The possibility that litigation funding agreements could fall within the definition of a damages-based agreement was trailed in our PodCost with Andrew Post KC earlier this year.  However, many of us thought that despite funders having the ‘soft power of holding the purse strings’, litigation funding agreements were clearly not damages-based agreements.

In the case of PACCAR, the Supreme Court has now decided otherwise.  On the back of what Simon described as a ‘narrow point of statutory interpretation’, the Supreme Court concluded that funders are providing ‘financial services or financial assistance’ and they must therefore be providing claims management services. As a result, litigation funding agreements are capable of being damages-based agreements if they provide for payment to a litigation funder for litigation services received based on the financial benefit obtained by the client.

The majority judgment of Lords Reed, Sales, Leggatt and Stephens includes some important points:

·        Although it is possible to say what sits outside the definition, there is no consensus about what ‘claims management services’ are and, because of this, the definition supplied by Parliament can’t be easily displaced.

·        There are important limits on how safe it is to rely on later legislation to construe earlier legislation.

·        A purposive interpretation will only be deployed when the court perceives some ambiguity in the natural and ordinary meaning of the words used.

·        The rule against absurdity won’t usually enable the court to rewrite a statute or substitute its own view about what should have been said.

Simon’s view is that Lady Rose’s dissenting judgment contains ‘powerful and convincing reasoning’ to the contrary:

·        the label ‘claims management services’ shouldn’t be abandoned just because there are specific definitions which also apply.

·        the 2010 and 2013 DBA regulations are an aid to interpretation and were not aimed at litigation funders.

·        it was improbable that Parliament would propose the direct regulation of litigation funders via s58 (b) of the Courts and Legal Services Act 1990 only to indirectly bring them within s58 AA – thereby rendering almost all litigation funding agreements unenforceable.

Whilst the majority of the Supreme Court approached their task as an academic exercise and did not appear concerned about the impact of their decision, both Simon and Jeremy make the point that the courts should be aiming for a just outcome which meets policy objectives and can operate in the real world.  There is much to commend the approach of Lady Rose, who did appreciate that there is a problem here to solve.

What next?

Simon makes the immediate distinction between ongoing and future cases and concluded or near-concluded cases.

The focus will initially be on ongoing cases and his prediction is that, over the next six to nine months, some degree of clarity will emerge to provide workable alternative structures – particularly in relation to collective actions.  Simon is optimistic that judges will bend over backwards to find ways to make this type of litigation work.

Bigger issues will arise in relation to concluded cases and some litigants, law firms and funders will end up involved in high stakes litigation trying to resolve the many issues which will inevitably arise.

Simon predicts that two issues will come to the fore:

1.      Can unenforceable parts of a litigation funding agreement be severed from an otherwise enforceable retainer?

2.      Will a client be able to demand repayment of sums which have been paid to their solicitor under an unenforceable DBA?

Both points also feature in a case which Simon is currently involved in – Volterra Fietta.  The first instance decision of Costs Judge Rowley was upheld by Mrs Justice Foster DBE and judgment is currently awaited from the Court of Appeal.

These policy points were also aired in the 2021 Court of Appeal case of Zuberi v Lexlaw Ltd and the decision in that case will have renewed importance going forward.  The irony isn’t lost that in Zuberi the Court of Appeal took a pragmatic view and, knowing that the Ministry of Justice had failed to advance the 2019 regulations drafted by Nick Bacon KC and Professor Rachael Mulheron, they refused to uphold an interpretation which would make DBAs unenforceable or insanely risky.

Simon does not see a scenario as likely in which the MOJ rapidly responds with a ‘perfectly honed and directed amendment that solves a practical problem’.  He predicts years of disputes to come.

There is also an inevitable concern that the reputation of London as a hub of international litigation and arbitration will be tarnished by this judgment.  Clients and funders do not want to see the commercial viability of a case being affected by old fashioned and inflexible rules which compare poorly with more modern permissive jurisdictions elsewhere.  It is in all our interests to have a system which works, and which is attractive to its users.

Few would be against a greater level of regulation of litigation funders, particularly if it came with the quid pro quo of reducing risk for funders, because the danger currently is that if you cross the line in relation to enforceability, you completely fall off a cliff with the result that nothing is recoverable.

Andy makes the points that in the light of the PACCAR decision we will see a rise of ‘’ type challenges and there will be increased activity around the certification process for collective actions in the Competition Appeal Tribunal.

Discussing the session with Jeremy after the event, he highlighted the continuing need to check terms of business carefully and not to rely on conventional wisdom – wise words indeed.


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