Government introduces a bill to remove regulations governing litigation funders 

Thursday 21st March, 2024

On 19 March 2024 the government published the Litigation Funding Agreements (Enforceability) Bill (the “Bill”) which, if passed, would have the effect of reversing the Supreme Court’s ruling last July in the case of PACCAR.  In PACCAR the Supreme Court ruled that litigation funding agreements which are calculated based on the amount of the recoveries in the litigation are unenforceable unless they comply with the consumer protections against onerous terms contained in the Damages-Based Agreements Regulations 2013 (the “Regulations”).

Most litigation funding agreements historically have not complied with those Regulations and are therefore unenforceable following PACCAR.  It is the objective of the Bill to remove the requirement for litigation funding agreements to comply with the Regulations, which means that in future litigation funders will be unregulated and can continue to include onerous terms in their funding agreements and recover excessive returns at the expense of consumers.  The Bill is also stated to apply retrospectively, which means that historic litigation funding agreements which were on onerous terms would be allowed to stand and consumers would not be entitled to recover excessive returns taken by the funders at the consumers’ expense.

Litigation funding provides access to justice for consumers of litigation services who have high value claims to bring but cannot otherwise afford to bring them.  An example of that is the sub-postmasters who used litigation funding in order to bring their claims against the Post Office.  However, that case also illustrates the dangers of allowing litigation funding to be unregulated:  the funder in that case reportedly took the lion’s share of the damages, leaving the post-masters with little to show for their meritorious claims.

Two aspects of the Bill are acutely concerning.  The first is that it has been introduced without any public consultation whatsoever.  Any legislation which seeks to abolish the regulatory protections which the Supreme Court has found exist for consumers in relation to litigation funding agreements is a radical step for civil justice and requires wide-ranging consultation with all interested parties, including consumer groups, funders and the legal profession as a whole.  Inexplicably that has not happened.

The second concern is that the Bill is retrospective; in other words it applies to historic litigation funding agreements and saves them from the consequences of being unenforceable.  Funders have taken many hundreds of millions of pounds over the years in recoveries under funding agreements that we now know were unenforceable.  The consumers who entered into those agreements with the funders should be entitled to have the excessive returns which were taken by the funders repaid to them.  The effect of the Bill is to prevent consumers from being able to reclaim those excessive returns from the funders in those “closed cases”. The government has sought to justify retrospective effect in respect of closed cases by stating that litigation funders have asserted that a risk to their previous investments creates a risk for future investments as funders may have less capital to commit to claims and less motivation to do so.  However, there is no evidence to support this and the government has not provided any such evidence.

Retrospective legislation is rare and is only ever passed for exceptional reasons. There is no justification for making this Bill retrospective in the absence of evidence for the need for it.  The retrospective effect of the Bill can only benefit funders at the expense of consumers who should be entitled to unwind those unenforceable historic agreements and seek the repayment of excessive and unreasonable returns.

There is much about the Bill and the background to its publication which is unsatisfactory.  The retrospective aspect of the Bill is unfair to consumers and should be removed in the first instance and then a wide-ranging consultation with all interested parties should take place before the rest of the Bill moves forward.

Articles by Tamar Halevy