Insights 20/12/2023
On 26 July 2023, the Supreme Court handed down its much-awaited judgment by a 4:1 majority in the case of R (PACCAR Inc and others) v Competition Appeal Tribunal and others [2023] UKSC 28 ("PACCAR"). It held that litigation funding agreements (“LFAs”) which entitle funders to payment based on the percentage of any amount of damages recovered, constitute Damages-Based Agreements (“DBAs”) and such LFAs are unenforceable unless they comply with the relevant regulatory regime for DBAs under section 58AA of the Courts and Legal Services Act 1990 ("CLSA 1990"). The Supreme Court further held that such LFAs in the form of DBAs cannot be used at all to fund opt-out collective proceedings before the Competition Appeal Tribunal (the “CAT”) pursuant to section 47C(8) of the Competition Act 1998 ("CA 1998").
The judgment sent shockwaves through the litigation funding market with many litigation funders rapidly looking to restructure their LFAs in a manner that avoids linking their entitlement to payment to a percentage of the amount of any damages recovered. Others moved to replace existing agreements with alternative arrangements to comply with the requirements for DBAs set out in Section 58AA of the CLSA 1990. The effect of the judgment was that most LFAs agreed since litigation funding began could be invalidated and the consequences for those already involved in cases could be catastrophic.
Two recent decisions before the Commercial Court and the CAT, Therium Litigation Funding AIC v Bugsby Property LLC [2023] EWHC 2627 (Comm) ("The Therium Decision") and Alex Neill Class Representative Ltd v Sony Interactive Europe Ltd and Sony Interactive Entertainment Network Europe Limited [2023] CAT 73 ("the Sony Decision"), respectively, have now given a ray of hope to litigation funders. The court and the tribunal in these cases held that the LFAs are enforceable so long as the unenforceable part i.e., the provisions which entitle the litigation funders to payment based on the percentage of any amount of damages recovered, can be severed. Interestingly, these cases are the first to address the ramifications of PACCAR.
1. The Therium Decision
This case involves an application for an asset preservation/freezing order ("proprietary injunction") by Therium Litigation Funding AIC ("Therium") against the Respondent, Bugsby Property LLC ("Bugsby") pursuant to section 44 of the Arbitration Act 1996. Therium had provided funding to Bugsby pursuant to an LFA for Bugsby to pursue an action against two entities in the Legal & General Group.
The litigation which Bugsby pursued with the benefit of litigation funding was successful but was settled pending appeal. Bugsby changed solicitors shortly before receiving settlement monies. The new solicitors had already paid some of the settlement monies to Bugsby and were about to send the remainder to them despite Bugsby’s obligations under the LFA to pay Therium first. Therium urgently sought the proprietary injunction to preserve the settlement monies pending a final decision on the dispute which would be a matter for arbitrators in line with the arbitration agreement in the LFA.
To get this proprietary injunction, however, Therium had to show that there was a “serious issue to be tried” that it was entitled to payment. Bugsby’s relied upon the decision of the Supreme Court in PACCAR, arguing that the LFA provides for payment to Therium to be calculated as a percentage of the damages award. It was therefore, in line with the decision in PACCAR, a DBA which did not comply with the DBA Regulations, and it was therefore unenforceable.
The LFA provided for three types of payment to be made to the funder by the funded party in the event of a successful recovery of damages: (1) a return of the funding provided, (2) a return calculated as a multiple of that funding and (3) a return calculated as a percentage of damages above a certain threshold. The court found in favour of Therium and granted the proprietary injunction based on the following reasons:
a. The court relied on the Court of Appeal decision in Zuberi v LEXLAW Ltd [2021] EWCA Civ 16, holding that it was only the third type of payment that comprised a DBA and that the DBA provision did not make the whole LFA unenforceable. The court held that the remaining provisions, including those concerning the trust, the repayment of the funded sums, and the contingency fee, insofar as it concerns a multiple return on those funded sums, are not DBAs and therefore enforceable. The court held that this point gives rise to a serious issue to be tried.
b. The court held that the offending provision could be severed from the LFA. The criteria that must be fulfilled before severance is possible are that (a) the offending provision can be removed without modifying or adding to other terms of the agreement; (b) the remaining terms continue to be supported by adequate consideration and (c) the removal of the unenforceable part of the contract does not change the nature of the contract, such that it is not the sort of contract that the parties entered into at all. The court held that it could reasonably be argued that there is no public policy objection to a severance which removes offending DBA provisions in a LFA leaving behind an entirely lawful agreement. The court held that this point gives rise to a serious issue to be tried.
2. The Sony Decision
This case involves an application by a Proposed Class Representative (the “PCR”) controlled by Alex Neill, for Collective Proceedings Order ("CPO") under the CA 1998 against Sony Interactive Europe Ltd and Sony Interactive Entertainment Network Europe Limited ("Sony"). The PCR argues that Sony holds a monopoly as the primary seller of PlayStation digital games and add-on content and that they have abused this dominance by enforcing restrictions on digital distribution and set unfair prices for third-party sellers.
The PCR relied on third party litigation funding for the application and the LFA took the form of a DBA. Following the Supreme Court’s decision in PACCAR, the PCR presented a revised LFA which it said resolved any issues relating to enforceability as a result of that decision. The revised LFA provides that the funder’s fee is to be determined by calculating a multiple of the costs limit, being the amount of funding which the funder is contractually obliged to provide, rather than a multiple applied to the funder’s outlay, being the actual amount drawn down. The LFA retained a percentage return provision but the same would only apply if the law changed post-PACCAR. The revised LFA also contained a severance provision severing the percentage return provision where necessary, to ensure the enforceability, legality or validity of the revised LFA.
Sony sought to strike out the application for a CPO arguing amongst others, that the revised LFA did not cure the enforceability concerns in the original LFA following PACCAR. The CAT held that the revised LFA was enforceable, finding as follows:
a. The revised LFA was not a DBA because it did not have a return to the funder based solely on a percentage but also on a multiple of the funding provided.
b. Applying Lord Wilson’s formulation in Tillman v Egon Zehnder Ltd [2019] UKSC 32, [2020] AC 154, the CAT found that the relevant portion relating to the return based on percentage can be severed from the payment provision and it does not consider that there was a major change in the overall effect of the revised LFA if the percentage provision clause was severed. The CAT found that the severance clause contained in the revised LFA is plain and sees no reason to go behind the express agreement between the parties.
c. The CAT noted that Sony could not point to any provision in the revised LFA by which the amount of the funder’s fee was limited by the amount of the Proceeds.
Discussion
While the Therium and Sony Decisions cannot vary the Supreme Court's decision in PACCAR, they have reopened the discussion surrounding LFAs. For litigation funders, the decisions reflect a sympathetic approach by the High Court and the CAT in the construction of LFAs, in particular, concerning opt-out collective proceedings before the CAT. This makes it easier for claimant groups to bring claims for damages for breaches of competition law.
Overall, the cases show that the High Court and the CAT will be prepared to enforce an LFA by severing the unenforceable part if the severance does not change the nature of the contract. This can be achieved through proper drafting of the severance clause in the LFA. Furthermore, the High Court and the CAT will be prepared to enforce an LFA where the provisions for payment of the funders include the repayment of the funded sums and a return calculated as a rising multiple of the invested capital over time.
We have not seen the end of the PACCAR ramifications and the decisions above may be the subject of appeals. It will be interesting to see the impact of the Digital Markets, Competition and Consumers Bill 2022–2023 which was announced in November 2023. If brought into force, DBAs for the purpose of litigation funding would be permitted for opt-out collective proceedings heard in the CAT. However, these adjustments would not alter the stance that LFAs offering a percentage return would fall under the category of DBAs, contrary to hopes that LFAs would be excluded from this classification.
The court and the tribunal in these cases held that the LFAs are enforceable so long as the unenforceable part i.e., the provisions which entitle the litigation funders to payment based on the percentage of any amount of damages recovered, can be severed.
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