Today's main discussion revolved around a critical topic we have previously covered in our PodCost– the far-reaching effects on litigation funding agreements of the Supreme Court's ruling in the PACCAR case.
In a nutshell, a 4:1 majority of the Supreme Court determined that a conventional third-party funding setup, where the funder gets a portion of the damages in return for supporting the litigation, was a non-compliant damages-based agreement. Reversing the pragmatic decision of the Court of Appeal, the Supreme Court decided that litigation funders are providing ‘claims management services’.
This decision proved fatal for the claimants in PACCAR, because damages-based agreements aren't permitted in collective opt-out proceedings in the Competition Appeal Tribunal (CAT). Beyond this specialised forum, the Supreme Court's decision means that funding agreements must adhere to the statutory requirements for damages-based agreements to be legally binding. That is easier said than done because it is ‘perfectly plain’ that the damages-based agreements regime was designed to cover lawyers, not funders.
Regulation 4 of the Damages-Based Agreements Regulations 2013 is particularly tricky. The payment to the funder must be made after deducting any costs or disbursements recovered from the paying party. When a solicitor already has a compliant damages-based agreement that accounts for such deductions, how can the funder comply with the rules? The funder can't deduct the amount again – it doesn't add up.
It might seem logical to alter the funding agreement so that the funder receives a multiple of their commitment rather than a percentage of the damages. However, the payment to the funder must still come from the client's damages. Funding agreements are often capped to ensure the client doesn't pay the funder more than they receive in damages. If the funder's payment is capped based on the damages, it could be argued that the amount paid is 'determined by reference to' the damages, rendering the agreement unenforceable. This is an unattractive prospect given that the cap is a consumer protection measure. However, this exact argument was presented in the CAT in a case against Sony (on 9 October 2023) and judgment has been reserved.
In the CAT, because of the certification requirements, discussions on funding occur early in the case. In commercial cases, these arguments may not surface until after the costs order is made, by which point it is too late to modify a funding agreement to ensure recovery from the paying party.
The Supreme Court's ruling presents a significant challenge to litigation funding in this country. The government might step in –in a statement, the Department for Business and Trade has said that it is carefully reviewing the judgment. Litigation funders have been actively lobbying the government, and a substantial portion of CAT cases, which rely on third-party funding, has been severely impacted by this decision. We will undoubtedly delve deeper into the ramifications of this ruling in the months and possibly years to come.
Today's discussion also covered a topic likely to resurface in future PodCost editions – the recent costs review by the Civil Justice Council, particularly its recommendations regarding costs budgeting.
As widely reported, the CJC report suggests keeping budgeting in place, but emphasises that a one-size-fits-all approach isn't appropriate. Alex points out that the details are currently a bit unclear, and we'll have to await specific proposals for budgeting in different types of cases.
Two longstanding decisions are highlighted – Kazakhstan Kagazy PLC (the budget should be the ‘the lowest amount which you could reasonably have been expected to spend to have a case conducted and presented proficiently’) and Discovery Land Company LLC (budgeting is supposed to be within a range).
There is a discussion about potentially separating costs management from case management in substantial litigation – and budgeting by stage rather than phase is also considered.
This PodCost emphasises the importance of giving clients clear and comprehensive information about the status of interim and final invoices and Alex is astonished by the number of major law firms that come a cropper with their retainers.
There may also be an increase in solicitor/client costs challenges driven by increased shortfalls between costs billed and costs recovered. Alex, Jeremy and Andy look at two areas where this might be a particular problem:
• As of 1 October 2023, fixed recoverable costs now apply to nearly all cases seeking damages up to £100k. While the rules don't dictate what a solicitor can charge their client, increased costs shortfalls are likely to be problematic.
• New guideline hourly rates (for summary assessment) were reintroduced in October 2021 after a decade-long hiatus. The Court of Appeal has clarified that London 1 rates are for extensive commercial work by centrally located London firms and parties seeking rates above the guidelines must provide compelling reasons. If costs shortfalls are greater because only guideline hourly rates have been allowed, this is another factor which may push clients towards solicitor/client assessments of their costs.
The panel also discusses currency conversion of fees not billed in sterling for the purposes of detailed assessment by reference to the case of Micula and others v Romania.
The final topic is a lighter look at what may be on the horizon for the use of AI to produce legal arguments, and even to assist with written judgments.
The contents of this article are for general information purposes only and do not constitute legal advice. While we endeavour to ensure that the information in this document is correct, no warranty, express or implied, is given as to its accuracy and we do not accept any liability for error or omission.