The PACCAR decision has had a profound impact on the third-party funding market. The Supreme Court held that many third-party funding agreements could, in practice, be rendered unenforceable. Moreover, the judgment did not operate prospectively. It contained no “from now on” limitation, meaning that its effect could extend retrospectively to funding agreements concluded both before and after the PACCAR ruling. This post examines the key aspects of the PACCAR case and considers how the Civil Justice Council’s (CJC’s) subsequent report has addressed the resulting issues.
What the PACCAR Case is About?
As the judgment puts it: “The specific issue for determination is whether litigation funding agreements (“LFAs”) pursuant to which the funder is entitled to recover a percentage of any damages recovered constitute “damages-based agreements” (“DBAs”) within the meaning of the relevant statutory scheme of regulation (“the DBA issue”)”. If they are classified as such, these agreements become subject to the formal statutory requirements governing damages-based agreements. Consequently, any agreement that fails to comply with those requirements, namely section 58AA of the Courts and Legal Services Act 1990 as amended in 2013, would be rendered unenforceable. The central issue in this case, therefore, was whether the third-party funding agreement in question constituted an enforceable contract.
The Supreme Court’s Findings
In summary, the Supreme Court rules that when a third-party funding agreement determines the funder’s success fee on a percentage basis, such agreements constitute damages-based agreements within the meaning of section 58AA(3)(a) of the 1990 Act. If they do not comply with the requirements in that section, such funding agreements are not enforceable.
Impact of the Decision
The decision clearly created significant uncertainty. In its aftermath, a series of challenges were brought against funders, concerning the enforceability of their funding agreements. As a result of these uncertainties, several major funders withdrew from the UK market. In response, a reform initiative was established, and the Civil Justice Council (CJC) subsequently published a report addressing the implications of the PACCAR decision.
CJC Findings
With its own words: “The Report recommends a series of reforms to litigation funding, the aim of which is to promote effective access to justice, the fair and proportionate regulation of third-party litigation funding, and improvements to the provision and accessibility of other forms of litigation funding”.
The CJC recommends that “to promote certainty concerning the status of LFAs, its recommendation concerning the reversal of PACCAR ought properly to be implemented as soon as possible”. The CJC proposes a light-touch regulatory approach to be reviewed five years after its implementation. Although these are the report’s primary recommendations, the document spans 12 parts and three appendices across 150 pages, offering detailed and comprehensive proposals.
Conclusion
The PACCAR decision caused significant disruption in the litigation funding market in England and Wales. The CJC is now taking steps to address and rectify the situation. However, Parliament should have acted sooner, arguably even before the PACCAR decision, so that no subsequent reversal of a Supreme Court judgment would have been required.
The reality is that third-party funding is now indispensable part of the litigation process. It has become something of a ‘Pandora’s Box’, once opened, it has spread rapidly across jurisdictions and cannot be contained. It is transforming the legal industry and will continue to do so. To ensure that this transformation is for the better, there is a pressing need for coherent global rules, consistent industry standards, and greater legal certainty worldwide.
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