Litigation Funding Agreements have to comply with the DBA Regulations
Problem: In an important decision, the UK Supreme Court tackled a crucial legal question: how should litigation funding agreements be treated under UK law? This debate, central to a significant case involving PACCAR Inc has far-reaching consequences for the litigation funding industry, fundamentally challenging the enforceability of contracts and the business model of litigation funding generally.
Outcome: The UK Supreme Court determined that litigation funding agreements are damages-based agreements (DBAs). This classification poses a significant challenge to their enforceability, marking a major shift in how these agreements are viewed and applied in legal proceedings in the UK. The ruling suggests that many of these agreements, crucial for financing litigation, may now be unenforceable, impacting both litigants and legal funding parties.
What is Litigation Funding?
Litigation funding involves a third-party funder who provides financial support for the legal costs of a party engaged in a court case. This financial support is typically essential for covering solicitors’ fees, court fees, and other related expenses. The key to litigation funding is that the financial return to the litigation funder depends on the success of the case: if the case is successful, the funder will receive a predetermined share of the financial recovery; if the case fails, the litigation funder bears the costs and gains nothing.
Litigation funding, and sharing proceeds had previously been unlawful for many years in the UK. However, since 2009, third-party litigation funding has now become a multi-billion-pound industry which, although driven by commercial motives and investors, can give claimants who would not otherwise be able to fund their claim access to justice (and share the risks and damages with the litigation financer).
Following the recommendations of Sir Rupert Jackson’s review of civil litigation costs in 2009, the litigation funding industry is self-regulated, but Parliament enacted provisions in section 28 of the Access to Justice Act 1999 which have not yet been brought into force.
Given the complexities and potential impacts of litigation funding on the legal system, there is a strong argument for some level of regulation in the litigation funding market in the UK to ensure fairness, transparency, and protection for all parties involved. However, any regulatory framework should be carefully designed to balance the need for oversight with the flexibility to adapt to the diverse needs of different cases.
Case Example of Litigation Funding
Consider a scenario where a business, ABC Ltd, has a valid claim against another company for breach of contract. The claim is worth £5m, but ABC Ltd cannot afford the legal costs estimated to trial at £500,000. A litigation funder steps in, agreeing to cover these costs in exchange for 30% of any financial recovery. If ABC Ltd wins and recovers £5m, the funder will receive £1.5m (30% of £5m). If ABC Ltd loses, the funder loses the £500k it invested, and ABC Ltd owes nothing.
This arrangement provides a means for parties with limited resources to pursue valid claims, ensuring that cases can be heard based on their legal merits rather than the financial capabilities of those involved.
What is a Damages Based Agreement (and the DBA Regulations 2013)?
A Damages Based Agreement (DBA) is a financial arrangement between a legal representative and their client in the UK. Under a DBA, the solicitor’s fees are not paid upfront but are instead contingent upon the success of the case. The fee is a percentage of the damages awarded if the case is successful. This model aligns the interests of the solicitor and the client, as the solicitor only gets paid if the client wins the case.
The DBA Regulations 2013, which came into force in April 2013, provides the legal framework for agreements in England and Wales falling within the definition of a DBA by providing:
- Cap on Recovery: The regulations cap the percentage of damages that can be claimed by solicitors. For personal injury cases, the cap is 25% of the damages (excluding damages for future care and loss); for employment cases, it is 35%; and for other cases, the cap is 50%. That is the critical feature which distinguishes a DBA from a CFA, under which a lawyer may stipulate for a success fee to become payable in specified circumstances, but not for a share of the damages recovered by the client.
- Transparency and Clarity: The regulations require DBAs to be clear and transparent about the terms, particularly regarding the calculation of fees and what constitutes a ‘win’ in the context of the agreement.
- Termination of Agreement: The regulations also outline the circumstances under which a DBA can be terminated and the financial implications of such termination for both the client and the solicitor.
The DBA Regulations 2013 do not explicitly exclude litigation funding, collective proceedings, or group litigation from their scope. However, it is important to note that Section 47C(8) of the Competition Act 1998 explicitly prohibits the use of Damages Based Agreements (DBAs) in ‘opt-out’ proceedings.
The prohibition stems from the complexities and potential conflicts of interest inherent in ‘opt-out’ proceedings. Given that these actions can involve large, undefined groups of claimants, the use of DBAs could complicate the determination and distribution of damages and legal fees. Therefore, if litigation funding agreements must comply with the DBA, those litigation funding arrangements for ‘opt-out’ proceedings would be unenforceable, and liable to challenge.
UK Supreme Court case on Litigation Funding
R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents) [2023] UKSC 28 [1]
Issue
The question was whether a third-party LFA that provides for the funder to be remunerated by a share of damages, but not to play any part in the active management or prosecution of the claim, is a DBA within the definition in section 4(2)(b) of the Compensation Act 2006:
- If the answer to that question is yes, it follows that section 58AA of CLSA 1990 would apply to render the LFA unenforceable unless it complied with the conditions in subsection (4), including the relevant requirements of the DBA Regulations 2013.
- If the answer, is no then litigation funding agreements were enforceable.
It was common ground that the litigation funding agreements in this case do not comply with the statutory regulations, and therefore if the litigation funding arrangements fell within the definition of DBA, then the litigation funding arrangements would therefore be unenforceable. Potentially leaving the litigation funder without recourse for payment.
Judgment
The UK Supreme Court held by majority that litigation funding agreements fell within the scope of DBAs the definition in section 4(2)(b) of the Compensation Act 2006, thereby subjecting them to the regulations and restrictions applicable to such agreements under the DBA Regulations 2013.
This meant that the litigation funding agreements were unenforceable and that going forward litigation funding agreements in the UK must comply with the DBA Regulations 2013. This is a significant limitation to litigation funding agreements which have been up until now self-regulated and the terms would have been negotiated without the limitations of the DBA Regulations.
The impact of the decision means that litigation funding would not be available at all for ‘opt-out’ proceedings. ‘Opt-out’ group litigation proceedings rely heavily on litigation funding thereby removing a significant part of claims that could be funded by a third-party litigation funder, and thereby potentially damaging access to justice.
Tips on ensuring compliance with Litigation Funding requirements in UK
Given the significant effects of the decision on the UK litigation funding market, it is important to take active steps to mitigate any losses and potentially renegotiate terms to ensure compliance with the DBA Regulations. We suggest that you ensure that you:
- Understand the Legal Framework: Familiarise yourself with the DBA Regulations 2013 and relevant legal provisions, such as those outlined in the Compensation Act 2006.
- Review Existing Litigation Funding Agreements: Conduct a thorough review of existing litigation funding agreements to assess whether they could be classified as DBAs under the current legal interpretation. Pay special attention to the terms of remuneration and whether they align with the caps and requirements stipulated in the DBA Regulations.
- Clear and Transparent Terms: Ensure that the terms of any funding agreement are clear, transparent, and compliant with legal requirements. This includes providing explicit details on the calculation of fees, defining what constitutes a ‘win’ for the purpose of the agreement, and ensuring that the remuneration cap is adhered to.
- Seek Legal Advice: Our expert lawyers specialise in costs and litigation funding. We can advise on structuring and reviewing funding agreements to ensure compliance.
- Renegotiate Terms: where there is a compliance issue, it is important to deal with it quickly and see whether it can be renegotiated with the client. If it is an ongoing claim, then it may be easier to negotiate amended terms, but if the claim has already concluded it will be more difficult and it may be best to wait to see whether the unenforceability of the funding agreement is challenged by a savvy claimant.
Litigation Funding Lawyers in London
We provide flexible funding options including fixed fees and ‘no win no fee’ arrangements for your costs and litigation funding dispute. Whether you are an individual or a business, our litigation funding lawyers provide exceptional legal services at cost-effective prices: this is our promise.
You can find out more information about Litigation Funding on our dedicated page here.
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