Another month, and another set of developments in litigation funding in the wake of the Supreme Court's decision in R (on the application of PACCAR Inc & Ors) v Competition Appeals Tribunal & Ors (PACCAR).

The story so far

For anyone who needs a primer, here's a brief outline of the story so far:

  • In July 2023, the UK Supreme Court handed down its judgment in PACCAR, finding that a litigation funding agreement (LFA) which provides for the funder to receive a percentage of the successful party's damages is a damages-based agreement (DBA) and so unenforceable in certain circumstances.
  • As anticipated in our subsequent piece for Solicitors Journal, The fallout from PACCAR, the courts are now starting to see satellite litigation probing the limits of the PACCAR judgment.
  • In our most recent article, Fracas post-PACCAR, we reported on two subsequent judgments which considered whether unenforceable funding agreements could be saved by severing the offending parts. While we don't yet have a definitive answer, the mood music suggests courts may be receptive to severing unenforceable clauses in LFAs.

What's new?

To that potted history of the last three months, we can now add two further developments in November. The first is more detail on proposed legislative intervention; the second is a further judicial decision on severance and related issues.

Legislative intervention

As reported previously, the Government has clearly heard the concerns of litigants and funders that this decision will affect access to funding and, consequently, access to justice. The Department of Business & Trade announced in August simply that it was "looking at all available options to bring clarity to all interested parties". Its proposed solution (or at least one part of it) has now emerged in the form of an amendment to the Digital Markets, Competition and Consumers Bill 2022-23, which was tabled on 15 November.

The effect of that amendment, if enacted, would be to remove "claims management services" (the legislative term which the Supreme Court held was wide enough to encompass the provision of pure litigation funding) from the definition of a DBA. However, this would be of limited effect, since the amendment (as you may surmise from the title of the bill) would only change the definition of DBA in respect of claims in the Competition Appeals Tribunal. In practice therefore, this amendment would only regularise the position for one aspect of PACCAR, by allowing the use of DBAs in opt-out collective proceedings. What it won't do is amend the core definition of DBAs in the Courts and Legal Services Act so as to impact claims brought outside of the Competition Appeals Tribunal. Accordingly, and without further action, LFAs providing for a funder to receive a percentage of damages will effectively remain unenforceable in other proceedings.

The Playstation variation

That said, parties to LFAs have not been resting on their laurels since PACCAR waiting to see what fix the Government proposes. Instead, they have been reworking LFAs to respond to the decision and in November, we saw one such reworked LFA coming under renewed scrutiny in the Sony Playstation litigation.

In June 2023, the Competition Appeal Tribunal (CAT) heard the claimant's application for a Collective Proceedings Order (CPO), to bring competition law claims based on an alleged abuse of dominance on behalf of a class against various Sony entities. In loose terms, it is a prerequisite to the grant of a CPO that the claimant demonstrates adequate funding for adverse costs in the event they are unsuccessful. The PACCAR decision (handed down after the initial CPO application hearing) rendered the claimant's existing funding agreement unenforceable, and necessitated a revised LFA and a further hearing in October. In the CAT's judgment, handed down on 21 November, it assessed whether the revised LFA was enforceable.

The revised LFA included the following wording (our emphasis):

The Funder's Fee shall be the greater of:

A multiple of the Costs Limit [being the amount the funder is contractually obliged to provide]; or

Only to the extent enforceable and permitted by applicable law, a percentage of the Proceeds

It also included a severance clause couched in the terms of the severance test endorsed by the Supreme Court in Tillman v Egon Zehnder:

"the Parties acknowledge and agree that, if necessary to ensure the enforceability, legality or validity of this agreement, any provision of this agreement which begins with the words "only to the extent enforceable and permitted by applicable law" shall be severable: (a) without modifying or adding to other terms of this agreement; (b) with the consequence that the remaining terms continue to be supported by adequate consideration; and (c) without changing the nature of the contract, such that it is not the sort of contract that the Parties entered into at all".

Sony argued that the revised LFA still provided for payment of a percentage of the Proceeds and that the simple addition of the wording "only to the extent enforceable…" could not convert an unenforceable DBA into an enforceable LFA. The CAT however disagreed, finding that the effect of the revised drafting was that payment by reference to the Proceeds is conditional, and has no legal effect unless and until Parliament legislates to reverse the effect of PACCAR – which it described as "an entirely proper position to take".

The CAT also expressed the view (obiter) that, if the "only to the extent enforceable" wording was ineffective, the severance clause was capable of removing it and the percentage payment mechanism it related to, leaving only an enforceable multiple of commitment mechanism. The CAT endorsed the use of a Tillman severance clause, saying "we see no reason to go behind this express agreement between the parties themselves" that the clause was capable of being severed without changing the nature of the contract.

The CAT was also unpersuaded by Sony's broader attempts to characterise various other parts of the revised LFA as constituting an unenforceable DBA, and its attempt to attack the amounts payable to the funder.

This decision should therefore give some comfort to those drafting LFAs that it is still possible to cater for a percentage of recoveries mechanism, albeit a conditional one that must lie dormant unless and until Parliament legislates to make them enforceable – which it appears to be doing, at least in the case of collective competition actions. It also signals that adding an express agreement that any such clause can be severed from the LFA without fundamentally altering the nature of the contract is a sensible belt and braces precaution.

For more information on any of the topics discussed in this article, please contact Emma Carr.