Litigation Funding Agreements (Enforceability) Bill [HL]

Lord Stewart of Dirleton Excerpts

Committee stage
Monday 29th April 2024 Grand Committee

Moved by

[Lord Stewart of Dirleton]

1: Clause 1, page 1, line 14, at end insert—
“(ia) where the litigant is a litigant in person, expenses incurred by that litigant, or”Member's explanatory statement
This amendment ensures that the definition of litigation funding agreements includes agreements under which a funder agrees to fund expenses incurred by a litigant in person.

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

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

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

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

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

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

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

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

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

“treated as always having had effect”.

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

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

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

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

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

However, there is a legitimate concern whether the expression

“by virtue of a costs order”,

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

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

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

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

My Lords, I will speak now because I have tabled the only non-government amendment before the Committee. It is a probing amendment.

The Minister, the noble and learned Lord, Lord Stewart, mentioned briefly the discussion about this Bill since the Second Reading debate—mostly in the context of the letter that he and the Secretary of State helpfully circulated—and the publication of the terms of reference for the review. That has been part of a wider discussion, and questions have been asked by a number of briefings. The briefing process for this Bill in relation to members of the public and interested or affected parties has been late; that has been a feature of the discussion, which has centred largely around questions on the need for regulation of the litigation funding market generally and on the issue of retrospectivity for the principal provision of the Bill, which the Minister mentioned.

I hope I will be forgiven for running through some of the arguments that were canvassed at Second Reading, largely in the light of the lateness of the briefings that we have had and the expressions of concern that there have been. A powerful argument has been advanced by some clients of litigation funders. They make the point—I foreshadowed it at Second Reading—that, in an unregulated market, litigation funders can effectively impose their terms on clients. This can mean that successful clients end up with only a very small part of the damages awarded to them, with the litigation funders taking the lion’s share; indeed, in one case that was brought to my attention and that of other noble Lords, funders have been in a position, following a case that they have funded, under their contracts of not only retaining all the damages awarded to the claimants but actively pursuing those claimants—their clients, in effect—for substantial costs that they incurred over and above the damages that were recovered. The clients say that that is most unfair; one can see their point.

The same people point to the DBA regulations—the Damages-Based Agreements Regulations 2013—and say, again with considerable force, that lawyers who enter into DBAs with their clients may not retain for themselves more than a prescribed proportion of the damages awarded, and that such lawyers are bound by other prescriptive regulations as to what they can set for their clients or in the contracts between them and their clients, the litigation funders having the upper hand in any negotiations of such agreements. They ask: why should similar restrictions as are imposed on lawyers in damages-based agreements not be imposed on litigation funders? They also say that, in any event, lawyers are already limited in the terms of what they can agree and are subject to comprehensive professional regulation, whereas litigation funders are not.

Noble Lords may remember that, at Second Reading, I said that, in the absence of regulation, there was

“a bit of a jungle out there”,—[Official Report, 15/4/24; col. 818.]

and that that should not be permitted to persist. Those expressing these concerns call for regulation of the litigation funders’ market generally, the primary purpose being to ensure more of a level playing field between funders and clients and the argument being that, if regulation of DBAs is appropriate for lawyers, why is it not for litigation funders?

As is well known to this Committee, the PACCAR decision gave legal effect to the essentially political argument that litigation funders should be subject to the DBA regulations. As we all know, this was because the Supreme Court decided that, if LFAs did not comply with the DBA regulations, which they generally would not, they would be unenforceable because LFAs involve the provision of case management services.

--- Later in debate ---

[Lord Ponsonby of Shulbrede (Lab)]

I will make the briefest of comments. I welcome the amendments put forward by the Minister. I very much take to heart the point made by the noble Lord, Lord Carlile, that the Bill would be pretty pointless unless there was an element of retrospectivity to it. I read the information that we were sent by the Bingham Centre, which was informative and interesting, and by the Bar Council. I absolutely understand the primary purpose behind this legislation.

The noble Baroness, Lady Bennett, commented on the legal balance in this Committee. I join her, as a non-lawyer; I cannot match her for gender, I am afraid. However, I can talk about the clients who are paying for this. I might have made the point at Second Reading that, by my understanding, the bulk of the people who take advantage of this type of funding would be at the sort of middle to large-sized company where I was chief executive. It is a way of cash management, in essence, because you do not know what litigation is on the horizon and you do not want to spend too much time on the litigation because that takes time away from running the business. So having these ongoing litigation funding arrangements is a way of managing risk. For me, that was the main purpose of occasionally entering into those agreements, rather than the litigation itself.

The other primary point worth repeating is that a lot competitors out there would like this business—Singapore, Australia, Dubai and elsewhere. I was very aware of that when I was running a business. I was regularly approached by people wanting to reach alternative ways of resolving any disputes that may arise.

Nevertheless, given those thoughts from a client’s perspective, I welcome this legislation. The English and Welsh model should be as up to date and competitive as possible. In that sense, I welcome the Bill and the Government’s amendments.

[Lord Stewart of Dirleton (Con)]

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

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

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

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

--- Later in debate ---

Moved by

[Lord Stewart of Dirleton]

2: Clause 1, page 1, line 16, after “order” insert “, an arbitration award or a settlement agreement”
Member’s explanatory statement
This amendment ensures that the definition of litigation funding agreement includes agreements under which a funder agrees to pay costs relating to litigation that arise by virtue of an arbitration award or a settlement agreement, as well as by virtue of a costs order.