Litigation funding agreement may be enforceable in part despite Paccar decision: High Court finds there is "serious issue to be tried"

In what appears to be the first decision to consider the implications of the Supreme Court's judgment in Paccar Inc v Road Haulage Association Ltd [2023] UKSC 28 (considered in our previous blog post), the High Court has held that there is a "serious issue to be tried" that the element of a litigation funding agreement which provides for the funder to receive a multiple of funding remains enforceable, even though the aspect which provides for a percentage of damages is unenforceable in light of Paccar: Therium Litigation Funding A IC v Bugsby Property LLC [2023] EWHC 2627 (Comm).

In Paccar, the Supreme Court held that litigation funding agreements which provide for the funder to be paid a share of damages are “damages-based agreements” (or DBAs) and therefore must comply with the regulatory requirements applicable to such agreements in order to be enforceable. In that case it was common ground that the relevant funding agreement did not comply and was therefore unenforceable if (as the court held) it was a DBA. Accordingly, the Supreme Court did not address what made the agreement non-compliant.

The Association of Litigation Funders of England and Wales, which intervened in the appeal, submitted evidence to the effect that a decision that funding agreements of this sort were DBAs would invalidate all or most litigation funding agreements ever agreed in this jurisdiction. This may be for a number of reasons, but one obvious area of difficulty is that, while funding terms vary, most funding agreements entered into before Paccar provided for the funder to receive, depending on the circumstances, either or both a percentage share of damages and an "underpinning multiple" of the funding provided. This would mean that, depending on the result of the case, the funder could be entitled to receive more than the maximum payment of 50% (including VAT) which is permitted under a DBA.

In the present case, however, Therium argued that its funding agreement is enforceable despite providing for both a multiple of the funding committed (2.5x or 3x committed funds, depending on when the recovery was achieved) and 5% of any damages over £37,569,295 (which was not in fact achieved by the settlement in the underlying case). The court agreed with Therium that there is a serious issue to be tried that the only aspect of the agreement invalidated by Paccar is the (inapplicable) 5% of damages, leaving Therium with an enforceable entitlement to the agreed multiple of funding, or alternatively that the offending provision can be severed from the agreement.

This decision does not establish that the relevant provisions of the funding agreement are enforceable, merely that there is a serious issue to be tried to that effect and therefore the funder is entitled to an injunction preserving its position while the question is resolved – which in this case will be by arbitration, as there is an arbitration clause in the relevant funding agreement. Given the stakes for many litigation funders, and claimants who have pursued claims with the benefit of funding, it is likely to be only a matter of time before this question is tested before the courts.

Background

A well-known litigation funder, Therium, applied for an asset freezing/preservation order over sums received by the respondent, Bugsby, in settlement of litigation that Therium (and another funder, Omni Bridgeway) had funded. Therium claimed that Bugsby was required to hold the relevant sums on trust for Therium under the relevant litigation funding agreement (the LFA), and therefore it was entitled to a proprietary order.

Since the LFA provided for LCIA arbitration, the application was made under s.44 of the Arbitration Act 1996 which gives the court power grant an order for the preservation of property or an interim injunction if the matter is urgent and if the arbitral tribunal has no power or is unable for the time being to act effectively. It was common ground that the well-known American Cyanamid test applies to asset preservation orders in support of proprietary claims, ie the applicant must show that: (a) there is a serious issue to be tried; (b) the balance of convenience is in favour of an injunction (including consideration of whether damages are an adequate remedy); and (c) it is just and convenient to make the order sought.

In the present case, Bugsby argued that Therium's claim failed to meet the hurdle of "serious issue to be tried" in light of the Supreme Court's decision in Paccar. It was common ground that any claim for 5% of Bugsby's recovery in excess of the relevant threshold (which had not been achieved) would be unenforceable, and that the question of enforceability of other aspects of the LFA must be judged by reference to the agreement as made, rather than the events as they had transpired.

However, Therium argued that there was a serious issue to be tried as to whether or not, as a result of Paccar, the entire LFA was unenforceable as opposed to (as Therium accepted) the term providing for 5% of any recovery over £37,569,295.

Decision

The High Court (Jacobs J) held that there was a serious issue to be tried and therefore granted the order sought by Therium.

Whether provision for multiple of funding formed part of DBA 

In support of its argument that Paccar did not invalidate the entire LFA, and in particular the provision providing for payment of a multiple of funding committed, Therium relied on Zuberi v Lexlaw Ltd [2021] EWCA Civ 16 (considered here) in which a majority of the Court of Appeal took the view that a "DBA" was not the entire contract of retainer with the solicitor but only those provisions which dealt with payment out of recoveries. Elements of the retainer which did not concern the payment of recoveries - including the termination provision which was the subject of the dispute in that case - were not part of the DBA.

Jacobs J considered that Lexlaw gave rise to a principled argument that the only unenforceable DBA element of the LFA in the present case was that part which entitled Therium to a percentage share of recoveries, ie the DBA regime was not engaged by the provisions which entitled Therium to a multiple of funding committed. That argument raised a serious issue to be tried.

Bugsby did not dispute that, in light of Zuberi, a DBA was not the whole of the agreement, but only certain parts of it, nor that a funding agreement confined to payment of a multiple would not be a DBA. However, Bugsby argued that Zuberi could be distinguished, as in this case all of the payments to which Therium was entitled were only payable out of recoveries, and were therefore part of the DBA. Further, the LFA defined the “Contingency Fee” payable from recoveries as referring to both the multiple and the percentage, so that they were "welded together" and it made no sense to say one but not the other was DBA.

However, the judge did not consider these points to be so clearly right, in light of Zuberi, that there was no serious issue to be tried. Bugsby did not argue that a funding agreement based solely on a multiple of funding would fall foul of the DBA legislation, and (the judge commented) it would not make any difference whether or not those monies were to be paid out of recoveries. As for the "welded together" point, there was a potential answer in that this was a matter of form rather than substance.

The judge also noted that the Supreme Court's decision in Paccar was very recent, and this appeared to be the first case to address its ramifications. Further, this was a developing area of the law which was not straightforward and where different conclusions were possible, as illustrated by the fact that in Paccar the Supreme Court had reversed the Divisional Court and there was a powerful dissent. That meant it was appropriate to tread carefully.

The judge emphasised that in reaching his conclusion that there was a serious issue to be tried, he did not express a view one way or the other as to who had the better of the argument, which would ultimately be a question for the arbitrators.

Severability

As an alternative to its argument based on Lexlaw, Therium argued that the provision for a percentage payment could be severed from the LFA leaving the remainder enforceable. While Therium did not need to rely on severance, given the conclusions outlined above, the judge considered that there was also a serious issue to be tried on severance. He noted that the criteria for severance are that: (a) the offending provision can be removed without modifying or adding to other terms; (b) the remaining terms continue to be supported by adequate consideration; and (c) the removal of the offending provision does not change the nature of the contract, such that it is not the sort of contract that the parties entered into at all.

Bugsby argued that the third requirement was not met in the present case, relying on the very recent decision in Diag Human v Volterra Fietta [2023] EWCA Civ 1107, in which the Court of Appeal concluded that a discounted conditional fee agreement (CFA) with solicitors was unenforceable because it failed to comply with the relevant legislation and that severance was not possible. The basis for the decision on severance in that case was that it would fundamentally change the nature of the contract from a CFA with a substantial proportion of the solicitor’s fees being conditional to a conventional retainer providing for fees at a discounted rate. Alternatively, the Court of Appeal said, severance was precluded as contrary to public policy as it would permit partial enforcement of the unenforceable CFA.

In the present case, the judge said he did not consider the line of argument based on Diag Human to be so persuasive as to preclude there being a serious issue to be tried on severance, including because that decision did not concern a DBA and the two types of agreements are not necessarily analogous. The judge noted in particular that, while a CFA is illegal at common law because of the prohibition on champertous agreements (ie the ancient rules against "trafficking" in litigation), a litigation funding agreement is lawful at common law and does not, in itself, offend public policy but will be rendered unenforceable if it does not satisfy the statutory requirements applicable to a DBA. The judge said it can therefore be argued, reasonably, that there is no public policy objection to severing the provisions of a litigation funding agreement which place the agreement within the DBA regime, leaving behind a lawful agreement to which the regime does not apply. That raised a serious issue to be tried which, again, would be a question for the arbitrators.

Note: The Court of Appeal has refused permission to appeal against this decision.