financial investment (which now includes many mainstream investment managers), have resulted in increasing momentum behind the use of third party funding in English litigation.

However, last year, the industry faced a potentially significant setback when a Supreme Court decision threatened to invalidate many existing funding arrangements. The UK government has subsequently sought to unpick the effects of the Supreme Court decision in draft legislation currently making its way through the Houses of Parliament. Yet, despite this apparent reset, further regulation of the litigation funding market appears to be on the horizon.

The road haulage case that put the brakes on third party litigation funding

In July 2023, the Supreme Court plunged the litigation funding industry into uncertainty as a consequence of its decision in R (on the application of PACCAR Inc) v Competition Appeal Tribunal [2023] UKSC 28. The court ruled that litigation funding arrangements (“LFAs”), under which funders typically finance the costs of a dispute on the basis that they will receive a percentage or portion of any damages awarded (irrespective of whether they played an active role in the conduct of the litigation) may fall under the statutory definition of damages-based agreements (“DBAs”) under section 58AA of the Courts and Legal Services Act 1990. Consequently, LFAs which are held to be DBAs but do not meet the relevant (and restrictive) regulatory requirements will likely be unenforceable. Crucially, for competition claims, DBAs are not permitted in opt-out collective proceedings.

The ramifications of the decision were, initially, expected to be far reaching. In her dissenting judgment, Lady Rose noted that the court’s finding was likely to “invalidate most if not all LFAs that have been agreed since litigation funding began”, leaving funders scrambling to review and, where necessary, amend their funding arrangements at the risk of forgoing any future recoveries.

Post-PACCAR challenges to TPLF in the Competition Appeal Tribunal

In the months after PACCAR, several defendants to collective proceedings before the Competition Appeal Tribunal, including Sony, MasterCard/Visa and Apple, sought to challenge the LFAs entered into by opposing class representatives. In each case, the LFAs had been amended in light of PACCAR. However, Sony, MasterCard/Visa and Apple each sought to argue that the agreements still fell within section 58AA as the funder’s fee would ultimately be capped (in the MasterCard/Visa case, expressly) by reference to the amount or a subset of proceeds recovered in the litigation.

In each case, the Tribunal held that LFAs where the funder’s fee was based on a multiple of the funding provided were not DBAs, despite being capped by reference to proceeds, and were thus enforceable in both opt-in and opt-out actions.

Government intervention

Also in response to the PACCAR decision, on 19 March 2024, the Litigation Funding Agreements (Enforceability) Bill (“Bill”) was introduced in the House of Lords by the UK government. The Bill as introduced, primarily sought to carve out LFAs from the definition of DBAs in section 58AA. In other words, it sought to restore the law to the pre-PACCAR position whereby litigation funding agreements are not considered DBAs where their return is calculated on the basis of a percentage of the damages awarded. The Bill had progressed to the House of Lords Committee report stage, however with the calling of the 4 July 2024 general election, the Bill will now no longer proceed in its present guise. Despite the cross-party support for the Bill, there have been no statements by either the Labour or the Conservative parties about introducing similar (if not the same) legislation in the next parliament.

Changes on the horizon

A number of points which participants in the litigation funding market should be aware of were raised throughout the House of Lords’ review of the Bill and therefore could be raised again in any future legislation, including: (i) concerns over the level of sums ultimately recovered by claimants that enter into litigation funding arrangements and whether limits on litigation funding recoveries should be introduced; (ii) concerns regarding the retrospective effect of the Bill on arrangements that have been re-negotiated to account for the PACCAR judgment; and (iii) possible government intervention and regulation of the litigation funding market.

These matters, amongst others will likely be explored as part of the Civil Justice Council (“CJC”) review of the litigation funding market. The CJC has scheduled delivery of an interim report for summer 2024, and a full report by summer 2025. Publication of these CJC reports will likely give the market a clearer sense of the future direction of any government legislation and longer term certainty over the position of litigation funding in the UK. However, it is unclear whether this means that the new government will refrain from reintroducing similar legislation to the Bill until after the CJC has delivered both of its reports, thereby leaving the litigation funding industry in limbo for the interim.

Concluding thoughts

Whilst the fears of last summer, concerning the significant impact of the PACCAR judgment, appear to have been largely unfounded in light of the initial political willingness to bring forward sensible legislation overturning the PACCAR judgment (i.e. the Bill), the election has created space for greater uncertainty.

Without publication of clear policy positions from any of the major parties concerning litigation funding, and the impending release of the initial CJC report, it is not clear if legislation similar to the Bill will be introduced in the short term. If not, then it will be left to the Court of Appeal to hear a number of forthcoming cases regarding the outcome of the PACCAR judgment and clarify its impact in the near term.

In addition to the above, the long term direction of the UK litigation funding market also remains unresolved. Whether market saturation and high interest rates stymie litigation funding’s historic growth remains an unanswered question. However, for the moment, litigation funding serves as a valuable tool for providing claimants access to justice and a potentially lucrative investment opportunity for the finance industry, one which the CJC reports and future UK government will hopefully seek to fortify.