Litigation funding shake up in 2024?

Litigation funding shake-up in 2024?

2024 will see changes in the rules related to how disputes are funded, but it is as yet unclear how far these will go. A series of recent developments has renewed momentum for the government to look again at the regime governing Damages Based Agreements (DBAs) - agreements under which lawyers or funders share in damages received, rather than being paid for time spent or capital committed.

A head of steam had built up for reform of the 2013 Damages Based Agreement Regulations (once labelled as not "the draftsman's finest hour" by a judge), but this dissipated in the COVID crisis. The Court of Appeal's apparent flexibility in interpreting the Regulations in Lexlaw v Zuberi (for more on which see here) arguably reduced the impetus, though it addressed only one issue with DBAs - the question of whether an alternative basis for payment could be used where the client dismissed its solicitors.

New drivers for reform

Then came the judgment of the Supreme Court in PACCAR (for more on which see here). This held that allLitigation Funding Agreements (LFAs) where the funder's return is potentially based on the damages recovered are DBAs and subject to the Regulations. No funders had worked on this basis and so many LFAs do not comply, with the effect that they are unenforceable.

The fallout from this decision has started and will continue throughout 2024. In Therium Litigation Funding AIC v Bugsby Propertythe High Court heard arguments as to whether funds should be frozen pending determination of whether a LFA was unenforceable following PACCAR. The funded claimants had settled their claim but have refused to pay the funders under the LFAs. The enforceability of the LFA will ultimately be decided by arbitrators and therefore have no binding effect on other similar cases, of which we expect there to be many.

Conditional Fee Agreements

One ominous sign for funders in all this is the High Court's decision in Diag Human v Volterra Fietta. *This case concerned a Conditional Fee Agreement(CFA) rather than a DBA, a CFA being an agreement where the fee paid to the solicitor is increased in the event of success, but by a percentage of the fees, not any damages awarded. In *Diag the parties had entered into a CFA which breached the applicable rules by allowing the solicitors, in certain circumstances, to be paid a success fee of more than 100% of their fees. The result was that the CFA was unenforceable. The court held that this meant that the solicitors were not entitled to be paid for their work at all and had to return any fees paid by the client so far.

The fact that Diag relates to CFAs rather than DBAs means it may be distinguished in cases where DBAs are challenged as unenforceable post-PACCAR. The judge noted this in Bugsby, without having to reach a decided view. But there is an obvious parallel. The court in Diag held that the offending clauses could not be severed, as to do so would change the nature of the agreement altogether. If that logic is followed in cases relating to LFAs that are DBAs, clients will not be obliged to pay their funders. If a client has no legal obligation to pay for its legal costs, it cannot claim them from the losing party, so those who lose litigation will have an interest in challenging the winners' LFAs too.

Litigation funding is now an essential part of the litigation landscape and certain types of claims are almost universally reliant upon it -- competition class actions being a case in point. If the result of PACCAR is the undermining of the funding industry, change will be urged upon the government.

Excessive rewards?

There is one more recent development that may also drive change: the apparent risk of excessive reward under a DBA undermining professional standards. In an explosive judgment in Nigeria v P&IDthe judge reported a solicitor and a barrister to their respective professional bodies over their conduct of the case. They had failed to return documents mysteriously sent to them that belonged to the other side and were subject to professional privilege. The judge made clear that in his view the fact that they stood to gain huge amounts if the claim succeeded may have influenced their behaviour. How huge? Try £3 billion for the solicitor and £850 million for the barrister. As the claim was worth £11 billion, those amounts did not breach the DBA Regulations, which impose a limit of 50% of damages recovered.

On a lesser scale, it is worth noting that in Therium v Bugsby the claimant would be left with nothing from its £27.6m settlement if it does have to pay its funders their return under the funding agreements. It is possible that returns under LFAs will come under scrutiny as well, though there is no question of these causing breaches of professional standards.

2024

The coming year is likely to be a busy one in terms of developments in the field of disputes funding. More parties to disputes are likely to follow in the footsteps of Bugsby Properties to seek to avoid large liabilities to funders. The latitude granted in relation to DBAs in Lexlaw v Zuberi will have to be squared with the strict approach on CFAs taken in Diag Human. All this could have a substantial impact on litigation risk for some sectors.

The government has already taken steps to address the decision in PACCAR. An amendment to the Digital Markets, Competition and Consumers Bill, currently making its way through Parliament, would prevent funding agreements providing for a return based on damages from being considered a DBA, but as currently drafted only in opt-out collective proceedings in the Competition Appelas Tribunal. There will be strong lobbying from funders to extend this to CFAs used in any form of proceedings and other interested parties will also be lobbying for changes. It will be sensible for anyone involved in dispute resolution to stay abreast of proposals.