Are litigation funding agreements unenforceable?

The Supreme Court decision in PACCAR Inc & Ors, R (on the application of) v Competition Appeal Tribunal & Ors [2023] UKSC 28, held that a litigation funding agreement (LFA) which requires payment to a third party funder based on a percentage of damages constitutes a Damages Based Agreement (DBA) and so must comply with the DBA Regulations in order to be enforceable. Most existing LFA’s will not comply with the DBA Regulations and there is uncertainty over whether LFA’s can ever be drafted to do so. Does this mean LFA’s are unenforceable?

The arguments for enforceability of LFA’s have been now been outlined in Therium Litigation Funding A IC v Bugsby Property LLC [2023] EWHC 2627 (Comm). In this case, the respondent, Bugsby Property LLC (Bugsby), had changed solicitors shortly before receiving settlement monies in the course of a dispute that it had pursued with the benefit of litigation funding. 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 LFA’s it had in place with litigation funders to pay them first. The judge did not have to decide at this stage whether or not Therium’s LFA was unenforceable for not complying with the DBA Regulations, because litigation funder Therium Litigation Funding A IC (Therium) was only asking for a court order to preserve the settlement monies pending such a determination. To get this asset-preserving order, however, Therium had to show that there was a “serious issue to be tried” that it was entitled to payment. Bugsby argued that there was not, because the PACCAR decision had made it clear that LFA’s were DBA’s, the LFA did not comply with the DBA Regulations and it was therefore unenforceable. Therium argued that there were good arguments for the enforceability of its LFA.

Argument 1: the DBA provision did not make the whole LFA unenforceable

Therium’s 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: a return of the funding provided, a return calculated as a multiple of that funding and a return calculated as a percentage of damages above a certain threshold. It was only the third type of payment that comprised a DBA.

Therium argued that the fact that the third type of payment comprised a DBA and was unenforceable did not mean the whole contract was unenforceable, and that it was still entitled to get the return on investment and the multiple. Therium relied on the Court of Appeal case of Zuberi v Lexlaw Ltd [2021] EWCA Civ 16, which involved a solicitors’ DBA that contained a clause for payment for early termination which was invalid under the DBA Regulations. The Court of Appeal held that only the provisions in the agreement which dealt with payment out of damages recovered amounted to the DBA, which meant that the other provisions, including those which provided for payment on a different basis, remained enforceable. This case had been referred to by the Supreme Court in PACCAR but not overturned, and is therefore still binding on lower courts.

Therium argued that the court could hold that the third type of payment was a DBA and unenforceable, but that the rest of the LFA would still be enforceable. The judge held that this was a realistic argument and that on this basis there was a real issue to be tried.

Argument 2: the DBA provision could be severed from the LFA

Therium had also argued that the offending provision could be severed from the LFA. An invalid provision in a contract can be severed leaving the remainder of a contract enforceable if (a) it 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 provision does not change the nature of the contract, such that it is not the sort of contract that the parties entered into at all (Tillman v Egon Zehnder Ltd [2019] UKSC 32).

Bugsby argued that severance was not possible and relied on the recent decision of the Court of Appeal in Diag Human SE & Anor v Volterra Fietta [2023] EWCA Civ 1107. This case did not involve a DBA but a Conditional Fee Agreement (CFA), where lawyers can charge a success fee as a percentage on top of discounted fees in the event of success. The CFA was unenforceable because it failed to comply with legislation governing CFAs and the solicitors sought to save a right to payment of the discounted fees by severing the rest of the agreement, but the Court of Appeal held that severance was not possible because that would so alter the character of the agreement that it would become not the sort of contract that the parties entered into at all.

The judge in Therium v Bugsby however decided that there was a realistic argument that this case could be distinguished because it involved a CFA not a DBA, and there were significant differences between them. In particular, a CFA is illegal at common law on public policy grounds, unless it satisfies the requirements of the CFA regime. By contrast, a LFA is lawful and is only unenforceable if the DBA requirements apply to and it does not comply with them. The judge 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 to which the regime does not apply.

Viewpoint

If the courts do hold that an offending DBA provision does not make the rest of a LFA unenforceable, or that it can be severed from a LFA, this will provide a great deal of relief to the litigation funding market. PACCAR however will still have significant ramifications. Litigation funders and their clients like to have payment provisions linked to the amount of monies recovered because they are both then sharing in the risk of the litigation. It may not even be possible to draft LFA’s that comply with the DBA Regulations - Lady Rose in her dissenting judgment in PACCAR queried whether this was the case. And LFA’s that are deemed to be DBA’s cannot be used at all in opt-out collective proceedings in the Competition Appeals Tribunal, which will make it much harder for claimant groups to bring claims for damages for breaches of competition law. The only way that that these issues will be addressed is either the DBA Regulations are rewritten to make easier compliance for litigation funders (as well as lawyers! – but this will not help with the opt-out collective proceedings problem), or the PACCAR decision is overturned by legislation. Whether there is political will or parliamentary time to do this remains to be seen.

Funders will hope that the approach taken in Therium v Bugsby is indicative of a more sympathetic approach by courts than had been feared would be the case in the wake of PACCAR. Time will tell.