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PACCAR’s tidal wave effects: Understanding the Legal, Financial and Policy impacts of a highly controversial ruling

By Ana Carolina Salomao |

The following is a contributed piece by Ana Carolina Salomão, Leila Zoe-Mezoughi, Micaela Ossio Maguiña and Sarah Voulaz, of Pogust Goodhead.

This article follows our previous publication dated 10 October 2023 regarding the Supreme Court ruling in PACCAR[1] on third-party litigation funding agreements which, very simply put, decided that litigation funding agreements (“LFAs”), permitting funders to recover a percentage of damages, amounted to (“DBAs”) damages-based agreements by virtue of s.58AA of the Courts and Legal Services Act 1990 (the “1990 Act”). As such, all LFAs (including those retrospectively drafted) were consequently required to comply with the Damages-Based Agreements Regulations 2013 (the “2013 Regulations”) or be deemed, unenforceable.

In this article, we explore the three main industry-wide changes that have arisen as a direct result of the PACCAR ruling:

  1. The diverse portfolio of LFA reformulation strategies deployed by litigation finance stakeholders.
  2.  The government response, both in terms of official statements and policy changes, which have ultimately led to the draft bill of 19 March 2024.
  3.  The wave of litigations subsequent to the PACCAR ruling, giving insight into the practical market consequences of the ruling.

Ultimately, the PACCAR impact and its proposed reversal has not undermined the UK litigation finance market, in fact the contrary; it has promoted visibility and adaptation of a litigation finance market that continues to gain significant traction in the UK. As a result, despite the concern shown by most UK industry stakeholders about the negative impacts of the PACCAR ruling, this article argues that proper regulation could indeed be highly advantageous, should it incentivise responsible investment, whilst protecting proper access to justice. However, the question does remain, will we ever get there?

The LFA reformulation storm.

As expected, the first reaction to PACCAR came from the litigation finance market. As anticipated, LFAs (those with an investor return formula based on a percentage of the damages recovered) are being amended by parties to avoid their potential unenforceability.

The majority of amendments being implemented are aimed to design valuation methodologies for the amount recovered, which are not directly related to the damages recovered, but are rather a function of some other metric or waterfall, therefore involving a process of alteration of pricing. The intention is for the agreements to fall out of the scope of the definition of ‘claims management services’ provided by section 58AA of the Courts and Legal Services Act 1990 (CLSA), which stipulates two main criteria: (i) the funder is paid if the litigation succeeds, and (ii) the amount paid back to the funder is a function of the amounts recovered by the claimant in damages. As such, novel pricing structures such as charging the amount granted in third-party funding with accrued interest; a multiple of the funded amount; or even a fixed pre-agreed amount recovered in the form of a success fee, would not meet both criteria and would hence fall outside of the legal definition of claims management services. These options would avoid the risk of an LFA being bound to the same requirements of a DBA and potentially rendered unenforceable.[2]

Another option to render LFAs enforceable following PACCAR is of course to make these compliant to the definition of DBA provided in s.58AA(2) of the 1990 Act. As such, LFAs would be subjected to stringent statutory conditions as per the Damages-Based Agreements Regulations 2013 (the “2013 Regulations”). This option has however not been the most attractive for funders, firstly due to funders not necessarily conducting claims management services and, secondly, because LFAs would automatically become subject to highly stringent rules to structure the agreements and pursue recovery. For example, such LFAs would need to comply with the cap requirements outlined in the 2013 Regulations such as: 25% of damages (excluding damages for future care and loss) in personal injury cases, 35% on employment tribunal cases and 50% in all other cases.

Ultimately, it can be argued that the choice for restructuring a single LFA or a portfolio of LFAs will vary on a case-by-case basis. Those parties who find themselves at more advanced stages of proceedings will be disadvantaged due to the significant challenges they are likely to face in restructuring such LFAs. From the perspective of the legal sector, on the one hand, we can see an increase in law firms’ portfolio lending, whereby the return to funders is not directly related to damages recovered by the plaintiff. On the other hand, there are certain actors who are remaining only superficially affected by the ruling, such as all funding facilities supporting law firms which raise debt capital collateralised by contingent legal fees.

The introduction of the proposed bill by the government (which is discussed below), is a reflection of the enormous burden the Supreme Court ruling has placed on critical litigation funder stakeholders who are likely to have invested disproportionate sums to amend their LFAs and restructure their litigation portfolios. However, the bill has also given momentum to the sector and is helping to highlight the importance of diversification in litigation funding to protect the interests of low-income claimants. The medium-term net balance of the regulation might be rendered positive if redirected at perfecting and not prohibiting third-party funding agreements to protect access to justice.

The UK Government Intervention.

The UK government has raised concerns regarding the legal and financial impacts of PACCAR relatively swiftlyfollowingthe 26 July 2023 judgement. Their first response to PACCAR came from the Department of Business and Trade (DBT) at the end of August 2023. The DBT stated that, being aware of the Supreme Court decision in PACCAR, it would be “looking at all available options to bring clarity to all interested parties.[3]

In the context of opt-out collective proceedings before CAT, the government proposed in November 2023 amendments to the Digital Markets, Competition and Consumers Bill (DMCC) through the introduction of clause 126, which sought to implement changes to the Competition Act 1998 (CA) to provide that an LFA would not count as a DBA in the context of opt-out collective proceedings in the CAT. This proposal came from the understanding that after PACCAR opt-out collective proceedings would face even greater challenges considering that under c.47C(8) of the CA 1998 DBAs are unenforceable when relating to opt-out proceedings. Proposals for additional amendments to the DMCC soon followed, many of which await final reading and approval by the House of Lords. However, in December 2023 Lord Sandhurst (Guy Mansfield KC) noted that while amendments to the DMCC would mitigate PACCAR’s impact on LFAs for opt-out collective proceedings in the CAT, “the key issue is that the Supreme Court’s PACCAR ruling affects LFAs in all courts, not just in the CAT, and not just, as this clause 126 is designed to address, in so-called opt-out cases.”

As a response to this, the Ministry of Justice announced last March that the government intended to extend the approach taken for opt-out collective proceedings in the CAT to all forms of legal proceedings in England and Wales by removing LFAs from the DBAs category entirely. The statement promised to enact new legislation which would “help people pursuing claims against big businesses secure funding to take their case to court”and“allow third parties to fund legal cases on behalf of the public in order to access justice and hold corporates to account”.[4]

Following this announcement, the Litigation Funding Agreements (Enforceability) Bill was published and introduced to the House of Lords. As promised by the government’s previous statements, the primary purpose of the Bill is to prevent the unenforceability of legitimate LFAs fitting into the amended DBA definition of PACCAR. Indeed, the bill aims to restore the status quo by preventing litigation funding agreements from being caught by s.58AA of the 1990 Act.[5]

The litigation wave.

As parliamentary discussions continue, all eyes are now in the Court system and the pending decisions in litigations arising from PACCAR. Despite the government’s strong stance on this matter, the bill is still in early stages. The second reading took place in April 2024, where issues such as the retrospective nature of the Bill, the Civil Justice Council’s (CJC) forthcoming review of litigation funding, and the need to improve regulations on DBAs, were discussed. Nevertheless, despite the arguable urgency of addressing this issue for funders and the litigation funding market, there is no indication that the bill will be expedited; hence the next step for the bill passage is the Committee stage. The myriad of cases arising from PACCAR may need to stay on standstill for a while, as Courts are likely to await the outcome of the proposed bill before deciding on individual matters.

The UK has a longstanding history of tension between the judiciary power and the two other spheres of the government, the Executive and Parliament. Most of these instances have sparked public debate and have profoundly changed the conditions affecting the market and its players. For example, in the case of R (on the application of Miller and another) (Respondents) v Secretary of State for Exiting the European Union (Appellant) [2017] UKSC 5, Gina Miller launched legal proceedings against the Johnson government to challenge the government’s authority to invoke Article 50 of the Treaty of European Union, which would start the process for the UK to leave the EU, without the Parliament’s authorisation. The High Court decided that, given the loss of individual rights that would result from this process, Parliament and not the Executive should decide whether to trigger Article 50, and the Supreme Court confirmed that Parliament’s consent was needed.

Another example is the more recent case of AAA (Syria) & Ors, R (on the application of) v Secretary of State for the Home Department [2023] UKSC 42 regarding the Rwanda deportation plan. In this case the Supreme Court ruled unanimously that the government’s policy of deporting asylum seekers to Rwanda was unlawful – in agreement with the Court of Appeal’s decision which found that the policy would pose a significant risk of refoulement.

Nevertheless, rushing the finalisation of a bill reversing PACCAR would probably be a counterproductive move. The recent developments suggest that policy makers should focus on deploying a regulatory impact assessment on any regulations aimed at improving access to finance in litigation. Regulators and legislators should ensure that, before designing new regulatory frameworks for litigation finance,  actors from the litigation finance industry are consulted, to ensure that such regulations are adequate and align with the practical realities of the market.

As the detrimental impacts of PACCAR become ever more visible, public authorities should prioritise decisions that favour instilling clarity in the market, and most importantly, ensuring proper access to justice remains upheld in order to “strike the right balance between access to justice and fairness for claimants”.  

A deeper look into the post-PACCAR’s litigations and their domino effects

Even though the English court system is yet to rule on any post-PACCAR case, it is important to understand the immediate effects of the decision by looking at a few landmark cases. We provide in this section of the article an overview of the impacts of the rulingin perhaps the three most important ongoing post-PACCAR proceedings: Therium Litigation Funding A IC v. Bugsby Property LLC (the “Therium litigation”), Alex Neill Class Representative Ltd v Sony Interactive Entertainment Europe Ltd [2023] CAT 73 (the “Sony litigation”) and the case of Alan Bates and Others v Post Office Limited [2019] EWHC 3408 (QB), which led to what has been known as the “Post Office scandal” (also referred to as the “Horizon scandal”).

Therium litigation

The Therium litigation is one of the first cases in which an English court considered questions as to whether an LFA amounted to a DBA following the Supreme Court decision in PACCAR. The case concerned the filing of a freezing injunction application by Therium Litigation Funding I AC (“Therium”) who had entered into an LFA with Bugsby Property LLC (“Bugsby”) in relation to a claim against Legal & General Group (“L&G”). The LFA stipulated between Therium and Bugsby entitled Therium to (i) return of the funding it had provided; (ii) three-times multiple of the amount funded; and (iii) 5% of any damages recovered over £37 million, and compelled Bugsby’s solicitors to hold the claim proceeds on trust until distributions had been made in accordance with a waterfall arrangement set out in a separate priorities’ agreement.

Following a settlement reached between Bugsby and L&G, Bugby’s solicitors transferred a proportion of settlement monies to Bugsby’s subsidiary, and notified Therium of the intention to transfer the remaining amount to Bugsby on the understanding that the LFA signed between Therium and Bugsby was unenforceable as it amounted to a DBA following the PACCAR ruling. Therium applied for an interim freezing injunction against Bugsby under s.44 of the Arbitration Act 1996 and argued that, as the payment scheme stipulated by the LFA contained both a multiple-on-investment and a proportion of damage clauses, and the minimum recovery amount to trigger the damage-based recovery had not been reached, no damage-based payment was foreseen.

This meant that the DBA clause within the LFA could be struck off without changing the nature of the original LFA, so that it constituted an “agreement within an agreement”. As legal precedents such as the Court of Appeal ruling in Zuberi v Lexlaw Ltd [2021] EWCA Civ 16 allowed for parts of an agreement to be severed so as to render the remainder of the agreement enforceable, the High Court granted the freezing injunction, affirming that a serious question was raised by Therium regarding whether certain parts of the agreement could be severed to keep the rest of the LFA enforceable.

By declaring that there was a serious question to be tried as to whether the non-damage clauses, such as the multiple-based payment clauses, are lawful or not, the High Court opened the possibility of enforceability of existing LFAs through severability of damage-based clauses in instances where PACCAR may also apply. The Therium litigation presents an example of another possible structuring strategy to shape LFAs to prevent them from becoming unenforceable under PACCAR. Nonetheless, as the freezing injunction will now most likely lead to an arbitration, a final Court ruling on the validity of these non-damage-based schemes appears to be unlikely.

Sony litigation

The Sony group litigation is another example of one of the first instances where issues of compliance of a revised LFA have been addressed in the aftermath of PACCAR, this time in the context of CAT proceedings. In this competition case, Alex Neill Class Representative Limited, the Proposed Class Representative (PCR), commenced collective proceedings under section 47B of the CA 1998 against Sony Interactive Entertainment Network Europe Limited and Sony Interactive Entertainment UK Limited (“Sony”). The claimant alleged that Sony abused its dominant market position in compelling publishers and developers to sell their gaming software through the PlayStation store and charging a 30% commission on these sales.

The original LFA entered between Alex Neill and the funder as part of the Sony litigation amounted to a DBA and would have therefore been unenforceable pursuant to PACCAR. On this basis, the PCR and funder negotiated an amended LFA designed to prevent PACCAR enforceability issues. The LFA in place was amended to include references for funders to obtain a multiple of their total funding obligation or a percentage of the total damages and costs recovered, only to the extent enforceable and permitted by applicable law. The LFA was also amended to include a severance clause confirming that damages-based fee provisions could be severed to render the LFA enforceable.

The CAT ultimately agreed with the position of the PCR and confirmed that the revised drafting “expressly recognise[d] 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.” In relation to the severance clause, the CAT also expressly provided that such clause enabled the agreement to avoid falling within the statutory definition of a DBA and referred to the test for effective severance clauses.

The CAT’s approach in recognising the PACCAR ruling and yet allowing for new means to render revised LFAs enforceable in light of this decision provides a further example of a Court’s interpretation of the decision, allowing another route for funders to prevent the unenforceability of agreements. Allowing these clauses to exempt litigation funders from PACCAR will in fact allow for such clauses to become market standard for LFAs, and in this case particularly for those LFAs backing opt-out collective proceedings in the CAT.

Post Office scandal  

Although the Post Office scandal occurred in 2019, this case was only recently brought back to light following the successful tv series ‘Mr Bates vs The Post Office’ which recounts the story of the miscarriage of justice suffered by hundreds of sub-postmasters and sub-postmistresses (SPM’s) in the past two decades. In short, the Post Office scandal concerned hundreds of SPM’s being unjustly taken to court for criminal offences such as fraud and false accounting, whilst in reality the Horizon computer system used by Post Office Ltd (POL) was found to contain errors that caused  inaccuracies in the system.

Mr. Bates, leading claimant in the case, brought the case on behalf of all the SMP’s which had been unfairly treated by POL. The issuing of the claim was only made possible thanks to a funding arrangement between litigation funders and the SPM’s, used as a basis for investors to pay up front legal costs. As outlined in a publication by Mr Bates in January 2024, such financing, combined with the strength and defiance of Mr. Bates’ colleagues, allowed the case to be brought forward, a battle which in today’s circumstances the postmaster believes would have certainly been lost.[6]

The sheer scale of the Post Office scandal, and the fact that traditional pricing vehicles for legal services would have negated the claimants access to justice, placed the case near the top of the government’s agenda and called again into question the effect of PACCAR on access to justice. Justice Secertary Alex Chalk MP relied on the example of Mr Bates and the Post Office scandal to affirm that that “for many claimants, litigation funding agreements are not just an important pathway to justice – they are the only route to redress.”[7]In light of this recent statement more radical changes to legislation on litigation funding and the enforceability of LFAs appear to be on the horizon.

Conclusion

Assessing the long-term impact of PACCAR will ultimately need to wait until the dust in the litigation finance market settles. Nonetheless, the immediate impacts of the decision have brought four key considerations to light.

First, the relevance of the litigation funding industry in the UK is substantial and any attempt to regulate it impacts not only those who capture value from the market but also the wider society. Regulation of litigation funding could inadvertently affect wider policy questions such as equal access to justice, consumer rights, protection of the environment and human rights.

Second, there is an undeniable intention of the regulators to oversee the litigation finance market, which could reflect in stability and predictability that would be much welcomed by institutional investors and other stakeholders. However, this conclusion assumes that regulatory efforts will be preceded by robust impact assessment and enforced within clear guardrails, always prioritising stability and ensuring proper access to justice.

Third, PACCAR serves to bring awareness that attempts to regulate a market in piecemeal can lead to detrimental outcomes and high adapting costs, far offsetting any positive systemic effects brought by the new framework. Any attempts to regulate a market so complex and relevant for the social welfare should be well-thought-out with the participation of key stakeholders.

Fourth, despite the recent headwinds, the market and government reaction further prove that the litigation finance market continues its consolidation as an effective vehicle to drive value for claimants and investors. The fundamentals behind the market’s growth are still solid and the asset class is consolidating as a strategy to achieve portfolios’ uncorrelation with normal market cycles. As private credit and equity funds as well as venture capitalists, hedge funds and other institutions compete to increase their footprint in this burgeoning market, it is safe to expect a steady increase of market size and investors’ appetite for the thesis.

In conclusion, despite a first brush view of the PACCAR decision, the reactions to this decision and the subsequent developments have evidenced how litigation finance continues to be a promising investment strategy and an effective tool to drive social good and access to justice.


[1] Ana Carolina Salomao, Micaela Ossio and Sarah Voulaz, Is the Supreme Court ruling in PACCAR really clashing with the Litigation Finance industry? An overview of the PACCAR decision and its potential effects, Litigation Finance Journal, 10 October 2023.

[2] Daniel Williams, Class Action Funding: PACCAR and now Therium – what does it mean for class action litigation?, Dwf, October 25, 2023.

[3] Department for Business and Trade statement on recent Supreme Court decision on litigation funding: A statement from the department in response to the Supreme Court’s Judgement in the case of Paccar Inc. and others vs. Competition Tribunal and others. Available at: <https://www.gov.uk/government/news/department-for-business-and-trade-statement-on-recent-supreme-court-decision-on-litigation-funding>.

[4] Press release, ‘New law to make justice more accessible for innocent people wronged by powerful companies’ (GOV.UK, 4 March 2024) Available at <https://www.gov.uk/government/news/new-law-to-make-justice-more-accessible-for-innocent-people-wronged-by-powerful-companies>.

[5] Litigation Funding Agreements (Enforceability) Bill (Government Bill originated in the House of Lords, Session 2023-24) Available at <https://bills.parliament.uk/bills/3702/publications>.

[6] Alan Bates, ‘Alan Bates: Why I wouldn’t beat the Post Office today’ (Financial Times, 12 January 2024) <https://www.ft.com/content/1b11f96d-b96d-4ced-9dee-98c40008b172>.

[7] Alex Chalk, ‘Cases like Mr Bates vs the Post Office must be funded’ (Financial Times, 3 March 2024) <https://www.ft.com/content/39eeb4a6-d5bc-4189-a098-5b55a80876ec?accessToken=zwAGEsgQoGRQkc857rSm1bxBidOgmFtVqAh27A.MEQCIBNfHrXgvuIufYajr8vp1jmn9z9H9Bwl0FC-u96h8f4LAiBumh82Jxp30mqQsGb71VSoAmYWUwo9YBO2kF5wuMP5QA&sharetype=gift&token=7a7fe231-8fea-4a0d-9755-93fc3e3689aa>.

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£878M Opt-Out Claim Brought Against Royal Mail, Backed by £10M in Funding 

By Harry Moran |

A new claim has been brought against International Distribution Services, the owner of Royal Mail, over allegations that it ‘prevented competition for bulk mail delivery services’ which in turn led to end-customers being overcharged for these services. The opt-out claim is being brought on behalf of any customers who purchased bulk mail services since January 2024, with an estimated 290,000 potential class members seeking up to £878 million in compensation for these overcharges.

An article in the Financial Times reveals that the application to bring collective proceedings was filed at the Competition Appeal Tribunal (CAT) on Thursday, with the action being led by the Proposed Class Representative, Robin Aaronson and supported by law firm Lewis Silkin. According to the Bulk Mail Claim website, it has secured £10 million in funding from ‘a specialist litigation funder to bring the claim’ and has ‘put in after the event (ATE) insurance to cover its liability to pay Royal Mail’s costs if the claim is unsuccessful.’

In a press release announcing the filing of the claim, Robin Aaronson said:

“Where there has been an abuse of dominant position, as has occurred in this case, it is important that those suffering loss are able to obtain redress. A collective claim is the only fair and efficient form of redress in this case, given that there are hundreds of thousands of affected customers and it would be commercially unviable for them to bring individual proceedings.”

Andrew Wanambwa, Partner in the Dispute Resolution team at Lewis Silkin, also provided the following comment:

“Royal Mail abused its dominant position, resulting in hundreds of thousands of bulk mail customers being overcharged. The purpose of this claim is to hold Royal Mail accountable for its actions and secure compensation for affected customers.”

Responding to the announcement of the filing, Royal Mail confirmed that it had received the application and said, “We consider [the claim] to be without merit and we will defend it robustly.” The draft Collective Proceedings Order can be read here.

Rockhopper Exploration Announces Receipt of Tranche 1 Funds for the Ombrina Mare Monetisation Transaction

By Harry Moran |

Rockhopper Exploration plc is pleased to provide the following update in relation to the monetisation of its Ombrina Mare Arbitration Award (the "Transaction") announced on 20 December 2023.

Having satisfied all precedent conditions to the Transaction as announced on 17 June 2024, the Company confirms that the Tranche 1 payment has been received.

Rockhopper has received €19 million of the €45 million Tranche 1 payment. As previously disclosed, Rockhopper entered into a litigation funding agreement in 2017 under which all costs relating to the Arbitration from commencement to the rendering of the Award were paid on its behalf by a separate specialist arbitration funder (the "Original Arbitration Funder"). That agreement entitles the Original Arbitration Funder to a proportion of any proceeds from the Award or any monetisation of the Award. The balance of €26 million has gone to Original Arbitration Funder in order to fully discharge the Company of all of its liabilities under the agreement with the Original Arbitration Funder. Tranches 2 and 3 of the Award remain payable to Rockhopper upon a successful annulment outcome.

As previously disclosed, success fees of approximately €4 million are owed to Rockhopper's legal representatives if Rockhopper win the claim, meaning liability is established and Italy is required to pay more than a nominal sum in damages (either by way of award or settlement in an amount equal to or more than €25 million).

Following receipt of the Tranche 1 payment, Rockhopper's cash balance is approximately $27 million.

Please refer to the Company's announcement on 20 December 2023 for further details on the Ombrina Mare Arbitration Award. Capitalised terms shall have the same meaning as in the 20 December 2023 announcement.

Samuel Moody, CEO, commented:

"We are delighted to have received the Tranche 1 payment under the Ombrina Mare monetisation agreement.  This cash gives us the strongest balance sheet we have had for a number of years, and we remain confident in the merits of our legal case as we await the decision of the Ad Hoc Panel on the annulment request from the Italian Republic."

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Industry Leaders React to House Committee Hearing on Funding Disclosure

By Harry Moran |

As LFJ covered earlier this week, a recent hearing in the US House Judiciary Committee reignited arguments around the appropriate level of disclosure required when third-party funders are involved in patent lawsuits. Whilst the hearing largely highlighted the arguments in favour of more stringent disclosure requirements, legal professionals and funders are now offering their own differing perspectives on these contentious issues.

An article in IAM looks at last week’s House Judiciary Committee hearing, focusing on the testimonies from witnesses called before the committee and examining the counter-arguments from industry professionals who are opposed to the introduction of excessively broad disclosure rules for litigation funders. As the article explains, the main point of contention around this issue relates to the level of disclosure required, with most third-party funding participants being open to the disclosure of a funder’s identity, but opposed to the disclosure of the financial details of funding agreements.

Erick Robinson, attorney at Spencer Fane, told IAM that mandating disclosure of the particulars of any funding agreement would be incredibly damaging for plaintiffs in patent infringement lawsuits. Robinson argued well-resourced defendants would “run modeling and be able to reverse engineer the budget based on their knowledge of funding agreements”, which would lead to these defendants dragging out the lawsuit to deplete the funder’s budget. Robinson also questioned the justification for providing defendants with this level of detail, claiming that “there's no legitimate reason any defendant should ever get strategic financial information.”

Anup Misra, managing director at Curiam Capital, concurred with Robinson’s arguments and acknowledged that whilst they would be open to allowing a judge to review the funding agreement, “we just wouldn’t want the economics of a funding agreement to be sent to the defence counsel.” Misra went on to question the idea that third-party funding introduces ‘unknown unknowns’ to the court, as it was described by one witness at the hearing. Misra argued that it should be left to the judge in any given case to decide if they require more information around the involvement of funders, suggesting that “if something were to happen during pending litigation, I'm sure those judges would then determine whether they wanted to see a funding agreement.”