Revised litigation funding agreement approved for opt-out competition claim: fee based on multiple of funding was not a DBA

The Competition Appeal Tribunal (CAT) has found that a litigation funding agreement that was revised to take account of the Supreme Court's decision in Paccar (considered in our previous blog post) was not a damages-based agreement (DBA). It was therefore enforceable in the context of an application for an opt-out collective proceedings order: Alex Neill Class Representative Ltd v Sony Interactive Entertainment Europe Ltd [2023] CAT 73.

In Paccar, the Supreme Court held that litigation funding agreements which entitle the funder to a share of any damages recovered are DBAs within the relevant statutory definition and must therefore comply with certain regulatory requirements in order to be enforceable. However, for funding agreements that relate to opt-out collective proceedings in the CAT, if the agreement amounts to a DBA it will be unenforceable in any event as DBAs are prohibited in that context (subject to a recently proposed legislative amendment to permit funder DBAs for opt-out collective proceedings, as we reported here).

In our blog post on Paccar, we noted that one immediate question was whether a funding arrangement providing for the funder to be paid a multiple of funding, rather than a percentage share of damages, would fall outside the statutory definition and therefore be enforceable in opt-out collective proceedings. The present decision suggests the answer to that question is yes. The CAT rejected an argument that the revised funding agreement was still a DBA, despite the funder's fee being calculated as a multiple of funding, because the fee would ultimately be capped by reference to the amount of the proceeds obtained in the action.

This is a significant decision in the context of opt-out collective proceedings in the CAT. However, it is not clear that the decision can necessarily be read across to funding agreements outside that context. The decision was based in part on the fact that the funding agreement did not contain an express cap on the funder's fee, and the fee would be determined by the CAT itself (in the event of a judgment) or by the terms of any settlement approved by the CAT. The amount of the proceeds would merely be a factor that could be taken into account.

In High Court proceedings, a litigation funder's fee is not determined or approved by the court. Where the fee is calculated by reference to a multiple of funding, one would expect the funding agreement to contain an express (or at least implied) cap on the amount of the fee by reference to the amount of the proceeds obtained. Litigation funding of this sort is invariably provided on a "non-recourse" basis, and claimants are unlikely to accept a liability for the funder's fee extending beyond their recovery in the proceedings. These could be relevant distinctions, so it would not be safe to assume that a funding agreement of this sort will necessarily fall outside the definition of a DBA (and therefore escape the need to comply with the relevant regulatory requirements) simply because it is based on a multiple of funding. (In Therium v Bugsby, considered here, the funded party conceded for the purposes of the funder's asset preservation application that the funding agreement would have been enforceable if based solely on a multiple rather than a percentage, but there does not appear to have been a point taken about the effect of any cap on the fee.)

It is also interesting to note that the revised funding agreement in the present case contained a contingent term providing for the funder to be paid a percentage of proceeds (where greater than the specified multiple) if that was permitted as result of a future change in the law. However, the government's recently proposed legislative amendment would not necessarily trigger that contingency, as it does not remove the need for a funder DBA to comply with the regulatory requirements that apply to DBAs, and therefore gives no guarantee of enforceability.

Background

The Proposed Class Representative's (PCR's) application for a collective proceedings order (CPO) against the proposed defendants (Sony) was heard by the CAT in June 2023. Following the Supreme Court's judgment in Paccar in late July, the CAT invited submissions from the parties as to the impact of that decision on the funding in this case, and held a further hearing to consider the funding issues in early October.

The Supreme Court's decision in Paccar turned on s.58AA of the Court and Legal Services Act 1990. This defines a DBA as an agreement with a person providing advocacy, litigation or "claims management" services which provides for the service provider to receive a payment if the client obtains a "specified financial benefit" in the litigation, and the amount of the payment "is to be determined by reference to the amount of the financial benefit obtained".

The effect of s.58AA is that a DBA is unenforceable unless it complies with the relevant requirements for such agreements, including the DBA Regulations 2013. But DBAs which relate to opt-out collective proceedings will be unenforceable in any event, under s.47C(8) of the Competition Act 1998 (subject to the legislative amendment referred to above).

In the present case, it was accepted that the effect of Paccar was that the original litigation funding agreement was a DBA and was therefore unenforceable, as it provided for the funder to be paid the greater of a multiple of the funder's outlay (ie the amount of funding drawn down) or a percentage of the proceeds recovered by the PCR. The PCR and the funder therefore entered into an amended litigation funding agreement (the amended LFA) which (simplifying slightly) provided for the funder's fee to be the greater of:

1. a multiple of the "Costs Limit" (ie the amount of funding the funder is contractually obliged to provide); or
2. "only to the extent enforceable and permitted by applicable law", a percentage of the proceeds obtained.

Sony challenged the amended LFA primarily on the basis that these terms meant the LFA still amounted to a DBA and was therefore unenforceable. Therefore, it argued, the CPO should not be granted, as effective funding arrangements are a pre-requisite for a claim to be brought in collective proceedings.

Sony also argued that the amended LFA, if enforceable, gave rise to perverse incentives which were contrary to public policy and a conflict of interest on the part of the PCR. Those arguments were rejected by the CAT, because it could control the level of costs at the judgment or settlement stage. They are not considered further in this blog post.

Decision

The CAT held that the amended LFA was not a DBA and was not therefore unenforceable. As a preliminary point, the CAT rejected Sony's suggestion that Paccar mandated a broad approach to assessing whether funding agreements were DBAs and effectively imposed a requirement to assess the proportionality of returns to funders which might, in reality, be DBAs in disguise. The Supreme Court in Paccar was, it said, concerned with an exercise in statutory interpretation and expressed no view on public policy considerations.

Contingent provision for percentage payment

Sony argued that the clause at (2) above meant that the amended LFA still provided for a percentage payment, despite it being payable "only to the extent enforceable and permitted by applicable law", and therefore was still an unenforceable DBA.

The CAT did not agree. The clause would have no legal effect unless the contingency (ie legislation to reverse the effect of Paccar) were to eventuate. The PCR and the funder were free to contract on that basis and it was not objectionable as a matter of public policy.

Funder's payment capped by reference to proceeds

Sony put this argument in a number of ways but the key submission was that the proceeds received in the action were a natural cap on the amount that could be paid to the funder, so that there was inevitably a reference to the amount of the financial benefit obtained in determining the funder's fee.

The CAT rejected this argument. Sony could not point to any provision in the amended LFA which limited the amount of the funder's fee by reference to the amount of the proceeds. The amended LFA was not therefore an agreement which provided that the amount of the fee was determined by reference to the amount of the proceeds, as the definition of a DBA at s.58AA required. It was in fact the CAT, exercising its discretion under the relevant rules, that would determine the funder's fee if there was a judgment. In a settlement, the funder's fee would be determined by the terms of the settlement, if approved by the CAT. In either scenario, the size of the proceeds might be a relevant consideration, but that was beside the point so far as s.58AA was concerned.

Note: On 5 January 2024, the CAT granted Sony permission to appeal this decision to the Court of Appeal. Although it considered that there was no reasonable prospect of Sony succeeding in the appeal, it concluded that permission should be granted on the “other compelling reason” ground. It commented that challenges to amended funding arrangements are “creating uncertainty and consuming the resources of the Tribunal and the parties, and that is unlikely to cease until there has been a conclusive decision on these points by the Court of Appeal”. The appeal is due to be heard by 19 December 2024.