Profession counts cost of crucial UK Supreme Court litigation funding ruling

Funders have been quick to reassure market, despite talk of ‘shockwaves’, reports Ben Rigby


Law firms and litigation funders are taking stock following yesterday’s UK Supreme Court decision that the funding supplied to many competition collective actions may now be unlawful.

The judgment has triggered a widescale review of funding arrangements for some key elements of the UK collective actions regime while the litigation funding industry has moved to reassure the market about the extent of its impact.

In PACCAR Inc & Ors v Competition Appeal Tribunal & Ors, the court ruled that litigation funding agreements that channel a percentage of damages to funders are damages-based agreements (DBAs). This makes them subject to a statutory regime that commentators believe renders funding agreements underpinning opt-out collective proceedings unenforceable.

While there has been talk of the judgment sending shockwaves through the litigation funding sector, both the International Legal Finance Association (ILFA) and the Association of Litigation Funders (ALF) have been quick to reassure the market. 

Gary Barnett, the ILFA’s executive director, and ALF Chair Susan Dunn noted that the decision ran contrary to accepted understanding but stressed that litigation funding’s business fundamentals were sound, with the impact limited to how legal finance agreements are structured to ensure compliance. 

“Individual financiers will have been considering what, if any, changes are needed to their legal finance agreements as a consequence of this decision,” they said. 

The funders, however, were sharply critical of the court, noting that the costs of opt-out competition claims ran to tens of millions and calling the decision “a regrettable outcome” which handed an unfair advantage to well-funded multinational corporates at the expense of small businesses and consumers.

“As DBAs are not permitted in opt-out cases in the Competition Appeal Tribunal (CAT), this decision has the potential to prevent the intended purpose of the CAT from being fully realised,” they said, calling on the UK government to clarify the situation to ensure the proper funding of opt-out cases in the CAT.

That prospect, however, looks remote, not least given competing pressures on thinly-stretched government resources. 

One funder, Anglo-Australian AIM-listed Litigation Capital Management, was swift to stress the decision had no impact on its portfolio but said it would impact others, noting in a regulatory filing that the decision could enable it to grow its future market share in the funding market, “given the lack of diversity in a number of our key competitors”.

Like other funders, LCM has structured funding contracts, so returns are calculated as a rising multiple of invested capital over time, with the funder saying the decision did not come as a surprise, nor did it pose a risk to LCM’s business model. 

CEO Patrick Moloney said: “We were fully across the risks posed by the pending decision and are confident it will not adversely impact the returns across our portfolios of investments or our business model in the UK.”

Other funders expressed similar sentiments, while law firms were quick to agree. Former Law Society president and co-chair of the Collective Redress Lawyers Association, David Greene, of Edwin Coe, said the result was unsurprising to those who watched proceedings. 

The Supreme Court, said Greene, had introduced new hurdles to funding and consumer access to justice. “Those on the claimant side and funders will work on a mechanism that meets the Supreme Court’s hurdles, and the momentum for enforcement of rights and access to justice will continue apace,” he said.

Like Dunn, he suggested dynamism was needed to bring statutory certainty to funding and DBAs, reforms that the Civil Justice Council has long sought. 

Damon Parker of litigation boutique Harcus Parker said: “Although not altogether a surprise this will cause consternation in some quarters.” But, like Greene, he does not expect to see wholesale changes in the litigation funding market. Outside opt-out claims in the CAT, he said, the effect should be small, with funders seeking to amend agreements to express them in terms of multiples of a funder’s expenditure.

From the defendant side, Tim West, a commercial litigation partner at Ashurst, agreed funders and claimants would need to move quickly to review and potentially replace their funding arrangements. He said the fact claimants needed to show they had the financial means to pursue claims “gives defendants a hook to question whether class representatives still meet the financial means requirements”.

He added there was a possibility funders may have a basis to seek to recoup money paid out by them under an LFA based on a “mistake of law”, although this was likely to be limited to legal costs. Claimants might also now have a basis for seeking to claim back any rewards paid to funders on similar grounds, he added.

Glenn Newberry, head of costs at Eversheds Sutherland, said the ruling would send “shockwaves” through the funding industry with smaller operators going out of business. However, he added that the political and legislative imperatives of change would remain a live question. “The collective funding of consumer claims has helped bridge the gap caused by the erosion of state-funded legal assistance for civil claims. Funders may start to lobby to seek legislation that actively reverses this decision.”

Edward Starling, head of disputes at Wedlake Bell, noted that there had been a proliferation of funders over the last 10 years, which had partly assisted access to justice for unfunded litigants. That, he said, had helped make the cost of funding more accessible but also had the broader benefit for corporates, particularly regarding cashflow. 

Elena Rey, head of litigation funding at Brown Rudnick, said that while most funders would invest in opt-out claims, some would take a wait-and-see approach to determine the true extent of the disruption caused by the judgment. “Meanwhile, funders might choose to focus on other areas, such as opt-in class actions, law firm financing and enforcement and monetisation of awards,” she concluded.

It has been a rollercoaster week for UK collective actions, given the Court of Appeal's earlier resurrection of a £2.7bn class action against six investment banks for alleged foreign exchange (FX) manipulation by allowing proceedings to go ahead on an ‘opt-out’ basis. Legal commentators agreed the ruling provided the UK’s collective action regime with a major boost, sending an important signal to the CAT on where it should set the threshold for opt-out cases, which are much easier to pursue than those approved on an opt-in basis.

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