The Litigation Funding conundrum

The Civil Justice Council (“CJC”) has recently published its final report on Litigation Funding (Report).

The Report was commissioned following the Supreme Court PACCAR decision. In PACCAR the Supreme Court held that litigation funding agreements (LFAs) where the funder is to receive a % of the damages should be properly classified as agreements falling within the statutory definition of damages-based agreements (DBAs). As such, LFAs were required to satisfy the statutory conditions for DBAs under the DBA Regulations 2013 failing which they would be unenforceable. Many LFAs in existence at the time were non-compliant with the DBA Regulations 2013 and were therefore unenforceable. Since then there have been calls for legislation to regulate the issue which came close to being implemented but which timed out as a result of the 2024 General Election. The current Government has decided to await the out come of the CJC report before taking further action. 

CJC Recommendations

The Report includes 58 recommendations in total. The main ones are:

1. Clarification LFAs not DBAs - The PACCAR decision should be reversed by legislation that makes clear that the provision of litigation funding pursuant to LFAs does not amount to the provision of claims management services such that compliance with the DBA Regulations 2013 is not required and that LFAs can include arrangements where the funder’s return is calculated by reference to the funded party’s damages or settlement or by multiplier.

2. Regulation of LFAs - LFAs and how funding is provided should be regulated by the Lord Chancellor and the Ministry of Justice rather than the Financial Conduct Authority. It is recommended that a “light-touch” approach to regulation is adopted. Such regulation to include:

   1. Control of Litigation - a codification of the prohibition on litigation funders from, directly or indirectly, controlling funded litigation, including settlement proceedings.

   2. Transparency – early disclosure of litigation funding, the name of the litigation funder and the ultimate source of the funding to the court/other parties.

   3. LFA Terms not disclosable – the terms of LFAs should not generally be subject to disclosure.

   4. Standard terms for LFAs - standard terms for LFAs should be developed and implemented, to introduce clarity into the market and improve consumer protection.

   5. Capital adequacy – all litigation funders will be required to maintain a level of capital adequacy to enable financial obligations to the met.

   6. Dispute Resolution - An independent, binding dispute resolution process to resolve disputes between litigation funders and funded parties should be established. The process should make provision for the promotion of the consensual resolution of such disputes. The cost of the dispute resolution process to be borne by the funder.

   7. Anti-money Laundering - Anti-money laundering regulation should be applied to litigation funders.

   8. Costs & Recoverability – there is to be no cap on funders’ returns and the Arkin Cap which limits funder’s liability for adverse costs to the sums advanced in the litigation should be codified. Litigation Funding costs should only be recoverable in litigation in exceptional circumstances. There should be no presumption of security for costs to be ordered against the litigation funder or funded party. Security for costs will not be available against a litigation funder or funded party where the funder has complied with regulatory requirements concerning capital adequacy, and they have in place a suitable and adequate ATE insurance policy with effective anti avoidance endorsements.

3. CFA/DBA Reform – a single regulatory regime for contingency fees is proposed. Importantly, it is recommended that hybrid arrangements for both CFAs ad DBAs are confirmed as lawful, while DBAs should be permitted in opt-out collective proceedings in the Competition Appeal Tribunal.

4. Small Claims redress scheme - The Report recognises the need for additional regulation of funding arrangements in consumer disputes. On the issue of low value/small claims or small mass or collective claims it was recommended that alternative means to secure access to justice for such claims via regulatory redress schemes and a class proceedings fund to provide an effective alternative and complement to collective proceedings before the courts. 

What next?

The CJC have recommended a “twin-track” approach with the immediate introduction of legislation to reverse PACCAR followed by separate legislation for the other reforms. This will most certainly be welcomed by Litigation Funders. The proposed move from the current self-regulation of litigation funding to a regulated system seems inevitable. Interestingly, it is recommended that the reversing of PACCAR be done both prospectively and retrospectively although some commentators have indicated that retrospective effect is unlikely to be implemented. The recommendation that hybrid DBAs are permissible will be welcomed which will allow for much greater uptake. The report is directed to the Ministry of Justice, so, the immediate next steps are to wait for the Ministry of Justice’s formal response which will detail what aspects of the report are to be implemented and timings. 

We will continue to monitor and update on developments over the coming months.