Litigation Funding Agreements (Enforceability) Bill [HL]

2nd reading
Monday 15th April 2024 Lords Chamber

Second Reading

15:21

Moved by

[Lord Stewart of Dirleton]

That the Bill be read a second time.

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

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.

15:35

[Lord Mendelsohn (Lab)]

My Lords, I feel like an amuse-bouche before such a distinguished group of lawyers who have yet to speak. I will raise a very small number of points which come from my experience in business and investment and which I think are relevant, but I of course defer to the greater legal understanding of others on these points.

First, we should be very proud of the legal services industry that we have here and its quality and importance. We should retain it as a central objective for any Government and for whatever we do. Secondly, access to justice is absolutely key and an essential principle. We have to do more to provide it across the country, whether in civil or even criminal matters. Access to justice is a real foundation, but we feel that there is probably a lot more for us all to do. Making sure that members of the public have access to those things is important, and the promise of litigation funding is a key part of that.

There are four points that are very important in the context of this debate. We have heard some of them previously, when looking at other times when we have used the courts or lawyers to seek justice for other people, whether it was for vibration white finger or other things. That always comes down to the question of whether the fees, costs, contingencies or arrangements are too onerous on the people most in need of being the beneficiaries of whatever compensation or arrangements come at the end. That remains a huge issue for us—and it is very hard to dodge that, looking at the number of funding arrangements from the LFAs and wondering whether things such as the multiple of capital versus the percentage of fees can achieve those outcomes.

Even in the Horizon matter, we are looking at the level of what is gained by those who are trying to access justice. I think that some of us feel that those issues remain, so those people still lack a sense of justice because of the sums and arrangements that were come to. The retrospective arrangements in this Bill mean that everything will be retained as it should have been, and I suspect that there will many cases where the onerous terms that had to be accepted by the litigants should be looked at in some way.

The second point is that this is a business model. As someone who has looked at the public quoted company—which is being approached to put money into these companies and which has been looked at recently—and the secondaries market in this area, I know that there are some major issues with how this is developing. That is common with any sector or business activities that develop; there are consequences to creating such businesses. There are also some unintended consequences: when we look at these sorts of prospectuses over the period in which they can be tracked, we can see an increase in the costs of law. So, while we are looking at increasing access to justice because of the costs of law, they are actually accelerators of costs in litigation.

So, for a variety of reasons, there are unintended consequences, but these are complex models. Even with funds that say they turn down 96% of the people who come before them, what struck me most is that this is a market that is mainly dominated by those who can afford it and who have money. It does not extend access to justice in the way we are thinking or the way in which the Government have presented it. They have shown no evidence to this effect.

It is a good way of de-risking legal exposure in litigation—whether by passing it off to an LFA or by getting the LFA and the lawyers to do conditional fee agreements that also place that risk in other places. The people accessing these funds and these arrangements are not those from whom the Minister says the foundation of this piece of legislation has come. Other people and entities can use it to de-risk their litigation. This is not to say it does not have that purpose—and, by the way, I do not have a problem with people de-risking their legal exposure by using these arrangements. That is perfectly fine.

Thirdly, we must not say we are doing this only in order to widen access to justice. It does not. It has not done so in quite the way we had hoped, even, for example, in the context of important cases such as Horizon. We have to think about what we do in order to make that happen.

In evaluating this Bill, it is important to consider the real issues, consequences and impacts. We have to focus on making sure that we properly identify which elements extend access to justice. In that regard, the Government are to be applauded for deciding to institute a review of the wider sector and its growth. This is very important. I am not entirely convinced that the CJC is the right vehicle for this, because it is about the development of an economic market with economic activity, actors and consequences. This is currently outside its scope, which I am keen should be extended. I look forward to the Minister’s further comments on that in due course.

Finally, I have no problem with rich people using litigation funding. I just have a real problem with us not being able to get access to justice for people who do not have it. In the review, we should be much clearer about the sorts of things that can be done to achieve this objective. This is not just about LFAs. Rollover agreements will not achieve it. If we truly believe in extending access to justice, we should think about supporting other funding mechanisms. If they have sufficient public benefit, perhaps they could be extended into other areas such as the charitable and philanthropic domain. In the context of this debate, let us take this as it really is: a massively growing, active economic market that will achieve many things, but will not exclusively achieve access to justice. We should consider how we do that.

15:42

[Lord Thomas of Cwmgiedd (CB)]

My Lords, I also welcome the Bill. It is an enormous achievement of the Lord Chancellor. We ought to be grateful that he has recognised there is a serious problem that needs to be addressed quickly and has brought forward the Bill. I am also particularly grateful to the Minister for the clear way in which he has explained it. It is important to concentrate on what this Bill does and then, subsequently, to look at some of the other issues.

In the last few years, litigation funding has become part of the way in which access to justice is obtained. In a moment, I will say a little more about this. It is important to realise that this is a worldwide market. Issues similar to ours have arisen in Australia and across the member states of the European Union. There is a massive growth in litigation about this form of funding in the United States. The scale of this industry can be seen. The current estimate of the revenue of litigation funders is approximately $17 billion.

I was surprised, I think like many, that the Supreme Court reached the decision that it did, because over the years people had realised there was a clear distinction between damages-based agreements and what litigation funding produced. So, although the Supreme Court by a majority, reversing the Court of Appeal, came to the view that the principles applicable to damages-based agreements should also apply to these, otherwise they were unlawful, it was following what has been perceived in some states, such as Alabama, North Carolina and Pennsylvania, as a degree of hostility to this industry.

Given that so many thought that this was an industry that produced access to justice, and many have acted in reliance on what they thought the law was, it is plainly right that the decision should be reversed with retrospective effect. If there are issues about that, they can no doubt be looked at subsequently, but it is plain that litigation funding does provide access to justice. One has only to look at the Horizon case, where the very complex proceedings before Mr Justice Fraser involved a lot of financing in relation to technical issues, at equal pay cases, or at some of the consumer actions that have been brought to see that litigation funding is essential.

I, like many, wish that we had legal aid. On many occasions I have spoken of the wish that HM Treasury would open its pockets or that we would devise some other scheme, but I am afraid I have been a wholly unsuccessful advocate and legal aid has declined. Therefore, when those who criticise this industry come to look at what should be done, they ought very much to bear in mind that we as a state, and most other states in the western world, are failing in providing access to justice because there is no legal aid, and this industry has come, to an extent, to the rescue.

I will come back to the social responsibilities of this industry in a moment, but it is not only about consumers. It is also very important that SMEs and other medium-sized companies, which were never within the scope of legal aid, also have access to litigation funding. I am sure that hardly anyone in this Chamber could possibly contemplate the risk of litigation. It is far too expensive. Access to justice is not something that is open to an individual in this country, unless he falls within the very narrow band of people who can get legal aid or whose wealth is to be measured in enormous terms, so it seems important to have a sense of realism that no real alternative has yet been devised to this form of providing access to justice, given the cost of litigation. However, I do not want to descend into the costs of litigation because that would be straying off the point of what the Bill seeks to do.

I have also been very grateful, when speaking on this issue on previous occasions, to His Majesty’s Opposition, the Liberal Democrats and my noble and learned friends on these Benches for the support they have given in getting this issue back and dealing with it speedily. But I wish to raise two points. As the Minister mentioned, the noble Lord, Lord Hodgson of Astley Abbotts, raised the question of regulation during the course of the debates. I too am delighted at what the Lord Chancellor has done in asking that this issue—the way in which these agreements operate—should be independently looked at.

The operation of litigation funding across many jurisdictions has been the subject of work by the European Law Institute. It established a working group and, by complete coincidence, Mrs Justice Cockerill, who at the time was the judge in charge of the commercial court, and Professor Susanne Augenhofer, were appointed as rapporteurs of this group. It is a project in which I am an assessor, so I have considerable knowledge of it, but to try to help progress this, the council of the European Law Institute has made available the core part of the report, which sets out the principles that have to be addressed, such as transparency, disclosure and whether there should be a cap. I am sure that this report, a copy of which I have provided to the Lord Chancellor and others, will give at least a head start.

This is not the time to go into the details of that. Although the noble Lord, Lord Mendelsohn, addressed many of the issues, those are really not the subject matter of this debate; however, it is essential that they be dealt with. If you look at what is happening in the United States of America and what has happened in Australia, it is plain that the issues that arise are real and need detailed consideration. I therefore very much hope that the work done by the European Law Institute, along with some of the papers written about the position in the United States, will give the group that is to consider this at least an understanding of the broad issues that have to be resolved and the principles and alternatives that should be put before Parliament for its consideration in due course.

It may be that regulation is one alternative. I personally think that regulation has not served us well in many areas. Self-regulation may be the better thing; or, simply agreeing some principles and leaving the courts to police what is effectively in front of them may be a way forward. However, this is not a matter for debate today. We need a proper report, and we will need legislation in the next Parliament to deal with this, because it is such an important issue. There is a huge amount of learning, and I think you will find that the work done by the European Law Institute in its report will be of great assistance.

Finally, I want to turn to one other issue that I think it right to mention. Many think that people make a lot of money out of litigation in one way or another. The proverbial jokes, the proverbial cartoons, do not have to be referred to—they are well in everyone’s minds. However, I want to point to the example of one of the litigation funders, which established a not-for-profit company that provided funds that could be used for litigation that would not be suitable for litigation funding but that raised broader important issues. As is mentioned in the register of interests, when the funds were provided, I gave some advice as to the many competing claims for this. But I do hope—and this is a plea to the litigation funding industry, and maybe to others who do very well out of litigation—that they look at what can be done by way of providing some assistance for small but very important cases that have wide implications, and that are not suitable for litigation funding, and whether some of the money that is made can be put into this kind of enterprise, which is so important not merely for the rule of law but for our society as a whole.

It is an illusion to think that people have access to justice in this country: most people simply do not. Those who do so well out of litigation ought maybe to put in the back of their minds doing something along these lines, for the greater good of our society. I firmly believe that others who are better advocates than me will find that HM Treasury is a very, very difficult place to go and ask for money for litigation.

15:54

[Lord Arbuthnot of Edrom (Con)]

My Lords, I declare my interest as a member of the Horizon Compensation Advisory Board. I am grateful to my noble friend the Minister, and to the Lord Chancellor, for securing a slot so quickly to right the consequences of the PACCAR judgment. I am impressed and surprised at the speed with which they have managed to do this. I am also grateful to my noble friend Lord Sandhurst, the noble Lord, Lord Carlile, and the noble and learned Lord, Lord Thomas—whom it is an honour to follow—for encouraging the Lord Chancellor in his speediness by moving amendments to an earlier piece of legislation.

I speak briefly to point out the sad fact that, until Alan Bates secured litigation funding in the Post Office Horizon scandal, the political process had completely failed him and other sub-postmasters. Although a substantial number of MPs, including a Cabinet Minister, Oliver Letwin, had gathered together to say that the concerns about the Post Office’s behaviour had to be independently examined, we got nowhere. Subsequently, Post Office Ministers said that they were lied to and MPs said the same thing. The turning point in the story was the fantastic judgment of Mr Justice Fraser, as he then was. I pay tribute to him. He succeeded in “blowing the bloody doors off” where the politicians had failed. That is why litigation funding is essential.

There will be questions about how litigation funding should work. Many of them will come up during this short Bill. For example, it is regrettable that the 555 sub-postmasters failed to recover their full costs from the Post Office. It was certainly regrettable that, out of a settlement of £57 million, after legal and litigation funding costs only £12 million found its way into the pockets of the sub-postmasters.

However, I do not say that the litigation funders were unfairly recompensed. They took the immense risk of taking on the country’s most trusted brand, the Post Office, which was backed by the bottomless purse of the taxpayer. That was a risk that needed a high pay-off if it succeeded, because it would have been ruinously expensive for the litigation funders if it had failed. We know, and we watched, how the Post Office did its best to spend the sub-postmasters into submission in a disgraceful display of legal bullying, so the litigation funders deserved their fees.

Yet the entire story must make us wonder whether there could be a better way. Litigation is slow and expensive. I found the comments of the noble Lord, Lord Mendelsohn, very interesting in this respect. Litigation funding must be one method of obtaining redress, but it should be considered alongside others, including the model of regulators-plus-ombudsmen recommended in various books by the chairman of the Horizon compensation advisory board, Professor Christopher Hodges, who is a friend of mine, with a properly regulated system of litigation funding that is subjected to what the noble and learned Lord, Lord Thomas, says. Regulation is needed, and with a stronger system of ombudsmen for the public sector, maybe we could avoid another Post Office scandal.

15:59

[Lord Carlile of Berriew (CB)]

My Lords, it is a tremendous privilege to follow the noble Lord, Lord Arbuthnot. He has shown, in his conduct in connection with the Horizon case, the courage, rigour and persistence that we all should aspire to and yet do not always achieve.

Like the noble Lord, I welcome this Bill. I have fond memories as a baby barrister of taking over preparing small cases that the noble Lord, Lord Thomas of Gresford, as he now is, was far too successful to deal with by then. I used to sit in the spare bedroom at home, very early in the morning, drafting pleadings in personal injury cases. Some of them were for the defendants—the employers or their insurers—but not a small number of them were for individuals who could get legal aid to bring those cases before the county court, where I often appeared to present them if the wicked insurers did not pay up. At the end of every quarter, as I am sure the noble Lord will remember, we used to receive a payment for our civil legal aid work, from which 10% was deducted because it was legal aid. Justice was obtained by very large numbers of people through that legal process, which obviously involved solicitors instructing us as well. It was another era, and I suspect we were far too successful in the work we did for claimants and legal aid became too expensive—but there we are. We have been left with the loss of legal aid for the bulk of such cases. Litigation funding is what has replaced it and it is here to stay. I was astonished by the PACCAR ruling, because it removed the enforceability at a stroke. I do not understand how it happened—and I have read the PACCAR judgment in the Supreme Court on several occasions. There we were, with those who were funding a lot of small cases not able to recover any costs when they won.

I also recall, much later in my life as a barrister, being what one might call a jobbing, part-time chairman of the Competition Appeal Tribunal under the rigorous but agreeable presidency of the noble and learned Lord, Lord Bellamy, when the CAT, on which I sat for 10 years, started to receive cases for bulk claimants. I now declare an interest, having been involved as an adviser in two such groups of cases that went before the Competition Appeal Tribunal. One group involved people who really could not afford to bring their own cases, but, taken together, the whole claim amounted to hundreds of millions of pounds. It is right that, where justice is on the side of such claimants, they should be able to bring their claims. Above all those commercial interests, it is right that people such as postmasters and postmistresses can recover damages.

There was a time in my life as a barrister when I used to do prosecutions for the Post Office on the Wales and Chester circuit, as it was then known. I do not know if I prosecuted any Horizon cases—I think not, because I took Silk a very long time ago and did not do it after that—but there was no doubt that, when instructions were presented to me as a prosecutor and when cases were presented to a court, there was a view that on financial matters the Post Office was infallible. It had a status which had an air of infallibility around it, and that has been proved to be horribly wrong. It is absolutely right that we should be supporting, in the right circumstances, those who will allow such cases to come to court. I very strongly support the principle behind the Bill and its very short provisions.

I want to express two lurking concerns, if I may, both of which have been dealt with in this debate already, so I will be brief. The first is that lawyers are regulated by statute but litigation funders are not. There is an organisation called the Association of Litigation Funders, but I have noticed that its 2018 code of practice has barely been mentioned in any publicity about this matter. My view is to welcome the CJC inquiry very strongly and that we should be prepared, if absolutely necessary, to provide statutory legislation for litigation funders—though I suspect from what I have seen that they will be willing to move voluntarily to a proper level of regulation, which is in some ways much better than statutory legislation because it is much more flexible.

Another point that has come to light came to my attention this morning, when I received a very large amount of information from an interested party, who I think instructed the noble Lord, Lord Macdonald—who has been mentioned and for whom I have immense regard—as legal counsel to provide an opinion on whether the Bill falls within the European Convention on Human Rights. The Minister has certified that it does and that it is in the Bill, which would not be here if it did not—except in the one case that we will be discussing tomorrow. I simply ask the Minister, at the appropriate time, which may not be this afternoon, whether he has had more than the three or four hours that I have had to consider what was presented to me by another person as very opportunistic lobbying, including the opinion of the noble Lord, Lord Macdonald, and whether he will advise the House on whether there are any ECHR problems.

I note that, at the end of his opinion, the noble Lord, Lord Macdonald, described the case against the ECHR as “arguable”. That was the word that he used, I suspect with great care. We have all used it from time to time in our legal lives, and it does not express the highest level of conviction. I am sure that the House would like to be sure that we are not, by accident, falling foul of the European convention, to which, in most respects at least—I cannot help saying this—the Government are devoted.

16:07

[Lord Wolfson of Tredegar (Con)]

My Lords, it is a pleasure to follow the noble Lord, Lord Carlile of Berriew, who made his points in his usual succinct style—notwithstanding that the usual channels, in what must be the paradigm case of the triumph of hope over experience, have allowed this debate between lawyers to proceed with no time limit whatever on speeches.

I begin by declaring my interest. I am a practising barrister in commercial and competition cases, which include cases where one party is supported by litigation funders; sometimes that is my client, and sometimes it is the other side.

As the House has heard, there is no doubt that third-party litigation funding is now and will remain part of our legal landscape. While this is not a debate about the merits of legal aid, there is no doubt that, in the real world, there is little prospect of a Government of any colour massively increasing the scope of civil legal aid. We must therefore be realistic about what will be in its place. Third-party litigation funding provides an important means to enable people to access justice, which is a fundamental part of the rule of law, and so to vindicate their legal right. That is the reality in the United Kingdom in 2024.

I remember doing cases where one party or the other—sometimes both—had to take out large loans or remortgage their home to fund legal costs, including the risk that they would lose and have to pay the legal costs of not only their side but the other side as well. This country usually has the “loser pays” system, which means that, if they lost, they could face financial ruin.

I therefore suggest that third-party litigation funding, together with the appropriate insurances that can be obtained, is a more attractive proposition for most litigants than taking out large loans, and therefore ought to be a more attractive proposition for society as well. As the noble and learned Lord, Lord Thomas of Cwmgiedd, explained, this is a worldwide market and an important one for the United Kingdom to remain a leader in. I suggest the real question is how we arrange our law to deal with the reality of such funding. That means we have to strike a balance: on the one hand, we want to provide access to justice, which is, as I say, an essential element of the rule of law; on the other, we do not want to see litigants given a raw deal by one-sided funding agreements, which mean that when they win, they can be left with very little.

However, it is perfectly right, as the noble Lord, Lord Arbuthnot, pointed out, to recognise that in many of these cases, the litigation funder is taking a very real risk. It is very easy after the event to say, “Oh, well that case was bound to win”. There is no such thing—I keep telling my clients this—as a case that is bound to win. Sometimes there are cases that are bound to lose, but that is a different matter. Therefore, we have to try to find a balance in this area. I very much welcome the review that the Lord Chancellor is setting up; I pay tribute to him for doing so. I hope and expect that this will be a cross-party endeavour.

PACCAR had the effect of treating many litigation funding arrangements as damages-based agreements—DBAs, as they are called in the vernacular—with the result that, unless they met the requirements of the DBA Regulations, they were unenforceable. I will not get into whether or not PACCAR was a surprising decision—I am reminded of one of AP Herbert’s “Misleading Cases”, in which losing counsel in the House of Lords seeks to avoid an order for costs on the basis that a decision of the House of Lords was an act of God, being something that no reasonable man could have predicted—but the fact is that PACCAR caused a real degree of consternation among litigation funders. It has also led to a huge amount of satellite litigation about funding agreements themselves, rather than the cases the funding agreements are there to support.

True it is that some funding agreements were renegotiated post PACCAR, so that instead of receiving a share of the damages—which is what caused the problem in PACCAR—the funder is instead paid an agreed multiple of its investment. There are, I understand, three cases of that type currently proceeding in the CAT—the Competition Appeal Tribunal. I think there are three; I am briefed in two, in one for the funded claimant and in the other for the defendant facing a funded claimant.

The fundamental point at issue is whether the decision in PACCAR should stand. The Government have concluded that it should not, and I broadly agree. I therefore support the Bill, which reverses the decision of the Supreme Court in PACCAR. As I say, that decision has been widely criticised.

I will make two other points. First, like the noble Lord, Lord Carlile of Berriew, I have my mind on other things happening this week. I gently note that this is a good example of the fact that Parliament is sovereign. There is nothing wrong with Parliament reversing a decision of the Supreme Court; ultimately it is for Parliament and not the courts to make the law in this or in any other area. The Bill is therefore perfectly constitutionally proper.

The second, and perhaps more substantive, point is this. I said that I broadly support the Bill, and I do. The reason for that slight note of caution—and it is a slight note—is that there is one issue I want to highlight. It is an issue which has been explained to me by people working in the area; it is not a matter relevant for any client for which I am acting.

The Bill as drafted restores the position ex ante—see Clause 1(4); it is retrospective in that regard. The phrase “retrospective legislation” is sometimes used to imply that the legislation is therefore, and necessarily, bad. That is not the case. The problem with retrospective legislation is not that it is bad in itself. It is that retrospective legislation should not, or at least should not without very good reason, disturb existing legal rights entered into on the faith of the law as it was.

I am concerned about the following sort of situation. Let us assume that someone had a funding agreement with funder A, which is then deemed to be unenforceable by PACCAR, so the litigant goes off and enters into a new funding agreement with funder B, which is PACCAR-compliant. The Bill, as I understand it, would revive the funding agreement with funder A and so leave the litigant with two funding agreements with two different funders on two different sets of terms. That is because the Bill operates retrospectively and does not cater for the fact that some litigants may have done all you could reasonably expect of them at the time; that is, going out to replace the unenforceable funding agreement with an enforceable funding agreement. I suggest that that does not make any sense and is not the intention of the Bill, although it seems to me, and, I think, to others, that that is what the Bill as drafted actually does. I have brought this to the attention of the Minister. I am grateful to him for his time in discussing the issue with me and to his officials for reaching out to discuss the matter with others. I am confident that a solution can be found to this perhaps niche, but none the less important, issue; otherwise, I support the Bill and look forward to participating in its further stages in your Lordships’ House.

16:16

[Baroness Jones of Moulsecoomb (GP)]

My Lords, it is always a pleasure to follow the noble Lord, Lord Wolfson, with his niche points. I keep finding myself in debates with lawyers. I must say, they have some very interesting anecdotes that we all listen to with great interest.

It is fair to say that I am deeply suspicious of everything that this Government bring to your Lordships’ House. All the legislation seems to me to be based on some at times quite cruel intentions. I am actually a little bit more suspicious of short Bills, especially those that come so quickly to this House. At first glance, the Bill does seem fairly simple. It restores the law to what it was less than a year ago and so is quite sensible, but the more one looks at it, the more it appears to be designed to protect the profits of hedge funds, sovereign wealth funds, banks and other backers of these litigation funding agreements, without any consideration of the impact that it will have on the claimants being funded.

One illustration of this is 555 sub-postmasters who were awarded compensation of £57 million against the Post Office for the Horizon scandal. It is reported that £46 million of that money was immediately payable to litigation funders. That seems an extraordinary amount: 80% of the damages awarded. I accept that it was a probably a very difficult case, but at the same time, the sub-postmasters were left with only £20,000 each, when their damages were estimated to be well over £100,000 each. In essence, they got 20% of the £100,000 they were really owed.

It makes you ask why any claimant would agree to put up so much of their compensation. The truth is that normal people cannot afford to take a case to court without such litigation funders. I have heard that we are stuck with this system and that legal aid is not likely to come back, but it seems that we have a particular lack. The noble Lord, Mendelsohn, put it quite well. If he was the amuse-bouche before the meal, perhaps I can be the mid-meal sorbet. Legal aid at least had the benefit of enabling everyone to get justice or to try to get justice. This system means that that is not true for everybody.

There is an inequality of arms in negotiations between a potential claimant and a litigation funder. Without robust regulation and protection for claimants, a litigation funder can reap huge profits by doing nothing other than provide funding for the claimant to take their case to court. One might say that there are dangers in that: of course there are, but this is a business and there are always dangers in business. This, to me, is a failure of successive Governments—just the current Government, which fail in so many ways, but also previous Labour and Liberal Democrat Governments, eroding legal aid and the state’s role in ensuring access to justice.

This litigation-funding business is now worth tens of billions of pounds, and it is a highly lucrative industry for those engaging in it. Legal aid and access to justice have been, essentially, privatised and turned into yet another arena for exploitation by hedge funds and financiers.

This Bill is also extremely lazy, because what the Government have done is choose between two options: do nothing or reverse the PACCAR judgment. They did not put any energy into thinking about a better solution: something that would help the majority of people, not just the few who get taken up by litigation funders. So I would say, “All right, it’s not awful, as some of the legislation is, but really it’s not very good”.

16:20

[Lord Meston (CB)]

My Lords, this Bill, and the Supreme Court decision which prompted it, have shone light on the somewhat arcane topic of third-party litigation funding. It is an area with which many legal practitioners frankly have little real familiarity, and with which most of the judiciary only have to deal from time to time. As stated in the Explanatory Notes to the Bill, third-party litigation funding is a niche market which typically operates in high-value claims. That is correct: it is less to do with individual smaller claims and little to do with filling gaps left by the loss of legal aid—on which I join my noble friend Lord Carlile in resisting the temptation to go down memory lane.

A rather cynical friend suggested to me that the speed with which this Bill has been produced shows how much money is at stake. However, in the shorter term, there is a need to limit the adverse consequences of the Supreme Court decision, hopefully including the need to avoid satellite litigation seeking to rectify or sever existing arrangements or to test out new arrangements trying to get round the effects of the Supreme Court decision. That is best achieved, as the Bill proposes, by stating the law to be what many people, including the losing party in the Supreme Court, said it was.

Additionally, there are clearly wider considerations and a need to preserve and improve established benefits of properly managed funding arrangements. If there are any significant concerns about commercial litigation funding, as suggested in a briefing paper that I received only today, they surely must predate the Supreme Court decision and are unlikely to be cured or made worse by this Bill.

Although the Long Title to the Bill will limit the extent of any permissible amendment, the passage of the Bill, distinguishing litigation funding agreements from damages-based agreements, should provide some opportunity to consider both types of arrangement.

Dealing specifically with damages-based agreements, these are governed by regulations made in 2013, about which, in a case in 2021, a member of the Court of Appeal said that nobody could pretend that those regulations represented the draftsman’s “finest hour”.

In a case in which I was recently involved, concerning only matrimonial property and finance, I was particularly concerned, and rather surprised, to see that the legal representative of the former wife had got her to sign what was called a damages-based agreement. The use and the terminology of such an agreement seemed quite out of place and inappropriate in matrimonial proceedings, particularly when there was no question of damages being awarded, but only allocation of the proceeds of sale of the modest family home.

However, in general, I understand that respectable practitioners favour damages-based agreements, which have advantages for both lawyer and client in sharing the litigation risks, with each doing only as well or badly as the other. In 2019, revised draft DBA regulations were produced and were, as I understand it, well received. If so, why have they been left in limbo and what is going to happen to those draft regulations now?

As to third-party funding arrangements, in an article in 2014, Professor Mulheron described the framework governing such arrangements as consisting of the 2014 code of conduct for litigation funders, its supervision by the Association of Litigation Funders, and sporadic judicial oversight of litigation funding agreements, with some unenacted legislation in the background for good measure. The experience of the subsequent 10 years does not indicate to a detached observer any consensus about whether, how and to what extent improvements can best be made.

During the Digital Markets, Competition and Consumers Bill in this House, an amendment proposing a requirement for the Government to review the litigation funding market and its regulation was not accepted by the Government. The Minister then explained that they were not blind to some of the challenges and opportunities to reform and improve the funding system. On that basis, the review by the Civil Justice Council has been commissioned. The Minister has answered the questions that I was going to ask today about the progress and scope of the review being undertaken. I am sure that it will be informed and assisted by the valuable work being done and the formulation of principles undertaken by the European Law Institute. In that context, it would also be instructive to learn what is happening in Scotland.

More generally, I suggest that what will be required will be clarity without overregulation: in particular, with the benefit of hindsight, regulation that does not give rise to the sorts of problems that needed resolution by the Supreme Court and then amending legislation, as we have with this Bill. Importantly, also, it should be regulation that does not hamper or restrict the funding market.

I assume there is no reliable statistical or other information to show how much British litigation is commercially funded by those who are not members of the Association of Litigation Funders. If regulation is to remain with no more than a light touch, it is all the more important that sufficient safeguards exist and are understood to protect the consumer—and important that, wherever possible, those who seek or who recommend funding arrangements are firmly guided towards members of the ALF and funders who adhere to their code of conduct.

In the area of law with which I am most familiar, statute provides that family proceedings cannot be subject to enforceable conditional fee agreements. That, together with the demise of legal aid and also the limited costs jurisdiction, makes the availability of bespoke third-party funding all the more important in financial remedy proceedings. It is not only in the wealthier family cases that funding options have to be explored. Sometimes, a bank loan or a loan from a relative or friend will suffice; but these can give rise to distracting arguments between the litigating parties about whether or not they are so-called “soft loans”.

I need hardly say how depressing it is for the judge at or near the final hearing to be told that the funding has dried up, so that one or other party will have to continue without representation. Typically, but not invariably, it is the wife in matrimonial proceedings, with only limited or illiquid funds, who most needs help, against a spouse with deeper pockets and with the means and motives to conceal assets and to frustrate disclosure and enforcement.

The family judiciary has welcomed the availability of funding arrangements to those who need or choose to use them. I therefore suggest that, in addition to referring the matter of litigation funding to the Civil Justice Council, it could be helpful to invite the views of the Family Justice Council, if only to confirm that no problems exist or are foreseen.

Finally, to return to the contents of the Bill before the House, in his recent article in the New Law Journal Professor Dominic Regan strongly welcomed the introduction of the Bill here and its succinct drafting. Indeed, he wrote:

“I will never again hear a bad word said about those old duffers in the other House”.


As none participating in this debate would admit to anything more than early late middle age, I suggest we return the compliment and should give the Bill a Second Reading.

16:30

[Lord Sandhurst (Con)]

My Lords, I rise, rather like the Arctic roll, to complete the speeches from the Floor. I congratulate the Government on moving swiftly and decisively to introduce the Bill. I congratulate the Minister too on his very clear opening. It has been a privilege to listen to today’s speeches, with many valuable insights that have opened our minds to a lot of issues that need to be addressed.

As we have heard, the Supreme Court’s decision in PACCAR rendered unenforceable third-party litigation agreements between claimants and third-party funders who finance litigation in return for the right to payment, usually set as a percentage of the damages. It was at once clear, as we know, after that decision on 19 July this year, that most current litigation funding agreements did not comply, and that it was very hard, if not impossible, to draft one that would comply. This, as we now know, has had serious ramifications for existing and future claims. It needed swift action, which is why we must all congratulate the Government on the course that they have taken.

It is interesting and important to remember that it has been government policy for at least 10 years, and in fact rather longer, to positively favour litigation funding agreements. I remind the House, as I have done previously, that the then Parliamentary Under-Secretary of State, the noble Baroness, Lady Neville-Rolfe, said in this House, in Committee on the then Consumer Rights Bill, on 3 November 2014 that

“there is a need for claimants to have the option of accessing third-party funding so as to allow those who do not have a large reserve of funds or those who cannot persuade a law firm to act pro bono to be able to bring a collective action case in order to ensure redress for consumers. Blocking access to such funding would result in a collective actions regime that is less effective”.—[Official Report, 3/11/14; col. GC 583.]

As we all know, the High Court group action by which the sub-postmasters obtained the critical findings exposing the defects in the Horizon system was possible only because they obtained very large sums of funding from litigation funders. After PACCAR, such litigants, and others like them, were left without the potential for an effective civil remedy. Group actions by individuals and smaller companies in the Competition Appeal Tribunal were at a stroke bereft of the means to litigate, and, as we know, so I shall not spend time on it here, that applied to other actions in the High Court.

Legal aid, as we have heard, is no longer available for claims of this sort or for any claims for damages, other than in clinical negligence and certain other categories, nor is it likely to be reintroduced. However, let us all remember that the promise of a property-owning democracy rings hollow if citizens do not have the opportunity to assert or defend rights through the legal system. The happy functioning of society requires that individuals have a reasonable opportunity to obtain legal remedies. The recovery of compensation and a judgment is not just about money; it is about redress. It is about an individual sense of fairness, of being valued by society, and of good name and reputation. The sub-postmasters epitomise that.

In the absence of legal remedies, much of the fabric that maintains our economic system is damaged or lost. The sense of individuals that we live in a society in which harm done falls to be recompensed, or that obligations made will be honoured, or that we will not be bullied by monopolists, is an important contribution to the individual’s sense of well-being and the value we place on the society in which we live. Concern to find funding mechanisms to achieve legal remedies for these individuals, and for smaller companies and the like, who do not have the resources to achieve this is a concern to preserve social value. It is the pursuit of the public interest. A market economy in which people do not have effective access to justice and cannot enforce their rights is not worthy of the name. The market, in turn, ceases to operate fairly or efficiently. I remind this House that, in December 2019, the Conservative Party’s election manifesto rightly included a commitment to access to justice for ordinary people.

Litigation funding agreements, whatever the complicated issues they bring, are an important plank of our justice system. For the reasons my noble friend the Minister has explained, there is an unusual retrospectivity provision. Like him, I believe it to be justifiable, but no doubt we shall have to look at it in Committee to see that it really works properly and fairly.

While congratulating the Government on the Bill, we must also ensure that defendants to claims funded by such funders are not going forward improperly harassed. We must ensure that payments recovered by the funder are reasonable for the risks involved and the money laid out. Successful claimants must be left with broadly fair recompense. Those issues are complex; they require difficult balancing arguments and it would be difficult to regulate or to manage, but they are not reasons for allowing the PACCAR decision to stand. This Bill is necessary.

Like other noble Lords, therefore, I applaud the Lord Chancellor for asking the Civil Justice Council to review the current operation of such agreements and to consider the need for further regulations and safeguards. This will ensure that those who provide such funding do so on an appropriate and fair basis. Funders must not be free to take excessive proportions of recoveries or harass defendants. I do not suggest that they do, but we must ensure that they do not going forward.

In this review process, I urge that proper attention is paid to a forthcoming report, of which we have heard, by the European Law Institute. The noble and learned Lord, Lord Thomas of Cwmgiedd, is an important member of the working party, of which he has spoken. I remind noble Lords that this project seeks to develop

“principles containing safeguards in order to provide an environment in which”

third-party litigation funding

“is allowed but balances the availability of the tool with the interests of claimants and defendants and a healthy litigation market”.

Finally, I agree with the noble Lord, Lord Meston, that the Government should look again at the draft Damages-Based Agreements Regulations 2019. They came in at the time when I was just finishing my practice before retirement. It was a mystery to practitioners at the time that, after all the work that had gone into them, they were never laid. We should look again at those. Looking forward, I commend this Bill to the House.

16:39

[Lord Trevethin and Oaksey (CB)]

My Lords, it is a pleasure to follow the noble Lord. I make precisely the same declaration of interest as did the noble Lord, Lord Wolfson. I occasionally advise funders and I quite frequently act in cases in which one party is funded and the other party is aggrieved by the existence of litigation funding.

I do not think anyone has spoken directly against the Bill, so I need not say too much, if anything, directly in support of it. I will just make one or two observations about the Bill and then, if I may, I will travel briefly off-piste and pick up some points made by the noble Lord, Lord Meston, about the DBA Regulations.

The reality, as a number of noble Lords have pointed out, is that there is no prospect of anything resembling a functioning legal aid system coming back into place. What follows from that is that there are very serious problems with access to justice in this country. Litigation funding unquestionably has its part to play.

In her very interesting—and, with respect, powerful—dissenting judgment in the Supreme Court PACCAR case, Lady Rose quoted an American judge:

“The realistic alternative to a class action is not 17m individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30”.


One could substitute $3,000 or even $30,000 for that sum; that is the reality. Without access to litigation funding, class actions or group actions—litigation of that type, which will sometimes be highly meritorious—simply cannot be brought.

One can test whether the practical consequences of the PACCAR decision are benign or malign by considering what probably would have happened if that decision had been handed down by the Supreme Court shortly before the litigation funders supporting Mr Bates and the other postmasters were going to take their case to trial, and shortly before a final decision had to be taken on the funding of that litigation. Almost certainly, the funders would have withdrawn. The Post Office, as one knows from what one has read about the history of that litigation and other matters, would have seized on that and sought to take advantage from it. Almost certainly, the proceedings would have been aborted. Mr Justice Fraser would never have handed down his masterful judgment and, to use the phrase of the noble Lord, Lord Arbuthnot, the doors would not have been blown off and the injustices which have horrified the country might have remained concealed. That suggests, I think, that the consequences of the PACCAR decision are not benign, and the Government are right to act in the way that they have.

I do not want to say any more about the merits of the Bill. I will make two points which involve travelling slightly off-piste. They build on what has already been said by the noble Lords, Lord Meston and Lord Sandhurst, about the 2013 DBA Regulations which were at the centre of the Supreme Court’s reasoning in the PACCAR case. Those regulations were put in place very shortly after the reforms founded on Sir Rupert Jackson’s report were enacted. Sir Rupert, in making significant changes to the conditional fee regime, strongly recommended that damages-based agreements should generally become lawful in this country. That recommendation was an important part of his overall approach to the reform of litigation in this country.

However, everyone, including the Ministry of Justice and just about every judge who has ever had to read the regulations, recognises that the 2013 regulations were badly drafted. In particular, they leave a very undesirable uncertainty about whether hybrid agreements involving an element of a damages-based agreement and an element of a more orthodox funding scheme are permissible. They leave a great deal of uncertainty as to what happens to the lawyers’ entitlement to remuneration if the client terminates the agreement in the course of the relevant litigation.

That is why the ministry instigated a review of the position, which led to the preparation of significantly better draft regulations by a group including Nick Bacon KC, a colleague of mine, who is a master in this field. There is no doubt that those draft regulations would represent a major improvement. If those draft regulations from 2019 had been put in place back then, we would not be having the current debate and there would be no PACCAR problem. Nick Bacon and his team spotted the difficulty that underlies the decision of the Supreme Court in PACCAR and drafted the new regulations to remove the relevant ambiguity and took litigation funding agreements outwith the scope of the DBA Regulations.

I am sorry to be mean to the Minister but, like the other Members of the House who spoke on the point, I would be very grateful if he were able to provide any further information or assurance as to the speed with which the ministry and the Government will move in the direction of reforming the DBA Regulations, as indicated.

My final point is a broader point about the way the Bill and the underlying regulations are structured. In this area, as in others, they operate in a completely binary way. They say that this agreement—a conditional fee agreement or a damages-based agreement—is either enforceable, if all the boxes and regulations have been ticked, or it is unenforceable. There is no middle ground whatever. There is nothing resembling the jurisdiction in the consumer credit legislation, which gives the court a power to hold that a consumer credit agreement is enforceable notwithstanding that there has been some technical non-compliance with the relevant regulations. Something of that sort would work well here because where there is the completely binary structure of enforceable or wholly unenforceable, there is trouble ahead: the stakes are raised much too high.

With this sort of structure, a party who shows that the relevant agreement is unenforceable stands to gain massively. A finding of that nature will close down the litigation and lead to a saving of millions, many of millions or hundreds of millions of pounds. You get very expensive, time-consuming, recondite satellite litigation which goes all the way to the Supreme Court and filters back down through the court system, causing judges to wrestle with difficult points. It is possible that all or most of that could be avoided if the scheme was structured so as to give the court the power to say, “Yes, this DBA or CFA is technically non-compliant with the regulations, but no detriment or prejudice has been caused and therefore we, the court, declare the relevant agreement to be enforceable”. That would be a better way forward.

16:48

[Lord Marks of Henley-on-Thames (LD)]

My Lords, rather repetitively, I suspect, I too declare an interest as a practising commercial barrister. I agree entirely with the observation of the noble Lord, Lord Wolfson, that litigation funding now forms part of the landscape of civil litigation both domestically and internationally.

I also pass on an apology from my noble friend Lady Brinton. She is not just my noble friend, but a non-lawyer, whose contribution would have been very welcome for that reason. Unfortunately, she has had to withdraw from the debate due to a family illness.

Like others, I broadly support the Bill and applaud the speed with which it has been introduced. That is because the unexpected decision of the Supreme Court—unexpected, I say, while hesitating to use the word “surprising” suggested and then withdrawn by the noble Lord, Lord Wolfson—in PACCAR has left us in an unsatisfactory position, with nearly all LFAs unenforceable on the basis that they generally do not comply with the DBA regulations applicable to damage-based agreements, as we have heard. The regulations date from 2013.

The Secretary of State’s Written Ministerial Statement of 4 March, announcing the intention to introduce this legislation, made a number of points—points which were also made and expanded upon in opening by the noble and learned Lord, Lord Stewart. The fundamental point made is that:

“Third-party litigation funding enables people to get funding to bring big and complex claims against bigger, better-resourced corporations”


than the claimants, which those claimants

“could not otherwise afford”.—[Official Report, Commons, 4/3/24; col. 31WS.]

I agree that this is the fundamental advantage of LFAs. I also agree with the points made by the noble Lord, Lord Mendelsohn, and the noble and learned Lord, Lord Thomas of Cwmgiedd, that LFAs add to the attractiveness of the United Kingdom as an international centre for commercial litigation and arbitration. It is highly significant that the legal sector brings in, on one estimate, £34 billion a year.

Where I slightly diverge from the Government’s position is where the noble and learned Lord made the point that the sub-postmasters’ claim was possible only with the backing of a litigation funder, without at the same time qualifying that statement by pointing out that the vast majority of the damages in that case went to the litigation funder and the lawyers. For many members of the public, that fact is bordering on the offensive. It is, however, certainly right that the postmasters were able to bring their case to court only because of the availability of litigation funding. I join with others in commending the endeavours of the noble Lord, Lord Arbuthnot, for the postmasters, and the success of those endeavours, for which they owe him a great deal. It was also made absolutely clear in the ITV programme “Mr Bates vs The Post Office” that the availability of litigation funding was crucial.

I also agree with the points made not only by the noble Lord, Lord Arbuthnot, but also by the noble Lord, Lord Wolfson, as to the magnitude of the risk regularly taken by litigation funders. One of the issues that we need to address, I suggest, is how to consider that risk without that risk and its effects damaging the actual recovery of the claimants in these cases.

The truth, as this debate has exposed, is that unregulated litigation funding leaves us caught in a bit of a jungle out there. We know that the Lord Chancellor shares that view. In his press release, also issued with the MoJ and the Courts & Tribunals Service, he said that the Government were

“considering options for a wider review of the sector and how third-party litigation funding is carried out”,

and it is entirely welcome that he has now initiated the process of such a review. The Minister has explained that the review of the whole litigation funding market has been ordered. That review could consider the need for increased regulation and for safeguards for people bringing claims to court, particularly given the growth of the sector over the last decade. For my part, I do not see why we should be left with uncertainty for long. I completely agree that we need a review, but there are some principles that we may be able to address now and in the later stages of the Bill—not necessarily by amendment, but by discussion and by formulating something approaching a way forward.

The traditional rules against champerty were founded on a distrust of investors, in effect, gambling on other people’s litigation. Despite the growth of litigation funding, the grounds for that distrust have not been entirely extinguished. On the other hand, they have to be balanced against the need to enable access to justice—a point that has been made. That is a need that, I suggest, can be met by a well-regulated and fully functioning system of private sector legal funding alongside a fully functioning legal aid system. I do not share the pessimism of the noble Lord, Lord Trevethin and Oaksey, that there is no future for legal aid. There are a number of areas where LFAs simply cannot replace legal aid; they are not suitable for a great deal of the litigation that used to be handled with the benefit of legal aid, but for which it is no longer available.

A great deal has been made of the 2013 DBA regulations. As the noble Lords, Lord Meston and Lord Trevethin and Oaksey, have reminded us, those regulations did not represent the finest hour of parliamentary draftsmen. Nevertheless, they sought to introduce—and did introduce—some controls and limits on what might be arranged between clients and, generally, their lawyers. That included: a definition of the circumstances in which the funder would be paid; definitions of the reasons for payment being transparent; excluding some classes of claims from such agreements; and, most importantly, limiting the overall percentages of damages that might be payable to funders. Those areas are important, and those regulations and the feelings behind them teach us some lessons. I was interested in the proposals apparently put forward by Nicholas Bacon KC for the proposed new regulations and to hear the description from the noble Lord, Trevethin and Oaksey, of those proposals.

But what we will have now, with this Bill, is no such helpful restrictions. Litigation funders have long argued, for reasons that they plainly find attractive, that the DBA restrictions do not apply to LFAs. That argument was rejected by the majority in the PACCAR case in the Supreme Court—undoubtedly doing, in effect, great damage to the structure of the whole sector in this country—but what we are left with has other weaknesses. Not only are there no limits on the percentages of overall recovery to be received by the funders, but there are no or very limited incentives, in a case in which the client is likely to win, for the funders to hold down the amount of costs and other fees that can be charged to the client’s account and very little control for the clients over the costs to which they might, ultimately, be exposed. That point was not made directly by the noble Lord, Lord Mendelsohn, but he alluded to similar points about the lack of control for clients over litigation funding.

Because of the requirements in Clause 1(4) that the provisions of the Bill are to be

“treated as always having had effect”,

there is the full retrospectivity alluded to by a number of speakers. That means that the avenues for challenging existing LFAs, where they exist, would probably be largely closed. I understand the Minister’s argument for retrospectivity—that it will restore the status quo pre-PACCAR—but it may, at the same time, undermine potential challenges that might have been made to existing LFAs.

The noble Lord, Lord Wolfson, raised what the noble Baroness, Lady Jones, might have called the “niche issue” about the interesting problem of litigants with overlapping LFAs. I see his point. It remains to be seen whether it would arise in practice.

I agree overwhelmingly with the point made by the noble Lord, Lord Sandhurst. The whole issue of retrospectivity and its effect will need to be carefully considered in Committee.

There are tricky areas in this Bill. It is interesting that the Competition Appeal Tribunal has developed a practical and flexible scheme for considering litigation funding agreements in assessing the ability of clients to fund costs of their own and meet potential adverse costs orders. There is much to be said for consideration of that scheme.

It would be wise to consider what amendments, if any, might improve this legislation. The need for regulation seems clear and I suggest that the overall balance of opinion in this Chamber today has been to the same effect.

I have some questions for the Minister about the review. I have no wish to pre-empt it by asking questions and seeking answers that might ultimately prove embarrassing for the Government. It would be interesting to know what areas the noble and learned Lord regards as important for the review to consider. What proposals for regulation would he see as being possible? What type of regulation would he consider to be within the review’s ambit? What limits, if any, would he foresee on the reward of litigation funders and how might they operate? When will we see the terms of reference of any review? Will it be open to consider alternatives to litigation funding, as has been suggested, particularly in cases against the Government where claimants face what has been called the “bottomless purse” of the taxpayer?

17:02

[Lord Ponsonby of Shulbrede (Lab)]

My Lords, I thank the noble and learned Lord for introducing this Bill, which we support.

First, I will set the wider scene. Third-party litigation funding in the UK has experienced a huge growth since 2010, highlighting the need for comprehensive oversight and regulation. Globally, it is worth more than £13 billion a year and it is on course to grow by 9% per annum for the next five years, taking it up to £20 billion a year.

The UK’s 15 largest litigation funders saw their balance sheet assets soar tenfold to £2.2 billion in the decade to 2022, while the number of funders operating in the UK has grown fourfold to 70—of which only 16 are members of the self-regulating industry body, the Association of Litigation Funders. I noted that the noble Lord, Lord Meston, questioned what proportion of the business goes to the regulated and to the non-regulated funders.

The industry is highly profitable. The insurance company Swiss Re has estimated that the average internal rate of return on personal injury cases from 2019 to 2021 ranged from 20% to 35%. For mass tort lawsuits, profits ranged from 20% to 25%.

The Litigation Funding Agreements (Enforceability) Bill would confirm in legislation that litigation funding agreements in England and Wales are not damages-based agreements. Thus, LFAs would once again not be subject to regulation under the Courts and Legal Services Act 1990 and the Damages-Based Agreement Regulations 2013—a return to the position that existed before July 2023, when the Supreme Court ruled that LFAs could be DBAs if the funder’s remuneration was based on a percentage of the damages recovered.

Prior to the Supreme Court ruling, LFAs and the litigation funding industry were self-regulated. DBAs are a type of no-win, no-fee agreement between a client and their representative—usually their lawyer or claims management company. DBAs must adhere to the statutory and regulatory requirements set out in the Courts and Legal Services Act 1990 and the Damages-Based Agreements Regulations 2013.

In July 2023, the Supreme Court ruled in the PACCAR case, which we have heard so much about, that LFAs could constitute DBAs if the funder’s remuneration was based on a percentage of the damages recovered. The Government and the litigation funding industry both expressed concern that many LFAs would be deemed unenforceable because they did not comply with the legislative requirements for DBAs. The Government said that this uncertainty risked impacting access to justice and could damage the attractiveness of the England and Wales jurisdiction for commercial litigation and arbitration.

The organisation Forward Global argues that the PACCAR judgment enables parties of LFAs prior to July 2023 to challenge these agreements in court. It argues that Clause 4 would stop sub-postmasters, who signed their LFA in March 2016, and other victims of “excessive” LFAs seeking justice. We believe that the Government must ensure that third-party funders have an appropriate and not excessive reward for the risk they take. This is of importance because excessive reward is usually at the cost of the successful claimant who has suffered the wrong.

Although the Bill itself does not expressly include any safeguards, with future safeguards or regulation of the litigation funding sector to be delayed until after the conclusion of the review by the Civil Justice Council, the Government say that the review is expected to

“expressly consider the need for further regulation or safeguards”.—[Official Report, 11/3/24; col. 1888.]

The noble and learned Lord the Minister gave an update on the progress of the review and when it is likely to report, but I did not pick up whether its terms of reference are available and would be available to Members taking part in discussions on the Bill.

During the recent passage of the Digital Markets, Competition and Consumers Bill, which is soon to have ping-pong, an amendment was proposed to require the Government to conduct a review of the litigation funding market and its regulation. The Government did not accept the amendment but, to quote the noble Lord, Lord Offord, did concede that they were

“not blind to some of the challenges and opportunities to reform and improve the funding system”.—[Official Report, 11/3/24; col. 1888.]

I think the noble Lord, Lord Meston, made this point as well.

The Association of Litigation Funders argues that Alan Bates, the lead claimant against the Post Office for the Horizon scandal, said that the backing of the litigation funders helped him and his colleagues to secure justice, expose the truth and clear their names and reputations. However, it seems that, based on Forward Global’s briefing, the funders arguably made an excessive profit. I take the point made by the noble Lord, Lord Arbuthnot, that there was very real risk in embarking on that litigation and that he believes that they did indeed deserve their fees but, as the noble Baroness, Lady Jones, argued, the sub-postmasters themselves are left with £20,000 each—a fraction of the total award. I think it was the noble Lord, Lord Marks, who said that, on first reading, those numbers look offensive and unfair to the sub-postmasters.

Speaking frankly, the suggestion by some that, if the Bill passes, it means that LFAs will escape regulation altogether is unconvincing. They should be regulated in their own right, but not by regulations that would not have been expected, by either side, to apply when the agreements were being drafted and which are generally agreed, as we have heard from a number of noble Lords, to be a dog’s dinner in drafting terms. We recognise the gravity of retrospective legislation, but without it there is no way to preserve all the agreements in cases that have now been concluded. The briefings I have received say that there is no actual problem here, because all live agreements can be renegotiated. However, it is the older agreements that would stand to damage the industry most, hence the need for the Bill.

There is also the separate issue, which has not been mentioned today, of transparency regarding who is funding the litigation. We have all had briefings, including me, from various groups saying that litigation is being used as a vehicle for circumventing international sanctions. This might be a satellite issue but it is still a real one, and I look forward to the Government addressing it.

As the noble and learned Lord, Lord Thomas, said, litigation funding arrangements raise issues that are worldwide. The issues are very similar, whether in continental Europe, the United States, Singapore or Australia, and they are covered by the Vienna-based European Law Institute, as he said. While it is not directly relevant to this Bill, the findings of that institute, and the work of the noble and learned Lord and Dame Sara Cockerill, will be of great interest and relevance. I accept his point that there is likely to be further legislation in this area within a relatively short time.

Today, we are concerned with the Bill before us. We support it and we are very conscious that most industry figures do so too. There have been comments such as this is the “beginning of the end” of the issues caused by the PACCAR ruling, and the Bill is “a great starting point” for removing these uncertainties. It is in that spirit that we support the Bill.

In conclusion, I want to reflect on my experience in business. I think I am one of three noble Lords who have taken part in this debate who is not, and never has been, a lawyer. I remember when I got promoted from engineer to chief executive, I had to start dealing with all the legal issues that came across my desk. I agree with the noble Lord, Lord Marks: it is a bit of a jungle out there. I was very grateful that my business partner was a lawyer; he managed to save me from some of the problems of managing a business. I listened very carefully to my noble friend Lord Mendelsohn when he went through the various benefits of litigation funding. I took two points from his speech. First, poorer individuals and organisations are not particularly benefiting from this way of funding. That is the political point, which I wholeheartedly endorse. The second point he made rang absolutely true for me, as a former chief executive: it is a way of managing risk. The business I ran was relatively wealthy, but we had unpredictable cash flows. Such arrangements were very beneficial, because anything can happen when you are running a business. De-risking and managing legal costs over a period of time was a very useful technique when actively running a business.

Having said that, we of course support the Bill, and I look forward to the Minister’s response to the various points that were raised.

17:13

[Lord Stewart of Dirleton (Con)]

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.

[Baroness Jones of Moulsecoomb (GP)]

I am sorry for intervening. It is a separate Green Party. It actually disaffiliated itself because of me, and I feel strongly about it.

[Lord Stewart of Dirleton (Con)]

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.

Bill read a second time and committed to a Committee of the Whole House.