Time to end the post-PACCAR chaos

There has never been a better time to be a lawyer who specialises in litigation funding agreements (LFAs). Since the Supreme Court’s (pictured) bombshell July ruling in R (on the application of PACCAR Inc) v Competition Appeal Tribunal [2023] UKSC 28, funders have had their favourite lawyer on speed dial, as funded parties queue up for a post-PACCAR meeting with them. Naturally, the power dynamic in these encounters rests on how close a case is to its conclusion – and how much the client still needs the funder’s support to continue their case.

For lawyers, advising on LFAs after PACCAR is both a nightmare and a dream come true. The hard part is that there are no straightforward, easy answers. However, there is also room for manoeuvre. A nimble lawyer can dance this way and that, arguing it from one side or the other, according to the client’s interests – be it a funder, or a funded party.

So what are the big unknowns? Most LFAs provide for the funder to be paid in two possible ways: as a percentage of damages, or as a ‘multiple’ of the sum it invested in the case. The percentage method is definitely not enforceable in the wake of PACCAR. But can agreements based only on a multiple still be valid? It seems the market is beginning to coalesce around the idea that they can.

But then there is the issue of severance clauses. Where an LFA provides (as many do) for payment to be the greater of, say, 40% of damages, or four times the amount invested, can this first limb be successfully amputated, leaving the rest of the agreement still standing? Or does this fundamentally change the nature of the agreement, causing it to collapse?

And if all else fails, can funders be saved by the principle that, if a client were able to avoid paying the funder, they would be benefiting from ‘unjust enrichment’; and so the funder is entitled to at least get its money back on that basis?

These are just some of the grey zones where conflicting case law leaves plenty of scope for argument, particularly since the Court of Appeal’s timely October ruling in Diag Human v Volterra Fietta [2023] EWCA Civ 1107, which adds to the mix on severance and unjust enrichment in a way that funders will not enjoy very much.

These same legal points will be cropping up in many separate disputes. What the market really needs is some binding authority on these issues. So far we have had a fleeting glimpse of the courts’ attitude in October’s twin rulings in Therium Litigation Funding A IC v Bugsby Property LLC [2023] EWHC 2627 (Comm) and Omni Bridgeway (Fund 5) Cayman Invt. Limited v Bugsby Property LLC [2023] EWHC 2755 (Comm), which involved an application by the funders for an injunction to protect the proceeds of the case. Jacobs J granted the injunction and accepted there was a ‘serious issue to be tried’ in relation to the enforceability of the LFA and the severance issue.

But while the market may be in dire need of a clear court ruling on the various uncertainties listed above, it is not going to get them any time soon. The vast majority of LFAs provide for disagreements to be resolved by arbitration. So the key battles will take place behind closed doors with the same arguments being recycled, but different arbitrators potentially reaching different conclusions.

All this chaos is not just bad for the litigation funding industry. It is also bad for all those businesses and individuals who may need to use funding in the future because they lack the financial firepower to bring their valid claims without it. PACCAR will make funding more expensive, and less available. As funders can no longer take a percentage of damages, they will compensate for that by charging a higher multiple. This in turn will rule many cases out of the equation, because their value will not be high enough to support that higher multiple. And so fewer clients will be able to bring their claims.

So what can be done? The government has already taken steps to salvage opt-out claims before the Competition Appeal Tribunal. Last month it shoehorned a narrowly drafted amendment into the Digital Markets, Competition and Consumers (DMCC) Bill as it dashed through the House of Commons. This is intended to ensure LFAs based on a percentage of damages will still be enforceable in such claims.

This week the meaty DMCC bill enters the Lords, where it will be scrutinised and debated. This a golden opportunity for a broader amendment to the DMCC that could clear away the damaging uncertainty surrounding all LFAs. Legislation is the only way to resolve this.