Damages based Agreements v Litigation Funding
In a recent judgment, the Competition Appeal Tribunal (CAT) provided crucial guidance post the Supreme Court’s decision in R (PACCAR Inc and others) v Competition Appeal Tribunal.
The case, Alex Neill Class Representative Ltd v Sony Interactive Europe Ltd, navigates the complexities of litigation funding agreements (LFAs) in the context of opt-out proceedings.
The CAT’s approval of a revised LFA signals a nuanced approach post-PACCAR. The judgment emphasises that careful drafting can distinguish LFAs from damages-based agreements (DBAs). Unlike DBAs, the approved LFA did not hinge on a percentage return but rather on a multiple, showcasing the adaptability of funders in the wake of PACCAR. This ruling offers a practical steer for parties revising funding arrangements and clarifies the enforceability of LFAs when structured meticulously.
The relevant drafting provision provides:
[APPROVED DRAFTING OF LFA]
‘…the Funder’s Fee shall be the greater of:
11.1.1. a multiple of the Costs Limit; or
11.1.2. only to the extent enforceable and permitted by applicable law, a percentage of the Proceeds’
The broader legal landscape post-PACCAR has been said to offer a seismic shift, classifying damages-based funding agreements as DBAs. The Supreme Court majority decision established that LFAs, structured with the funder’s remuneration tied to a percentage of damages, fall within the DBA definition. The impact transcends individual cases, casting a shadow on all CAT proceedings reliant on similar funding agreements.
In short he ruling’s ripple effect extends to ongoing cases, where funding agreements specifying payment as a percentage of damages may become unenforceable, triggering potential claims against funders.
Looking forward, the legal landscape anticipates regulatory amendments to address the industry-wide implications of the PACCAR ruling. The Ministry of Justice may face pressure to revisit statutes like the Competition Act 1998 and amend the DBA Regulations promptly.
A neat summary of the funding arrangements on PACCAR is below:
On 26 July 2023, the Supreme Court handed down its judgment in R (PACCAR Inc and others) v Competition Appeal Tribunal and others  UKSC 28 (the “PACCAR Judgment”) in which the Supreme Court held that litigation funding agreements (“LFAs”) pursuant to which the payment to the funder is calculated as a percentage of the damages award were unenforceable insofar as they relate to opt out collective proceedings.
Following the PACCAR Judgment, the PCR entered into an amended Litigation Funding Agreement (“LFA”) on 4 September 2023 and a further amended LFA on 31 October 2023.
The Tribunal determined that:
- The words “only to the extent enforceable and permitted by applicable law”, as inserted into clauses 11.1.2 and 11.2.2 in the amended LFA, operate with a contingency, such that they have no legal effect until the contingency (legislation by Parliament to reverse the effect of the PACCAR Judgment) eventuates. There was therefore no logical possibility that section 58AA of the Courts and Legal Services Act 1990 could be engaged to make the provisions unenforceable.
- Section 58AA had no application to the wider provisions of the amended LFA so as to make it unenforceable.
- The funding arrangements do not create unacceptable risks of perverse and unmanageable incentives at this time.
The above extract is an unofficial summary prepared by the Registry of the Competition Appeal Tribunal.
In conclusion, the CAT’s recent judgment and the broader PACCAR decision reshape the legal terrain for opt-out proceedings. The adaptability of LFAs, as demonstrated in the CAT case, underscores the importance of precise drafting. However, the overarching impact of PACCAR raises industry-wide challenges, prompting a reevaluation of regulatory frameworks to navigate the intricate relationship between DBAs, LFAs, and consumer protection in the evolving legal landscape. However post PACCAR in Alex Neill Class Representative Ltd v Sony Interactive Europe Ltd, it appears and I could be wrong that careful re-drafting to exclude percentages and provide multiples may offer a solution to the complex puzzle of the litigation funding world.