Supreme Court ruling sets out new parameters for litigation funding – but it won’t kill the future of collective proceedings

Last month a ruling by the UK’s Supreme Court delivered a surprising decision which suggested that Litigation Funding Agreements (‘LFAs’), which charge the funded party a percentage of the proceeds of a successful claim, were Damages Based Agreements (‘DBAs’). DBAs are not permissible for cases that come before the Competition Appeal Tribunal (the CAT).

‘I think the judges’ analysis is wrong,’ says Susan Dunn, who is also co-founder of Harbour, the UK’s largest privately-owned litigation funder. ‘I don’t believe they fully understood the distinction between a litigation funder – whose role is very passive – and the lawyers who run the cases or those who seek out potential claimants for cases.’

‘Nobody is saying, in all of this, that they don’t want funding to continue. The Supreme Court’s ruling might have a cooling effect in the short term regarding cases in the CAT, as funders regroup and revisit the terms of their funding for group claims. However, demand for funding for these important cases, which cannot proceed without it, remains high. Most funding agreements in the CAT are not caught by this ruling anyway, since they charge based on a multiple of the funding they provide.’

What is litigation funding?

Litigation funding is where a third party covers all the costs of bringing a case to court in return for a share of the win – that share is only paid out if monies are recovered from the defendant. Litigation funding agreements (LFAs) are entered into between funders and claimants. In some cases, these agreements set out the percentage amount that will be paid to the funder should the claim be successful in court. No money is owed to the funder if the claim fails.

‘Damages-based agreements were never intended to cover third parties who have no control over the way proceedings are conducted – such as funders,’ Susan explains. ‘The Supreme Court’s ruling came from a defendant seeking to avoid an established liability (they had already admitted they were operating a cartel following an EU investigation) by trying to remove the funding source from the claimants. These claimants remain determined to pursue their claim so will amend their funding agreement to make it compliant.’

For consumers, litigation funding supports group claims where people come together to make a collective claim against an organisation or business.

‘Individually, consumer claims are simply not big enough to justify the expense of a court hearing,’ says Susan. ‘But collectively, consumers with strong claims – of which there are many – can be brought together as a way of justifying the legal costs, which can run into the millions and, sometimes, tens of millions of pounds.’

Group claims that are brought to the Competition Appeal Tribunal are known as ‘opt out’ claims – this means that one person acts as a lead claimant to fight the case, and if they win everyone who meets the criteria of the claim is entitled to compensation. Anyone can choose to ‘opt out’ of receiving this compensation. Claims are currently being brought in this way across a number of sectors including against big tech firms, gaming, cars and most recently the water industry.

What does the Supreme Court ruling mean?

Lawyers run the day-to-day of the claim and it is widely accepted that DBAs applied to them. The Supreme Court decided that litigation funders should also be captured by the definition of providing claims management services. But as Susan notes, ‘they do not manage the claim or solicit the claimants for the claim –they simply provide financial assistance. Even more confusingly, the Supreme Court decided that banks who might provide similar financial assistance are not captured by the Regulations.’

The Supreme Court ruling means that LFAs with a percentage-based fee cannot be used to fund opt-out collective proceedings that come before the CAT. ‘In the history of litigation funding and the DBA regulations, this had never been considered to be the case and the two lower courts certainly didn’t think they are one and the same,’ says Susan.

She believes litigation funders will be able to switch funding models, so that they eliminate the percentage basis of LFAs and instead calculate a final figure based on a multiple of the amounts spent on costs in the case. ‘Litigation funding is now a vital part of the legal landscape, and this ruling acknowledges that fact while also appearing to work against the funders who enable claims to proceed,’ says Susan. ‘Every single case that comes before the CAT is a funded case, so it is in their interests, as well as the interests of consumers fighting group claims, for a solution to be found.’

Susan Dunn is one of the most experienced professionals in the litigation funding sector, and a pioneer of litigation funding in the UK. She was a founding member of the sector’s self-regulating body, the Association of Litigation Funders, and is now its Chair. She also set up and now runs Harbour, the UK’s largest privately-owned litigation funder.