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
What is the PACCAR Judgment?
In R (on the application of PACCAR Inc and others) v CAT  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
This ruling has had significant impact for
What constitutes a DBA?
The definition of DBA includes an agreement to provide "claims management services" where:
- the service provider is paid if the recipient obtains a specified financial benefit in the matter related to the services; and
- 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
Analysis of Judgment in
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
Impact of the PACCAR Judgment in the Therium case
Now that we've run through the background context of
This case was the first to be impacted by the consequences of the
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
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.
- 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;
- the remaining terms following the "blue pencil" must be supported by consideration; and
- 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.
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
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:
Although it might be seen that
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.
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