In a recent case, the Supreme Court decided that Litigation Funding Agreements are Damages-Based Agreements. This article explores the consequences of this decision.

In this article, we'll explore how recent Commercial Court Case Therium Litigation Funding A IC v Bugsby Property LLC [2023] was impacted by the consequences from the PACCAR decision - but first, we'll need to provide some background on PACCAR itself.

What is the PACCAR Judgment?

In R (on the application of PACCAR Inc and others) v CAT [2023] the Supreme Court decided that Litigation Funding Agreements (LFAs), which entitle funders to payment based on the amount of damages recovered, are Damages-Based Agreements (DBAs).

Consequently, they cannot be used at all to fund opt-out collective proceedings before the Competition Appeal Tribunal (CAT) and are unenforceable unless they comply with the relevant regulatory rules for DBAs. While the LFAs at issue in PACCAR were entered into to support collective claims brought on behalf of multiple claimants before the CAT, this decision affects all LFAs entitling funders to payment that's based on the level of damages recovered.

This ruling has had significant impact for UK litigation funders and law firms that undertake work involving third party funding. LFAs that are now rendered invalid must be replaced in ongoing litigation and decisions will have to be made regarding what might be done (if anything) to recover historic legal spend and return on investment.

What constitutes a DBA?

The definition of DBA includes an agreement to provide "claims management services" where:

  1. the service provider is paid if the recipient obtains a specified financial benefit in the matter related to the services; and
  2. the payment amount is to be determined by reference to the amount of the financial benefit obtained.

The key question before the Supreme Court was whether "claims management services" should be interpreted as including the provision of litigation funding. The Supreme Court held that they should.

Analysis of Judgment in PACCAR

The fact that the majority of LFAs currently in force provide for funders to receive payment based on the amount of damages recovered was a factor in the Supreme Court's determination. Most of these are now likely to be at least partially unenforceable so far as their payment provisions are concerned. That is so even in cases where the LFA stipulates that the funder's entitlement to payment is conditional on other requirements being met - as long as the funder's remuneration is determined by reference to damages recovered, it will constitute a DBA.

Impact of the PACCAR Judgment in the Therium case

Now that we've run through the background context of PACCAR, we can address the Therium Litigation Funding case.

This case was the first to be impacted by the consequences of the PACCAR decision, regarding the enforceability of LFAs. Judgment was given by the Commercial Court on 20 October 2023 that it's arguable that parts of LFAs are enforceable, notwithstanding the approach taken to them by the Supreme Court in PACCAR.

In this case the Judge granted the applicant litigation funder an interim proprietary injunction, which permits the preservation of the fruits of a settlement agreed to in funded litigation. The injunction was resisted on grounds that the LFA was unenforceable following PACCAR and so, there was no "serious issue to be tried" so as to warrant it being granted.

But the judge held that there was indeed a serious issue to be tried. The LFA in issue provided for three types of payment to be made to the funder who had assisted the funded claimant:

    a return of the funding provided;
  • a return to the funder calculated as a multiple of that funding; and
  • a return calculated as a percentage of damages/settlement sums above a pre-determined threshold.
  • Although the third type of payment comprised a DBA and was therefore unenforceable it was held that it was arguable that this did not render the whole LFA unenforceable because it could still be argued that only the "damages-based agreement" part of the contract could not be enforced and did not itself affect the rest of the contract.

    In looking to other cases, the Court of Appeal decision in Zuberi v Lexlaw [2021] is a relevant example. This case concerned whether a termination clause triggering payment in the event of termination would be unlawful and/or would render the whole agreement unenforceable, which, in this case, was not what the court found.

    Alternatively, the offending part of the agreement could be severed. Severance requires a three stage "blue pencil" test to determine which parts of a contract will remain valid:

    1. if the illegal provision can be removed without modifying the words of the remaining terms. If it still makes sense, the illegal provision can be removed, or, blue pencilled;
    2. the remaining terms following the "blue pencil" must be supported by consideration; and
    3. following the blue pencilling of the illegal parts, the contract must continue to be the same sort of contract that the parties entered into in the first place.

    Conclusion

    Although it might be seen that PACCAR has caused widespread anxiety for funders and litigation law firms over the enforceability of LFAs, the judgment in Therium gives them a degree of hope that depending on how an LFA has been drafted, it might still survive being declared void and unenforceable if certain parts remain valid and binding, separate from elements that constitute strict DBA provisions alone.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Mr Phillip Sewell
Shepherd and Wedderburn LLP
1 Exchange Crescent, Conference Square
Edinburgh
UK
Tel: 131228 9900
Fax: 131228 1222
E-mail: paulina.barela@shepwedd.com
URL: www.shepwedd.com

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