Funding fears allayed in Court of Appeal ruling

The Court of Appeal has rejected arguments seeking to render litigation funding agreements ("LFA"s) void on the basis that they needed to comply with the Damages Based Agreement ("DBA") Regulations 2013.

The PACCAR fall out

Following the Supreme Court's decision in PACCAR in 2023 that LFAs that based the funder's return on the damages recovered were DBAs and unenforceable if they failed to comply with the DBA Regulations, defendants in seven claims brought by funded claimants sought to argue that those funding agreements also fell foul of the DBA Regulations. The LFAs in these cases did not calculate the funders' returns as a percentage of damages recovered, instead allowing them a return based on a multiple of the amount invested or committed. However, the LFAs capped the return the funders could receive by reference to the total damages, or a proportion of them.

The defendants in these cases argued that this element of contingency upon the damages received brought the LFAs within the scope of the DBA Regulations. It was not in dispute that if that were the case the LFAs failed to comply with those Regulations and would therefore be unenforceable.

The claimants and funders argued that the clauses in question in the LFAs were not the "primary contractual entitlement" for the funders and were by way of a limitation of what they could receive. The cap acted to protect the claimants from a situation in which the funders would be entitled to an amount greater than the damages obtained in the action, leaving the claimants with nothing or even a debt. For the DBA Regulations to have this effect would be counter to their intended purpose of protecting parties from excessive litigation costs.

As DBAs are prohibited in Competition Appeal Tribunal cases, where class actions are always funded under LFAs, the claimants and funders also pointed out that a finding that these LFAs were DBAs would hollow out the scheme for collective redress in the CAT.

The all clear for LFAs with returns based on a multiple

In Sony Interactive Entertainment Europe Ltd v Alex Neill Class Representative Ltd the Court accepted that the LFAs in question were not DBAs and that the DBA Regulations did not apply to them. Delivering the lead judgment, the Chancellor of the High Court, Sir Julian Flaux, held that the "absurd result is reached on the appellants' case, that a cap on the funder's recovery, which by definition protects the class and the class representative from having to pay excessive amounts to the funder, renders the LFA an unenforceable DBA".

The Court noted that "the Court will not interpret a statute so as to produce an absurd result, unless clearly constrained to do so by the words Parliament has used" and that no such constraint was present here. The "primary contractual entitlement of the funder" was not related to the damages recovered and therefore the agreement was not one under which the funder's return was "determined by reference to the amount of the financial benefit obtained", as set out in the definition of a DBA in section 58AA of the Courts and Legal Services Act 1990.

Impact

Had the Court held that LFAs in the form in question here were DBAs, it would have massively reduced the availability of litigation funding in the jurisdiction and brought to a halt a number of significant cases, particularly in the Competition Appeals Tribunal. While the result had been widely expected, this restores some calm to the litigation funding market in the short term, while legislation to deal with the PACCAR decision is awaited.

As part of a wider review of litigation funding, the Civil Justice Council has urged the UK Government to pass legislation reversing the effect of the PACCAR judgment, on a retrospective basis, as soon as possible (see more here).

For more on the PACCAR decision, see here.