Lord Stewart of Dirleton

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That the Bill be read a second time.

The Advocate-General for Scotland (Lord Stewart of Dirleton) (Con)

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My Lords, the Litigation Funding Agreements (Enforceability) Bill will fulfil the Government’s commitment to address the impacts of the United Kingdom Supreme Court’s judgment in the case of the King on the application of PACCAR Incorporated and others v Competition Appeal Tribunal and others. The reference for the case is 2023 UKSC 28. It was handed down in July 2023. This case is colloquially known as PACCAR, taking the name of the lead applicants in the case.

First, I will address the judgment in question. It arose out of a claim against truck manufacturers regarding anti-competitive behaviour. The Supreme Court ruling rendered many third-party litigation funding agreements—LFAs—unenforceable by bringing them into scope of the regulatory regime for damages-based agreements, or DBAs. For the sake of brevity, I will refer from time to time to these vehicles by their initials.

The Supreme Court ruling has had a detrimental impact on access to justice and the attractiveness of this jurisdiction as a global hub for commercial litigation and arbitration. This is an important sector for the United Kingdom and so we must act now. Put simply, the Bill will restore the position that existed before the Supreme Court ruling in July 2023, which was that LFAs are not DBAs and hence are enforceable.

It will accomplish this by amending the definition of a DBA in Section 58AA(3)(a) of the Courts and Legal Services Act 1990. It will also ensure that claimants can continue to access litigation funding to bring big, complex cases against larger, better-resourced corporations which they could not otherwise afford.

The restoration of the previous funding position is needed urgently to reduce uncertainty for both the future of litigation funding and for LFAs that had been entered into previously. By rendering many existing LFAs unenforceable, the position post judgment risks undesirable satellite litigation, an increased burden on the courts, and creating an unfavourable market for litigation funding, which, in turn, threatens access to justice. I will go on to explain in more detail how the Bill operates, but first will address why it matters.

Third-party litigation funding plays a key role in enabling ordinary people and small and medium-sized enterprises to bring large, costly claims against better-resourced companies and institutions. Litigation funding agreements involve a third-party funder, typically an independent financial institution. The funder finances all or part of the legal costs of a claim, in return for a share of any damages awarded. Third-party litigation funding is a niche market, which operates typically in high-value commercial, arbitration or group litigation claims, including the types of claims brought in the Competition Appeal Tribunal.

A recent example of where an LFA was used is the Post Office Horizon case—Bates v the Post Office—which had the backing of a litigation funder. Some other examples of cases where LFAs have been used include equal pay cases; motorists bringing claims against car manufacturers over false diesel emissions; and consumers bringing claims against multinational companies regarding data breaches and data misuse.

In the United Kingdom Supreme Court judgment in PACCAR, the court held that LFAs between claimants and litigation funders which entitle the litigation funder to payment based on a percentage of the damages recovered from the losing party are DBAs—damages-based agreements—as defined in Section 58AA of the Courts and Legal Services Act 1990. The principal problem is that LFAs which fall within the definition of DBAs are subject to, but generally will not comply with, the DBA Regulations 2013, as was noted in the PACCAR judgment. As such, those LFAs are rendered unenforceable against the claimant.

For many claimants, LFAs are not just an important pathway to justice; they could be their only route to redress against well-resourced corporations with deep pockets. I have no doubt that all noble Lords will have been moved by the plight of the sub-postmasters affected by the Horizon scandal, and their impressive campaign for justice. It is just one example of the importance of third-party litigation funding. Alan Bates himself has noted that, as things stand today, since the Supreme Court judgment, the sub-postmasters would not be able to bring their claim had it arisen. That is why we must remove the risk and return to the position preceding the July 2023 judgment: promoting access to justice for ordinary people by making sure that it is not the preserve only of big business, powerful institutions and the moneyed few.

The new legislation, which will apply to all proceedings, will allow the Government to deliver a return to a funding regime which promotes access to justice, as well as enhance the competitiveness of the jurisdiction and the attractiveness of a thriving United Kingdom legal sector which contributes over £34 billion per annum to the UK economy.

I return to how the Bill achieves this. The Litigation Funding Agreements (Enforceability) Bill provides that LFAs are not damages-based agreements. It should be noted that the legislation applies and extends to England and Wales only. This restores the position in place before the July 2023 judgment, making affected LFAs enforceable once again and enabling ongoing and future claims to continue to be funded by LFAs.

The Bill contains two clauses. Clause 1 amends Section 58AA of the Courts and Legal Services Act 1990. Subsection (2) amends the definition of a DBA to provide that an agreement, to the extent that it is an LFA, is not a DBA. Subsection (3) defines an LFA for the purposes of section 58AA of the 1990 Act. Subsection (4) provides that the amendments are to be treated as always having had effect. The amendment only addresses the Supreme Court’s finding that LFAs are DBAs and does not seek to reverse the finding that litigation funders provide claims management services.

Clause 2 explains the extent, commencement and short title of the Bill. Subsection (1) provides the territorial extent of the Bill, expressing that the Bill extends to England and Wales only. Subsection (2) provides the commencement provision for the Bill. The Bill will be commenced upon the day of its passing. Subsection (3) gives the shortened title by which the Bill can be referred as upon passing. This is described as the Litigation Funding Agreements (Enforceability) Act 2024.

The Bill will have retrospective effect. The legality and propriety of the proposed retrospection, including its compatibility with the European Convention on Human Rights, has been considered carefully. The Bill will achieve the important policy objective of preserving the rights of individuals to challenge alleged breaches of the law. Access to justice is an essential component of the rule of law. If the Bill were prospective only, there would be uncertainty as to the enforceability of agreements entered into before the PACCAR judgment but where the claim is concluded after the Act comes into force. This could lead to undesirable satellite litigation, which would benefit no one.

Retrospective effect will also ensure that the contractual rights and obligations agreed under LFAs entered into before the Supreme Court’s judgment continue to have effect as intended. Early commencement will minimise the period of retrospection. These provisions will remove any uncertainty about the enforceability of LFAs in cases that have settled and enable litigation funders to continue to fund cases, including existing cases.

On retrospective effect, the noble Lord, Lord Macdonald of River Glaven KC, has raised a number of points for the Government to consider. I also acknowledge the engagement which I have had with my noble friend Lord Hodgson of Astley Abbotts in relation to wider risks which may arise in some circumstances out of third-party litigation funding. I first thank the noble Lord, Lord Macdonald, for sharing his expert views, and assure him that the Government will consider them in due course. In relation to the useful engagement which I have had with my noble friend Lord Hodgson, I will come on to discuss the ambit of a review of the matter which the Government have ordered.

There are a wide variety of views about litigation funding arrangements and how they should work. That is why, alongside legislative change, the Lord Chancellor has asked the Civil Justice Council—which is the body for overseeing and co-ordinating the modernisation of the civil justice system in England and Wales, under the chairmanship of the Master of the Rolls—to undertake a review of the third-party litigation funding market in England and Wales.

The review will consider questions raised during the discussions on the PACCAR judgment, including in your Lordships’ House, such as the need for greater safeguards for claimants, regulation of the sector and the possibility of caps on the returns made to funders. The CJC will publish its terms of reference and other related documents shortly. An interim report is due by this summer—2024—and a final report by the summer of 2025. The Government will consider the way forward following that final report.

By acting swiftly to restore the previous funding position via legislation, and investigating whether that position can be enhanced through a longer-term, forward-looking review, the Government will restore and improve a vital avenue to justice for all deserving claimants, not just those with the most resources. I submit that this is a much-needed Bill to address an important issue affecting access to justice. I beg to move.

Lord Stewart of Dirleton (Con)

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My Lords, I am grateful to all those noble Lords who participated in this debate. I am grateful in particular to the noble Lords, Lord Ponsonby of Shulbrede and Lord Marks of Henley-on-Thames, from their Benches, for the broad support they are giving. But if a financial metaphor is not inappropriate in the circumstances, I do not take either of them to have issued the Government with a blank cheque as far as this legislation goes. If your Lordships are minded that a Committee of the whole House should be established to consider this Bill, as I will move, I look forward to your contributions, and those of the whole House, in giving the Bill the scrutiny it deserves.

The noble Lord, Lord Mendelsohn, opened the responses and in many ways set the parameters for the interesting debate that followed, setting up the question of access to justice and stressing from a historical perspective the medical legal cases arising out of the condition known as vibration white finger. That prompted me to recollect the importance of associations such as trade unions and others in providing legal assistance for their members when entering into costly litigation relating to the safety of the workplace.

It is quite correct that funding litigation is frightening for individuals and smaller companies who are contemplating it in defence of their right. It is for that reason that the Government have put forward this Bill to address the consequences of the PACCAR ruling. Legal Members of your Lordships’ House touched on that question, in particular the noble Lord, Lord Carlile of Berriew, and my noble friend Lord Wolfson of Tredegar. The noble Lord, Lord Carlile, referred to the surprising character of the judgment. Certainly, it took lots of people in the profession by surprise. It is to deal with the consequences of that decision that the Government tabled the Bill. I respectfully endorse the characterisation of the dissenting judgment by Lady Rose, which was put forward by the noble Lord, Lord Trevethin and Oaksey, as a powerful one.

The noble and learned Lord, Lord Thomas of Cwmgiedd, in a characteristically thoughtful analysis of the position, set forth what is accepted across the House with one exception—that there is no real alternative to funding of this sort in the litigation landscape as we currently find it. I do not wish to depress the House by saying that legal aid is dead. On civil cases in England and Wales, legal aid can be provided as an exceptional case funding measure, for matters out of scope where the failure to provide legal services would breach or likely breach a person’s ECHR rights. Where a matter is within legal scope or could be caught by exceptional case funding, the applicant must also pass a means and merits test.

The Ministry of Justice published the Government’s response to the means test review consultation exercise on 25 May 2023. That set out the detailed policy decisions underpinning the means test arrangement. The Government assess that their changes will increase the number of people eligible for civil legal aid in England and Wales by 2.5 million. Therefore, although there are concerns from Members across the House—particularly the noble Lords, Lord Mendelsohn, Lord Marks of Henley-on-Thames, Lord Trevethin and Oaksey, Lord Meston and Lord Carlile of Berriew, and my noble friend Lord Wolfson of Tredegar, and while legal aid will remain an important feature of how access to justice is delivered, it is the view of the Government and I think of the debate overall that we must take steps to address the necessity of third-party funding to permit access to justice for the sorts of persons, organisations and corporations which I have described.

The very interesting contribution by the noble Lord, Lord Trevethin and Oaksey, anticipated me in referring to the decision of the American judge who said that the alternative to class actions funded by funders of this sort was not 17 million individual actions but no actions at all because, as the noble Lord quoted, and as I am happy to repeat, only a lunatic or a fanatic would litigate over $30. The noble Lord also, along with my noble friend Lord Arbuthnot, put before the House a quote from “The Italian Job”. I wonder whether that is the first occasion when that particular work has been referred to in your Lordships’ counsels.

Both noble Lords—and my noble friend Lord Arbuthnot spoke with the immense moral authority that he carries with him as a result of his selfless and tireless work on behalf of the sub-postmasters—made important points about access to funding for litigation. As I quoted in opening the debate, the eponymous Mr Bates has referred to the importance of third-party litigation funding in enabling the process by which justice is arrived at to commence.

The noble and learned Lord, Lord Thomas of Cwmgiedd, referred to the manner in which, as all of us common lawyers know, definitions or concepts of enormous importance across the whole mighty edifice of the common law world can emerge from the least important-sounding or most apparently trivial causes, whether it be snails emerging from bottles of ginger beer in cafés in Paisley or other areas in which matters of huge import for the civil common law have arisen from small-scale disputes between parties.

All the noble Lords were united in their concern about the sums ultimately received by litigants and the potential sums realised by litigation funders. The best vehicle for discussion of this point will be the review by the Civil Justice Council to which reference has been made, but it is a problem of which the Government are acutely conscious.

I am grateful too for the contribution to the debate made by my noble friend Lord Wolfson of Tredegar and for his informed engagement with me at an earlier stage, to which he was good enough to refer your Lordships—an earlier stage before I rose to address the House this afternoon. I am grateful to him for his analysis of the concept of retrospection in legislation, as I am for his endorsement of the constitutional position in relation to Parliament being responsible for making law.

My noble friend Lord Sandhurst referred to the importance of maintaining a situation where defenders are not unduly harassed by litigations funded by third-party funders, and he was quite correct to make that point. I am sure that this is something that the review being carried out under the chairmanship of the Master of the Rolls will consider.

A number of specialist points were made during the debate. In relation to a series of questions posed by the noble Lord, Lord Marks of Henley-on-Thames, I look forward to engaging with the points that he made. In the first instance, I will write to him in relation to those specific points with which he concluded his submission, and I would like to do so against the basis of an understanding of the terms of reference of the forthcoming review. In relation to him and to the point echoed from the Opposition Front Bench by the noble Lord, Lord Ponsonby of Shulbrede, as your Lordships heard from me in opening, an interim report is expected in the summer; the terms of reference under which that report will be carried out will be published in due course.

The noble Baroness, Lady Jones of Moulsecoomb, expressed herself as suspicious of everything that comes out of the Government. I have to echo that by saying I am suspicious of everything that comes out of the Green Party. After all, I have to live in Scotland where we see the effects of government by the Green Party, and they are absurd where not actively malign.

Lord Stewart of Dirleton (Con)

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As always, the noble Baroness has fulfilled a valuable public service.

On the question from the noble Lord, Lord Meston, on the scope of the Bill, the view of the Public Bill Office confirms that this is a one-purpose Bill. Its scope is closely connected to the enforceability of litigation funding agreements and the Public Bill Office does not think that amendments relating to the wider category of damages-based agreements would be in scope, nor would more general issues relating to litigation funding. Again, I would be happy to revert to the noble Lord with further details on those points, as I learn them.

The noble Lord, Lord Meston, along with my noble friend Lord Sandhurst and the noble Lord, Lord Trevethin and Oaksey, also posed a question on the revision of the current DBA regulations. The Government will consider the timetable to make improvements to the DBA regulations without encouraging unnecessary litigation. Any revisions to the current regulations will be subject to a statutory consultation, which is set out in Section 58AA of the Courts and Legal Services Act 1990, and to an affirmative resolution, which is set out in Section 120 of the 1990 Act.

I apologise to any noble Lords whose valuable contributions to this interesting debate I may have overlooked. To sum up, I gauge the mood of your Lordships’ House as one of concern that access to the courts, the reputation of which the House is jealous of and grateful for, should not be artificially constrained. I also recognise noble Lords’ concerns that access to justice on behalf of a less well-funded party or individual should not come at the expense of excessive profits for those responsible for funding. In my own jurisdiction of Scotland, it is a matter of daily encouragement and inspiration to enter Parliament Hall in Edinburgh and pass the portrait of a notable lawyer, of whom it was said after his death that, while he lived, no poor man in Scotland wanted for a good lawyer. It is the aspiration of the whole House that that should apply today as much as it did in previous centuries. I hope that, ultimately, the Bill passes and that the House, as a whole, accepts that it is done with the intention of furthering that aspiration.

The Advocate-General for Scotland (Lord Stewart of Dirleton) (Con)

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My Lords, I will address Amendment 1 alongside government Amendment 2 in one moment. I need not repeat in detail why this Bill is important, as we debated it so recently, just two weeks ago at Second Reading, but I want to address some of the points raised. I wrote to noble Lords—and to noble and learned Lords—but thought it important to put those matters on record here as well.

Clause 1 makes it clear that the Bill will have retrospective effect. The Government have carefully considered the point and decided that the Bill should have retrospective effect, meaning it will apply to litigation funding agreements in place before the PACCAR judgment and to any that may have been made between the judgment and the Bill becoming law. I thank noble Lords for their contributions, particularly my noble friend Lord Wolfson of Tredegar, King’s Counsel, who is not in his place today.

There were concerns about the possibility of claimants who negotiated new funding agreements following the PACCAR decision, having believed their first agreement to be unenforceable, facing the prospect of two funding agreements that could be enforced once the Bill comes into effect. In addition, reference was made by the noble Lord, Lord Carlile of Berriew, King’s Counsel, to a suggestion that the Bill’s retrospective effect may interfere with the Government’s obligations under the European Convention on Human Rights. That was raised in the context of the opinion of the noble Lord, Lord Macdonald of River Glaven, King’s Counsel, which was shared among noble Lords ahead of Second Reading. On behalf of the Lord Chancellor, I thank noble Lords for raising this issue and assure them that the Government are looking into the questions raised and hope to provide a further update on Report.

I regret that I cannot say much more than that at this stage, to allow the Government to review the matter, but I welcome the continued engagement from across the House, of which this Committee is a part.

I should also like briefly to mention the forthcoming Civil Justice Council review of third-party litigation funding, which was discussed by a number of noble Lords, and to address particularly the points raised by the noble Lord, Lord Marks of Henley-on-Thames, KC, and the noble Lord, Lord Ponsonby of Shulbrede, who raised a series of important questions on potential regulation of the market and limits on funders’ returns. As the Committee may be aware, since Second Reading, the Civil Justice Council published its terms of reference for the review on 23 April, which provide further detail on scope and timing. I thank noble Lords for their interest. If any noble Lords have further material they wish to share, I encourage them to contact the Civil Justice Council directly, which will doubtless welcome their contributions and expertise.

With those points addressed, I turn to the amendments. The Bill contains two clauses. Clause 1 amends Section 58AA of the Courts and Legal Services Act 1990. Its subsection (2) amends the definition of a damages-based agreement to provide that an agreement

“to the extent that it is a litigation funding agreement … is not a damages-based agreement”

—a DBA. Subsection (3) defines an LFA for the purposes of Section 58AA. Subsection (4) provides that the amendments are to be

“treated as always having had effect”.

The amendment addresses only the Supreme Court’s finding that certain LFAs are DBAs and does not seek to reverse the finding that litigation funders provide claims management services.

The Government have tabled two amendments to this clause. Amendment 1 remedies a perceived gap in the current draft definition of a litigation funding agreement, or LFA. As drafted, the definition of an LFA does not include reference to an agreement to pay the expenses of unrepresented litigants, which may occur where, for example, an unrepresented litigant receives funding for an expert report—a report from a skilled witness. Since the expert would not be providing “advocacy or litigation services” within the meaning of the legislation, an agreement to provide funding in this instance would not qualify as an LFA within the current draft definition.

The Government therefore believe that this should be addressed by bringing a small technical amendment to the Bill. This amendment will ensure that an LFA of the type rendered unenforceable by PACCAR, which is used to fund items of expenditure where the litigant is unrepresented, will be enforceable between the funder and the litigant. This reflects the policy objective of the Bill, which is to restore the position to that which existed before the Supreme Court ruling in July 2023, so that those LFAs of the type affected by the judgment are enforceable.

The second amendment tabled by the Government also addresses an ambiguity in the draft definition of a litigation funding agreement. As currently drafted, the definition of an LFA includes an agreement for

“the payment of costs that the litigant may be required to pay to another person by virtue of a costs order”.

However, there is a legitimate concern whether the expression

“by virtue of a costs order”,

may be interpreted too narrowly, and therefore be a source of litigation around its meaning regarding LFAs which neither specifically fund court or tribunal proceedings or envisage the issue of costs being determined by the court.

This amendment, which is, again, a small technical change, is designed to make it clear that the payment of adverse costs the litigant may be required to pay to another party, which would be funded under an LFA, includes the payment of costs following court, tribunal or arbitration proceedings, or as part of a settlement.

Clause 2 explains the extent, commencement and short title of the Bill, as I specified at Second Reading. I hope that noble Lords, and noble and learned Lords, will support these technical amendments, and I beg to move.

Lord Stewart of Dirleton (Con)

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My Lords, I thank noble Lords and noble and learned Lords for all their contributions today. I will try to respond to the substance of the points that noble Lords have raised.

The Supreme Court judgment in PACCAR rendered many litigation funding agreements unenforceable. Uncertainty around litigation funding risks having a detrimental impact on the attractiveness of the England and Wales jurisdiction as a global hub for commercial litigation and arbitration, as well as on access to justice more broadly.

Through this Bill, we will restore the position that existed before the Supreme Court’s ruling in July 2023 so that litigation funding agreements affected by the judgment are enforceable. This will also ensure that claimants can get access to litigation funding in order to bring big and complex cases against bigger, better-resourced corporations, which they could not otherwise afford. In saying that, I reflect the principled concern raised by the noble Baroness, Lady Bennett of Manor Castle, in her brief comments and echoed by the noble Lord, Lord Ponsonby of Shulbrede. It is a leitmotif that ran through much of our discussions at Second Reading; we are all seized of the difficulties to which inequality of arms can give rise.

The remarks of the noble Lord, Lord Marks of Henley-on Thames, which went over much of the history of litigation funding as we now have it—or as we had it up to the point of PACCAR—gave us a useful reminder of some of the issues at stake. It is also of use for us to consider the background to the rise of litigation funding and to bear in mind the objections that law has traditionally had against third-party litigation of this sort—the traditional objections to the pacta de quota litis, which would allow someone else a controlling hand in the manner in which litigation was carried out, perhaps to the detriment of the person in whose interest that litigation was nominally being pursued.