Fallout from Supreme Court decision on litigation funding arrangements

Two recent decisions show the High Court and the Competition Appeal Tribunal (CAT) grappling with some of the unanswered questions and areas for dispute following the Supreme Court decision on litigation funding arrangements in R (PACCAR) v Competition Appeal Tribunal [2023] UKSC 28 (“PACCAR”) (considered in our earlier post here.) In PACCAR, the Supreme Court ruled by a majority that litigation funding agreements (LFAs) that remunerate the litigation funder by reference to a proportion of the damages ultimately recovered constitute damages-based agreements (DBAs). The effect of this decision is that many LFAs currently in existence are likely to be unenforceable unless they satisfy additional stringent conditions in subsidiary legislation.

In the first case, Therium Litigation Funding A IC v Bugsby Property LLC [2023] EWHC 2627 (Comm), the Commercial Court considered an injunction application in support of arbitration proceedings. The Court held that there was a “serious issue to be tried” that the part of a LFA which provided for the litigation funder to receive a multiple of funding remained enforceable, even if the part providing for a percentage of damages was unenforceable following PACCAR.

In the second case, 1527/7/7/22 Alex Neill Class Representative Limited v Sony Interactive Entertainment Europe Limited; Sony Interactive Entertainment Network Europe Limited; and Sony Interactive Entertainment UK Limited 21 Nov 2023 (Sony), the CAT approved a LFA that had been revised to reflect the decision in PACCAR, and which included a provision allowing the funder to recover a percentage of the damages “only to the extent enforceable and permitted by applicable law”. The CAT found that it was open to the proposed class representative (PCR) and the funder to agree such a clause and that this agreement was not a DBA and was enforceable in the context of an application for an opt-out collective proceedings order.

 

Background to Therium decision

Therium Litigation Funding A IC (Therium) entered into a LFA with Bugsby Property LLC (Bugsby) in relation to litigation that Bugsby was pursuing against a third party. The LFA provided that Therium was entitled to recover the amount of funding which it had paid out, a multiple of that amount and a percentage share of any recoveries made by Bugsby.

Bugsby received settlement monies pursuant to the litigation. There was no dispute between the parties that any claim by Therium under the LFA for a percentage share of the settlement proceeds would be unenforceable following the decision in PACCAR. However, Therium wished to rely on other provisions in the LFA entitling it to recover amounts it had paid out and the three times multiple of that amount. Therium applied for an asset preservation or freezing order against Bugsby in respect of the settlement monies, pending the resolution of the matter by arbitration. Therium argued that there was a “serious issue to be tried” that the part of the LFA which provided for the litigation funder to receive a multiple of funding remained enforceable, relying upon the decision of the Court of Appeal in Zuberi v Lexlaw Ltd [2021] EWCA Civ 16 (“Zuberi”). In Zuberi, it was held that the term "damages-based agreement" should be given a narrow meaning, such that it only applied to the part of the agreement relating to the payment of sums recovered in the claim or damages, and not to other elements of the agreement, such as the termination provisions.

 

Therium decision

The Court granted Therium a proprietary injunction to preserve the settlement monies received by Bugsby. The Judge considered that the judgment in Zuberi gave rise to a principled argument on the part of Therium which raised a “serious issue to be tried”. That argument was essentially that the only unenforceable element of the LFA was the part which entitled Therium to recover a percentage share of the recoveries. Therefore, the DBA regime was not engaged by the provisions of the LFA which entitled Therium to recover the amounts which it had paid out and the three times multiple of that amount. Those provisions did not fall foul of the decision in PACCAR.

The Judge considered that there was also a serious issue to be tried on severance. Bugsby relied on Diag Human v Volterra Fietta [2023] EWCA Civ 1107 (“Diag”) to argue that severance was unavailable because removal of the unenforceable part of the contract (the provisions relating to payment of a percentage of damages) would so alter the character of the agreement that it would cease to be the sort of contract into which the parties had originally entered. However, the Judge did not consider that this argument was so persuasive as to preclude there being a “serious issue to be tried” on this point. He noted that Diag concerned a Conditional Fee Agreement (CFA) rather than a DBA and there was ample room for legitimate argument as to whether the considerations preventing severance in the context of a CFA could be transposed to DBAs.

 

Sony decision

Similar arguments to those made by Therium in the above case were deployed by the PCR in Sony. In this case, the LFA (amended following the decision in PACCAR) allowed the funder to recover a percentage of the damages “only to the extent enforceable and permitted by applicable law”. Sony challenged the LFA on a number of grounds, including to argue that this amendment failed to convert the agreement into an enforceable arrangement. However, the CAT held that the amended LFA was not an unenforceable DBA. In particular, it did not agree that the above mentioned amendment meant that the amended LFA still provided for payment based on a percentage of the damages, stating that “as a matter of freedom of contract, it is open to the PCR and the funder to agree on such a provision, and we see no reason of public policy or otherwise to make that objectionable. The drafting expressly recognises that the use of a percentage to calculate the Funder’s Fee will not be employed unless it is made legally enforceable by a change in the law, which appears to us to be an entirely proper position to take”. Given the CAT’s decision on this issue, it was not necessary for it to consider the question of severance. However, the CAT observed that it would have been prepared to sever the clauses in question if necessary. It did not consider that it could be said that severance of the clauses would result in there being a major change in the overall effect of the LFA.

Sony also sought to argue that the proceeds received in the claim acted as a natural cap on the amount paid to the funder, meaning that the funder’s fee was inevitably derived by reference to the amount of financial benefit obtained by the PCR, and was hence unenforceable following PACCAR. Sony advanced similar arguments by reference to other documents in the funding documentation “suite”, including a priority agreement entered into by the relevant stakeholders, and by reference to the ability of the CAT to determine the amount payable to the funder in the event of a judgment in favour of the PCR. They argued that this too would involve a determination by the CAT “by reference to the financial benefit obtained by the PCR”. The CAT also rejected these arguments, including on the basis that Sony could not point to any express provision that limited the funder’s fee by reference to the amount of the proceeds. The amended LFA was not an “agreement…provid[ing] that the amount of the [funder’s fee] is to be determined by reference to the amount of the [proceeds]” further to the relevant statutory definition of a DBA.

Finally, Sony advanced arguments in respect of the effect of the amended LFA on the incentives of the PCR and the funder, and the risk that the amended LFA could create a conflict of interest for the PCR. In respect of both arguments, the CAT’s view was that these risks (to the extent they arise) could be managed by other mechanisms available to the CAT pursuant to the collective proceedings regime.

 

Key Takeaways

The Therium case appears to be the first case to address, before the courts, the ramifications of the PACCAR decision regarding the enforceability of LFAs. However, the courts will not make the final decision on the issues raised by the parties on this occasion, as the LFA provides for the resolution of disputes by arbitration. However, there will be opportunity for further judicial consideration of these issues in other cases, in particular in many of the collective proceedings currently being heard in front of the CAT, in which LFAs entered into before the PACCAR decision may now be unenforceable. Sony is one such example.  The CAT’s decision in this case suggests that it may be reluctant to go behind the express agreement reached between the parties. It is likely that this ruling will encourage funders to revisit their existing LFAs with renewed vigour, in the hope of circumventing some of the pitfalls arising out of PACCAR.

The government has also been grappling with the issues arising from PACCAR. It recently tabled an amendment to the Digital Markets, Competition and Consumers Bill, which would allow the use of DBAs with litigation funders in opt-out collective proceedings before the CAT. This may provide a solution for litigation funders in respect of opt-out collective proceedings, but it will not address the issue in cases heard outside of the CAT. Many questions remain to be answered, including the extent to which funders who have entered into potentially unenforceable DBAs can now seek to recover a share of damages awarded, at least in respect of the funding that they have paid.