Government announces planned legislation to bolster litigation funding by reversing effect of Paccar

The government has today announced that it will introduce legislation to reverse the effect of the high profile decision in Paccar last July (considered in this blog post), in which the Supreme Court held that litigation funding agreements in which the funder is to receive a share of damages are Damages-Based Agreements (DBAs) and therefore must comply with the relevant regulatory regime (the DBA Regulations 2013) in order to be enforceable. The decision meant that many litigation funding agreements in existence at the time were unenforceable.

Since the decision, funders have been busy amending their funding models, and renegotiating existing agreements, to try to ensure that their funding agreements are not DBAs, most commonly by moving to a model in which they receive a multiple of funding rather than a percentage of damages. The Competition Appeal Tribunal (CAT) has held in a number of cases that such agreements fall outside the relevant statutory definition of a DBA (see for example this blog post), but has granted permission to appeal in order to resolve any continuing uncertainty.

The government has already introduced a legislative amendment to mitigate the impact of Paccar in opt-out collective proceedings in the Competition Appeal Tribunal (CAT), where the decision has had a particularly dramatic effect since DBAs are prohibited in that context (see our blog post here). That legislation will allow the use of DBAs with funders for opt-out actions, but DBAs with solicitors and barristers will still be prohibited in such cases. Importantly, however, it does not remove the need for funding agreements to comply with the DBA Regulations if they fall within the definition of a DBA, whether in opt-out proceedings or in other proceedings in the CAT or in other courts and tribunals.

The government's more recent announcement promises a more fundamental legislative change, restoring the position that existed before Paccar when it was assumed that litigation funding agreements were not DBAs and so did not need to comply with the DBA Regulations, whether or not they allowed for the funder to receive a percentage share of damages. The government's press release states that the legislation will be introduced "shortly" and will apply only to England and Wales

The press release also states that the government is considering options for a wider review of the sector and how third-party litigation funding is carried out, which could consider the possible need for increased regulation or safeguards for claimants, particularly given the growth of the litigation funding sector over the past decade. The timing of any such review is unclear: the announcement simply states that further details will be set out in due course.