Update: New UK law to reverse ruling in PACCAR

On 19 March 2024, the Litigation Funding Agreements (Enforceability) Bill (the Bill) was introduced into the House of Lords. This follows the announcement on 4 March 2024 by the UK Government that it would introduce new legislation to change the law in England and Wales to help claimants pursuing damages claims obtain funding for their claims (i.e. to reverse the position on litigation funding agreements to how it operated before the Supreme Court’s decision in PACCAR last year). See DLA’s previous post on the announcement: New UK law to reverse ruling in PACCAR.

In R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal and others¹ the Supreme Court held that a litigation funding agreement under which the funder takes a share of any damages recovered constituted a “damages-based agreement” (a DBA) and would, therefore, be unenforceable unless it complied with strict regulatory requirements. See DLA’s previous post: Supreme Court: Litigation funding agreements are “damages-based agreements” which considers the decision in PACCAR in more detail. The explanatory notes for the Bill state that “The Supreme Court judgment rendered LFAs unenforceable. Uncertainty around litigation funding risks a detrimental impact on the attractiveness of the England and Wales jurisdiction as a global hub for commercial litigation and arbitration, and on access to justice more broadly.”

The Bill is relatively short and simple. It amends section 58AA of the Courts and Legal Services Act 1990 (CLSA) to alter the definition of a DBA in England and Wales confirm that a Litigation Funding Agreement (which is defined in the Bill) is not a DBA. A Litigation Funding Agreement is defined as an agreement which provides that a funder is to fund legal fees for the recipient, or the payment of an adverse costs order and the litigant is to pay the funder in the circumstances specified in the agreement. The amendments are to be treated as having always had effect - the Bill will, therefore, have retrospective effect. As noted in the previous DLA update, there are a number of challenges going through the Competition Appeal Tribunal and Court of Appeal on whether other types of funding arrangements (such as where the funder is compensated by way of a multiple of the funds invested if the claim is successful) constitute DBAs. All of these challenges should fall away if the Bill is passed. 

Assuming the Bill is passed it will be welcomed by the litigation funding community which has been pressing the Government for a reversal of PACCAR since last July 2023. It has been clear that many in the legal community have been expecting the law to change and we have seen this reflected in recent funding agreements. For example, in the McLaren Class action², a revised LFA was found to be enforceable even though it allowed the funder’s fee to be calculated by reference to any proceeds. The CAT held that this was not a DBA as the relevant provision was contingent on such arrangement being legal and enforceable (which it is currently not following PACCAR but would be if the Bill passed).

It is not clear how quickly the Bill will pass through parliament or whether it will face any objections or amendments. The second reading of the bill, where there will be a general debate, has yet to be scheduled. Assuming the process is straightforward, the new Bill could be in force before the Summer Parliamentary recess.

In its previous press release, the Government said that it is considering a wider overall review of the third party funding sector. It is clear from the House of Lords debate on 11 March 2024 that the Lord Chancellor has written to the Civil Justice Council asking for that review, including whether there is a need for further regulation or safeguards.