The low down
All eyes are on the litigation funding business because the Civil Justice Council undertakes a evaluation of the sector. Main adjustments could possibly be on the playing cards, together with statutory regulation, caps on funding returns and an obligation to reveal the presence of funding. However so far as funders are involved essentially the most urgent concern is the necessity for a authorities reversal of the Supreme Court docket’s July 2023 PACCAR ruling. Within the aftermath of PACCAR, funders needed to undertake a brand new method to structuring their litigation funding agreements. This new method is now underneath assault by defendants, with a significant Court docket of Attraction ruling on the difficulty as a result of be heard earlier than the tip of July. If it goes the improper approach, the implications for the business will probably be disastrous.
This isn’t an excellent time to be a litigation funder. Over the previous few years, the business has been beset by downside after downside.
Economically, the funding surroundings will not be what it was. Litigation funding thrived in a low-interest world the place it was arduous for buyers to make a good return in additional mainstream, much less dangerous investments. However that’s now not so.
What’s extra, litigation funding faces competitors from different funding choices that aren’t solely extra predictable, however don’t require the identical diploma of endurance earlier than reaping the rewards. As Malcolm Hitching, companion at Metropolis agency Macfarlanes, explains: ‘One longstanding difficulty which has come to the fore within the final yr or two is the so-called “length danger” of investments. Buyers assumed they might be investing in litigation property that might be more likely to yield a return in three to 5 years. The fact is that has not been the case. The courtroom course of is now sometimes taking longer than anybody would initially have foreseen.’
In opposition to this troublesome backdrop got here the fateful Supreme Court docket ruling in PACCAR ([2023] UKSC 28), dealing a dramatic physique blow to the business. Earlier than PACCAR, litigation funders had their cake and ate it, with a selection of two methods of getting paid: as a share of damages, or a a number of of the sum they invested. Most litigation funding agreements (LFAs) allowed the funder to take whichever of the 2 choices labored out greatest for them.
This has all modified since PACCAR, as a result of the Supreme Court docket determined that LFAs involving a return based mostly on a share (or share) of damages should be classed as damages-based agreements (DBAs). That makes all such LFAs invalid in opt-out collective proceedings earlier than the Competitors Attraction Tribunal, as a result of DBAs will not be permitted in these instances. Exterior of this, an LFA based mostly on a share would want to adjust to the Damages-Primarily based Agreements Rules 2013 so as to be legitimate; however that isn’t technically doable. Susan Dunn, founding father of Harbour Litigation Funding and chair of the Affiliation of Litigation Funders (ALF), explains why: ‘It’s as a result of DBAs will not be meant for third events, they’re meant for legal professionals. So in the event you take a look at the studying of the DBA rules, funders can’t make them match as a result of we’re not the legal professionals on the case. You simply can’t draft an settlement that works with the terminology of the DBA, as a result of they’re designed solely for use by a consultant who stands to realize cash from the case that they’re working for the shopper. So you’ll be able to’t make [LFAs] compliant.’
All this put an abrupt finish to the apply of funders calculating their return as a share of damages. Within the rapid aftermath of PACCAR, funding agreements have been urgently renegotiated and the business switched to basing returns solely on a a number of of the sum invested within the case (‘the a number of method’). Now that they now not have the choice of taking a sizeable share, nonetheless, the a number of that funders use has elevated, and funding has turn out to be dearer since PACCAR.
The overwhelming majority of LFAs have been efficiently renegotiated, helped by the truth that the place a case was ongoing and the funder’s monetary assist was nonetheless wanted, it was in everybody’s greatest pursuits to succeed in an amicable answer. Elena Rey, companion at Brown Rudnick, feedback: ‘I used to be more than happy with how the market handled the PACCAR determination, as a result of events in a short time got here to the identical answer, which was to amend the funding phrases and to work on amended funding constructions.’
The place instances have already concluded, nonetheless, or the place the events don’t want any extra cash from funders, the steadiness of pursuits is considerably completely different. Battles have been raging behind closed doorways, with purchasers or former purchasers difficult the enforceability of their percentage-based LFAs and both refusing to pay up or demanding their a reimbursement. As LFAs normally present for such disagreements to be resolved via arbitration, nonetheless, these disputes are confidential and it’s arduous to get a way of simply what number of are ongoing, and what the outcomes are.
To manage or to not regulate?
Whether or not and the way litigation funding ought to be regulated has been one of the vital high-profile points of the Civil Justice Council (CJC) evaluation, and organisations such because the Authorized Providers Board have referred to as for statutory regulation.
Richard Blann, head of litigation and conduct investigations at Lloyds Banking Group, summarised defendant considerations in regards to the present self-regulatory surroundings at a CJC session occasion final month.
He mentioned: ‘Litigation funding will not be altruistic, you don’t get American hedge funds investing within the UK for the advantage of UK shoppers… it’s vital to recognise the realities of that dynamic. The legal professionals wish to safe an revenue stream. That’s mitigated by their duties to their shopper… On this association, the claimant is the weakest occasion and, inside that dynamic, there’s potential for shopper hurt. This isn’t theoretical, we’ve got seen real-life examples of those dangers.’
Blann mentioned examples included shoppers getting little or no info on the phrases of the funding, and being prone to hostile prices if issues go improper. ‘We’ve seen some examples within the press lately the place the legal professionals collapse, the ATE gained’t reply and the funder doesn’t step ahead to choose up any legal responsibility, and so it’s left with the buyer themselves,’ he mentioned. Blann added that voluntary self-regulation is ‘ineffective and insufficient’, as not all funders are signed as much as the Affiliation of Litigation Funders (ALF), which in any case lacks ‘tooth’.
ALF chair Susan Dunn asserts that whereas the ALF might solely have 17 members, these ‘symbolize 95% of the funding that goes on on this nation’. Funders additionally level to the ‘umbrella impact’ of ALF’s code of conduct, with its requirements now broadly adopted all through the market. Additionally they query the proof of any hurt that must be addressed by regulatory change.
Stewarts companion Julian Chamberlayne displays that ‘one thing needs to be accomplished about the issue that ALF doesn’t symbolize something like all of the funders working out there’. One choice can be an ‘ALF 2 mannequin’, whereby ALF membership is obligatory, via licensing. One other can be full statutory regulation via the Monetary Conduct Authority. ‘There are clear execs and cons to that,’ he muses. ‘Full FCA regulation is unlikely to make funding cheaper. However we’ve obtained a robust funding market, and the time might have come to make sure that funders are all working underneath the identical code.’
Elena Rey, companion at Brown Rudnick, says that the presence of SRA-regulated legislation corporations in any funding association already gives a layer of safety. She provides: ‘I’d welcome a extra proactive ALF entity. However the safety is best than in different industries. For instance, we don’t have any code of conduct for actual property builders or lenders, and there are many offers in the true property market with very excessive pricing… So I’m undecided why there’s a lot concentrate on litigation funding, given the advantages that it additionally brings.’
A sequel to PACCAR?
If the PACCAR ruling was the equal of a zombie horror film for funders, then they should brace themselves for what could possibly be a terrifying sequel, coming quickly to the Court docket of Attraction (CA). A listening to in Alex Neill v Sony Interactive Leisure might herald an actual apocalypse for the business, as a result of the validity of the a number of method – on which the overwhelming majority of funding agreements at the moment are completely based mostly since PACCAR – is underneath problem. The CA listening to teams collectively plenty of appeals from the CAT that every one require a definitive reply on the query of whether or not LFAs based mostly on a a number of ought to be classed as DBAs, rendering them unenforceable. A keep on these appeals, imposed whereas PACCAR -related laws seemed imminent, was lifted in February, and the listening to will happen by 31 July.
‘I’d be shocked if multiples weren’t upheld… the market has thought-about all completely different prospects of the right way to adapt for the reason that PACCAR ruling got here out, and this was considered the most secure method’
Elena Rey, Brown Rudnick
So why would possibly the a number of method quantity to a DBA? In LFAs calculated as a a number of of the sum invested, the funder’s price can’t be greater than the complete quantity of damages. Defendants argue this creates a connection between the funder’s price and a (100%) share of the damages; and so a DBA is born.
Many legal professionals imagine this argument is unlikely to succeed. Rey suggests: ‘I’d personally be shocked if multiples weren’t upheld… the market has thought-about all completely different prospects of the right way to adapt for the reason that PACCAR ruling got here out, and this was considered the most secure method, not simply by funders, but in addition by king’s counsel and legal professionals who suggested them. I feel that’s an excellent indication of multiples being throughout the authorized framework.’
‘If the Court docket of Attraction finds that LFAs utilizing a a number of are making a DBA, that will probably be an enormous shock to the business’
Jenny Morrissey, Harcus Parker
The problem is that whereas it could be completely doubtless that the Court docket of Attraction will uphold the a number of method, nobody may be positive; and if it doesn’t, the ramifications will probably be large. As Neil Purslow, chair of the Worldwide Authorized Finance Affiliation and chief funding officer at funder Therium, places it: ‘The Court docket of Attraction case could be very, very important. It shouldn’t go improper, but when it does, it’s PACCAR 2, and dangers inflicting irreparable hurt to the funding business and the provision of litigation funding on this jurisdiction.’
Jenny Morrissey, companion at Harcus Parker, provides: ‘If the Court docket of Attraction finds that LFAs utilizing a a number of are making a DBA, that will probably be an enormous shock to the business, as a result of all of the newly negotiated agreements [since PACCAR] may even fall foul… It might forestall single [case] funding, as a result of how on earth do you calculate your return? The normal funding of funder to claimant can be blown out of the water. And simply take into consideration the prices which were spent coping with PACCAR. The prices that might then be spent coping with this – one would assume that the federal government might need to take a seat up and listen at that time, as a result of basically, it’s impacting the power of claimants to entry justice.’
‘It might be troublesome for funders to maintain laying out hundreds of thousands of kilos funding claims in the event that they actually thought their agreements have been at critical danger of not standing up’
Julian Chamberlayne, Stewarts
Regardless of the Court docket of Attraction decides, that won’t be the tip of the matter, as one facet or the opposite will inevitably attraction to the Supreme Court docket. It will require permission to attraction, however given the importance of the problems, that appears unlikely to be refused.
Julian Chamberlayne, companion at Stewarts, predicts that if the Court docket of Attraction does rule in opposition to the validity of the a number of method, ‘we’ll all have a horrendous interval ready for it to rise up to the Supreme Court docket’. He provides: ‘Within the meantime, there’s each likelihood there will probably be a hiatus. It might be troublesome for funders to maintain laying out hundreds of thousands of kilos funding claims in the event that they actually thought their agreements have been at critical danger of not standing up. They will’t simply hold shovelling cash in in the event that they’re at critical danger of not getting their a reimbursement, not to mention getting the return on it.’
Within the various, if the Court docket of Attraction upholds the a number of method, Chamberlayne suggests it might be ‘enterprise as standard’ whereas the difficulty made its approach to the Supreme Court docket. By which period, the Civil Justice Council (CJC) may have printed the suggestions from its evaluation of litigation funding, due this summer time. It is usually doable that the federal government may have signalled an intention to legislate. If there isn’t any signal of any PACCAR laws earlier than the a number of query reaches the Supreme Court docket, nonetheless, then the funding business ought to be very apprehensive. In PACCAR itself, the best courtroom took a really black-letter method to the wording of rules and paid no regard to the real-world penalties, which have been for presidency to cope with. There is no such thing as a cause to assume it might change that method.
State of uncertainty
In line with Regulation Society analysis, the UK authorized sector generates £44bn in turnover for the UK economic system. However there are rising indicators that the fallout from PACCAR is having a dangerous affect. Burford Capital, for instance, with a $7.5bn litigation portfolio, lately mentioned it was shifting some dispute decision exercise away from London to rivals similar to New York as a result of persevering with ‘uncertainties’ within the UK.
Hitching feedback: ‘If you’re a funder, why would you spend money on a single case alternative in England and Wales in the mean time? Litigation is a dangerous sufficient funding as it’s. If there have been further danger layers on prime to say that, if we win, there’s really no certainty that we’re even going to get our a reimbursement – fairly aside from the return – funders are going to say, fairly rightly, we’re going to place our cash some other place.’
He provides: ‘Certainly as an economic system, what try to be after is development. What is occurring in the mean time is the other of development, it’s precluding buyers from investing into the UK economic system.’
Macfarlanes companion James Popperwell factors out that the complete impact of PACCAR will not be but seen. He says: ‘The fascinating query is, what’s the impact of PACCAR on new funding, subsequent to July 2023? For the time being we’re nonetheless seeing instances that have been funded pre-PACCAR enjoying out… However give it one other 12-18 months, and we should always see whether or not the brand new instances being filed within the courts are going to be on the rise, or on the decline. There are already indicators that it’s trying like a downward trajectory… That is actually partly affected by uncertainty within the litigation funding market affecting English instances.’
Dunn provides that the adverse results of PACCAR are actual, not theoretical. She displays: ‘In an unsure world, whenever you’re making an attempt to lift cash as a funder, the extra uncertainty there’s, the harder it’s to lift cash. With out query, funders throughout the piece are discovering it difficult to lift cash.’
It’s not simply the funders which might be affected. As Popperwell explains: ‘We’re not simply speaking in regards to the funding of instances, but in addition the funding of legislation corporations, which is enjoying an more and more vital function within the litigation panorama at present. That funding permits these legislation corporations to supply their very own DBAs or CFAs. But when this uncertainty impacts the funding to these legislation corporations, the funders can’t supply these offers…. we’re in a state of affairs that isn’t so completely different to what we had pre-Jackson reforms, after we had no DBAs and little or no third-party funding. We had CFAs, which have been broadly recognised to be disproportionate of their impact. And that’s the place we discover ourselves at present; it looks as if CFAs are the one sure, viable approach of funding a big business case in England. We’ve wound the clock again.’
ThePACCAR query kinds a part of a broad-ranging evaluation of litigation funding being carried out by the CJC. Funders hope that when it publishes its suggestions this summer time, the council will urge authorities to take separate, immediate motion on PACCAR, slightly than coping with it as a part of the broader reforms, which can take longer. Underneath the earlier authorities, justice secretary Alex Chalk had spearheaded a brief Litigation Funding Agreements (Enforceability) Invoice to just do that, however this fell sufferer to the final election. The Labour authorities has to this point declined to observe go well with, indicating that it’s going to cope with PACCAR as soon as it has thought-about all the problems within the CJC’s evaluation ‘within the spherical’.
Hitching warns that legislative motion on PACCAR might come too late: ‘Whether it is one other 12-18 months earlier than something actually occurs, there could also be little or no left by means of capital that basically desires to deploy on this sector on this nation. It’s a finite useful resource… PACCAR is a extremely important dampener on the litigation funding market on this jurisdiction and we’d urge that the federal government offers with it speedily.’
Opponents of the earlier LFA invoice argued strongly in opposition to its retrospective impact, which they are saying is unjustified and goes in opposition to authorized norms. Retrospectivity could be very important for funders, as with out it they may nonetheless be weak to challenges over previous agreements. At a latest CJC session occasion, Mr Justice Simon Picken, co-chair of the CJC evaluation, gave funders trigger for hope. Itemizing an entire vary of findings that the evaluation would possibly probably make, he included a possible conclusion ‘that third-party litigation ought to be considered as a [DBA] however that the place ought to solely apply to post-PACCAR agreements, and that any agreements entered into pre-PACCAR shouldn’t be understood to be damages-based agreements’. This not less than suggests the CJC has not dominated out recommending retrospective laws.
Underneath evaluation
With the CJC presently scrutinising the funding business, many out there have been shaking their heads final December on the timing of a uncommon public spat between a funder and a category consultant. The £200m settlement agreed between Walter Merricks CBE and Mastercard, in a declare as soon as valued at £10bn, led to funder Innsworth Advisors difficult the settlement settlement within the CAT, with out success. ‘It was a nasty coincidence that this got here up simply on the time when [litigation funding] is correct underneath the highlight [and] points like funder management are being thought-about,’ remarks Chamberlayne.
‘Why ought to a cap be imposed between refined contracting events? Why ought to any restriction be imposed?’
Malcolm Hitching, Macfarlanes
In addition to questions over how funder conduct ought to be regulated (see field), two additional points are lurking throughout the CJC evaluation that make funders notably jumpy. The primary is whether or not funded events ought to need to disclose that they’re backed by litigation funding; a transfer presently being thought-about in numerous US states and elsewhere to carry better transparency. Funders fear this could hand an vital tactical benefit to opponents and argue that the identical guidelines ought to then apply to disclosure of defendants’ insurance coverage.
The second controversial difficulty is whether or not funder returns ought to be capped. This highlights the completely different state of affairs confronted by shoppers versus business events. Hitching displays: ‘Why ought to a cap be imposed between refined contracting events? Why ought to any restriction be imposed? It strikes us as wrongheaded that one ought to attempt to impose restrictions in these circumstances. However flip it round, and if there are shoppers, then it’s extra comprehensible. If a shopper wished to borrow cash, for instance, they might be protected by the Client Credit score Act. The CJC might say that could be a wise comparator… there could possibly be some sort of shopper safety.’
He provides: ‘I’d warning very significantly in opposition to interference in relation to freedom of contract between refined events… It might be perverse to go in opposition to centuries of custom on this nation that basically says, if you’re a complicated contracting occasion, you’ll be able to agree what you want. That has made it a really engaging place to do enterprise.’
Total, the CJC might want to strike a cautious steadiness to attain the appropriate stage of management over the funding business whereas guaranteeing that it will probably nonetheless do the job it’s wanted for.
‘Litigation is so costly on this nation that only a few folks can afford it,’ remarks Hitching. ‘If funding drops away as an choice, that will probably be a nasty end result. There will probably be lots of people who gained’t have the ability to carry their instances, and gained’t have the ability to even take into consideration accessing justice.’
Rachel Rothwell is editor of the Gazette’s sister publication, Litigation Funding
