The UK litigation funding industry has been left scrambling to renegotiate contracts in the wake of a Supreme Court judgment earlier this week (26 July) which ruled that many of the funding agreements used for group action competition cases are unenforceable.
The judgment, which relates to the high-profile cartel case brought against DAF and other truck-makers, ruled that litigation funding agreements (LFAs) allowing funders to recover a percentage of damages awarded constitute damage-based agreements (DBAs), which are not allowed in collective actions in the Competition Appeal Tribunal (CAT).
Four out of five Supreme Court judges found that these agreements amount to ‘claims management services’, overturning the decision of lower courts.
Their decision has significant ramifications not just for the funding arrangements in Trucks but for numerous other cases with similar arrangements.
It renders existing LFAs unenforceable, leaving litigation funders scrambling to renegotiate contracts, particularly in the competition law sphere where damages-based agreements are prohibited.
To date, percentage-based LFAs have been the most popular method for funding CAT cases.
Despite the blow, funders have moved to allay fears about the future of their industry.
‘We’re in the middle of a triage process to figure out what needs to be amended, and how to amend it,’ said Adrian Chopin, co-founder and managing director at Bench Walk Advisors, who added that the judgment was ‘commercially nonsensical and unhelpful’ but dismissed doubts about the future of the funding industry as ‘unnecessary bed wetting’.
Susan Dunn, founder of Harbour Litigation Funding and chair of the Association of Litigation Funders, added: ‘For people to suggest that funding is dead in the water, is unfounded hyperbole. Agreements will be amended if they are not currently compliant and the reality is that claimants continue to need funding to progress their claims, where costs run into the tens of millions and good claims often can only proceed with funding. In the final analysis, I think this will be seen as a less significant judgment than some are suggesting’
They argue that the industry is mature enough to withstand the judgment, with the additional administrative burden the biggest issue they face.
Many partners agree that the impact will not be as far-reaching as some fear, with Skadden litigation and arbitration partner David Edwards commenting, ‘while this judgment will not likely alter the wider dynamics, its immediate impact may be unwelcome to those operating under existing funding agreements’.
Elena Rey, head of the litigation funding working group at Brown Rudnick, highlights the precautionary steps some funders had already been taking ahead of the decision.
‘In anticipation of this decision, we have been working with funders and claimants to draft amendments to existing litigation funding agreements. We expect that provided that the funding documentation is updated to reflect relevant points referred to in the decision, this decision should not impact funders’ returns in any meaningful way.’
While the longer term impact is harder to predict, in the short term funders and claimants look set for extensive renegotiations of existing funding agreements in order for Trucks and other class actions to proceed.
Funders are confident that both parties will be equally motivated to do this but, in theory, clients could refuse to renegotiate LFAs, potentially leaving funders without their returns.
Central to this will be the relationships between litigation funders and their clients, with Chopin stressing that ‘ this is when you need that client relationship to be working well.’
Going forward, given DBAs are not-permitted in opt-out cases in the CAT, funders are also calling for further clarification and amendments from government to ensure that group actions can still be properly funded in the CAT, where claims can run into millions and take years to resolve.