Jim Diamond: UKSC ruling puts pressure on litigation funders in England

Jim Diamond: UKSC ruling puts pressure on litigation funders in England

Jim Diamond

Jim Diamond discusses a recent Supreme Court case on litigation funding. Although in this article reference is made to the UK, it is not intended to cover Scotland, which has its own rules about funding agreements. The decision of the court does not affect agreements made under Scots law or funding of Scottish cases unless these agreements are in fact made according to English law.

Mr Diamond has worked in the funding arena since 2010, providing budget, cost management and introductory services to clients and UK and US litigation funders. Details of his mainstream legal work can be found on here.

The UK litigation finance industry has been shaken by the recent decision in the case of R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal and others. While many funders have tried to downplay the ruling’s potential impact, it is crucial not to underestimate the disruption and distraction it will bring.

Given the likely effects, it is perhaps unsurprising that the litigation funding industry is very much playing down the effect of the decision and an apparent sang-froid of the industry as evidenced in various quotes from several funders.

The legal dispute emerged in the context of follow-on proceedings aimed at securing compensation for alleged losses resulting from an arrangement among multiple truck manufacturers, which violated European competition law as determined by the European Commission’s infringement decision on July 19, 2016 (Case AT.39824 - Trucks). The claim asserted that consumers had to pay inflated prices for trucks due to this infringement.

Collective proceedings were initiated against various truck manufacturers, including DAF, for violating competition law under section 49B of the Competition Act 1998. To pursue these collective proceedings, the claimants obtained an order from the Competition Appeal Tribunal, certifying their ability to cover their own costs and adverse cost orders through funding arrangements with litigation funders and After-The-Event (ATE) insurance.

However, a dispute arose when DAF argued that the funding agreements were Damages Based Agreements (DBAs) under S. 58AA(3)(a) of the Courts and Legal Services Act 1990 (CLSA 1990), making them unenforceable due to non-compliance with the specified requirements.

So, what was the core issue and what was the outcome? Paragraph 27 of the judgment highlighted the pivotal statutory provision:

Section 58AA(3)(a) of the CLSA 1990 defines a damages-based agreement as “an agreement between a person providing advocacy services, litigation services, or claims management services and the recipient of those services…”

The central issue in the appeal revolved around whether funders, or funders in general, offer “claims management services”. The appellants argued they did, while funders disagreed. The court ultimately determined that funders do indeed provide “claims management services” because this includes “financial services or assistance”, even when not directly involved in managing a claim by lawyers. This was the key point of decision.

What are the implications of this decision? It means that the litigation funding agreements (LFAs) in question were considered DBAs and, since they did not comply with the Damages Based Agreement Regulations 2013 (“DBA Regs”), they were deemed unenforceable.

The relevant sections of the DBA Regs stipulate several requirements for damages-based agreements, including specifying the claim or proceedings to which the agreement relates, the circumstances for payment of the representative’s fees and costs, and the reasons for setting the payment amount.

Regulation 3(c) poses a challenge for funders as it is unlikely that any LFA includes the required pricing justifications. Another potential issue is Regulation 4(3), which limits the fee under a DBA to a certain percentage of the damages recovered, potentially affecting many LFAs.

The judgment raised the question of whether all LFAs are DBAs. For an LFA to be considered a DBA and thus subject to the DBA Regs, it must satisfy S. 58AA(3)(a)(i) and (ii) of the CLSA 1990. This may involve a ‘percentage of recovery’ return to the funder, although the precise interpretation remains a topic of debate.

What are the potential consequences? The UK litigation finance industry has operated for about 15 years, using various methods to calculate returns, such as a percentage of damages or a multiple of invested capital. While some believe this decision only affects LFAs with a percentage of recovery, the situation is uncertain and likely to face legal challenges.

Challenges will emerge in four main categories:

  • Cases funded in the Competition Appeal Tribunal (CAT): The LFAs in this case were ruled as DBAs, which are not allowed in opt-out proceedings in the CAT. Parties involved may seek to amend their LFAs, but defendants may contest this. Questions also arise about adverse costs and the stance of ATE providers.
  • Cases funded solely with a multiple return: Some LFAs define the funder’s return solely as a multiple of invested capital. Funders seem to have convinced themselves that these seem safe from DBA classification. This seems optimistic.
  • Cases with both a multiple and a percentage return: Many LFAs in the UK combine a multiple return with a percentage of damages, almost certainly falling under the DBA Regs.
  • Historic concluded cases: Funded parties that paid a portion of their damages to a funder through a percentage clause may seek reimbursement. This could lead to a significant number of cases revisiting payments made and is where the market is already seeing significant turmoil.

This decision has raised significant concerns for UK litigation funders and the law firms relying on them. All LFAs are now under review, and satellite litigation will continue for some time. A number of UK funders will not survive the challenges and there already significant market rumours in relation to several funder’s solvency.

Imagine the challenges for a funder that has been advising investors for a number of years but now has to revert to them and ask for funds paid over to be returned on the basis that the agreements they used are unenforceable and the profits made have to be reimbursed – an unpleasant conversation, but nonetheless conversations that are happening now.

Unsurprisingly some funders have felt the need to make public statements about the position and whether it affects them. It is highly unlikely that any funder operating in the UK is immune from these problems, regardless of their public stance. These issues are not confined to cases where a percentage has been charged – the issue remains that the funders have been held to be providing ‘claims management services’ and are caught by the DBA regulations in many situations – to think otherwise is far too simplistic. There are already a large number of clients having conversations with funders. There are funders who are happy to finance these claims. These discussions are underway. It is of course likely that settlement will be achieved, but at what cost to the funders. It is also unlikely that any funder wants to run the risk of setting a precedent.

There are many clients who now need the correct advice and they are not receiving it. The most surprising response in the time since this judgment is the reaction from lawyers acting for funded parties. Be under no illusion – this is a catastrophic decision. Lawyers are in a difficult position and those who do not advise properly as to the effects of it on their clients’ position, will be in the firing line. It seems already that a number of lawyers simply don’t understand the legal position, or do not want to.

Simply saying that the funder’s return is a multiple and not a percentage misses a number of points. Almost every LFA in the UK is caught by this decision and failure to advise clients as to the actual position will lead to a large number of claims against law firms. On the other hand, there is also a real problem for lawyers who advised funders on their LFAs. This is not new law. It is possible that if the funders have to reimburse clients, then those amounts and claims may be passed on to the lawyers.

One further curve ball may well result in further satellite litigation on the multiple instead of percentage-based LFA agreements. Litigation funders who use the term ‘reasonable legal costs” in their LFA may not fully understand the consequences of that term.

In simple terms, if there are £100,000 costs and they are assessed on a reasonable basis one would expect to have traditionally expected to receive between 60-80 per cent of these costs. However, following decisions such as Samsung Electronics Co Ltd v LG Display Co Ltd (2022) EWCA Civ 466 and Athena Capital Fund SICAV-FIS SCA & ors v Secretariat of State for Holy See (Costs) 2022 EWCA Civ 1061 and fully debated in Kerry Underwood’s blog Guideline Hourly rates: Are they Tramlines? are a gamechanger.

In Samsung the Court of Appeal said that even in very heavy commercial work, a party must provide “clear and compelling justification” to depart from London 1 Guideline Hourly Rate” (GHR). Using the £100,000 figure as an example, City partners’ rates are charged at £800-£1500 per hour in comparison to GHR for partners (London 1) is fixed at £512.00 per hour. That massively reduces “reasonable cost” in the 40-60 per cent (bracket) just on the hourly rates issue. Add the balance of doubt generic legal costs issues and reasonable costs could be further 10%-20% reduction.

In simple terms:

  • £100,000 costs x say a multiple of 4x, the litigation funders fees are circa £400,000.
  • £100,000 costs on reasonable costs say £30,000 x say a multiple of 4x, the litigation funders fees are circa £120,000.
  • Add a couple of 00s to the £100,000 costs example and then imagine the potential fallouts.

The GHR will also become more relevant to counsel. The GHR sub-group of the Civil Justice Council working party issued its report in May 2023. The report said counsel’s fees “should also be capable of being assessed by reference to a guideline hourly rate”. In the “Skat” litigation at a CMC in 2021, the budget brief fee for trial of £1m for junior counsel was dwarfed by the silks brief fee of £3m (yes, these figures are accurate, as I produced the budget). This in my view, is the beginning of the end for brief fees.

There are some very turbulent times ahead for funders with historic and current investments and the lawyers that advised them and their clients.

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