Litigation Funding Agreements (Enforceability) Bill [HL]

Lord Marks of Henley-on-Thames Excerpts

2nd reading
Monday 15th April 2024 Lords Chamber

[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decision of the Supreme Court—unexpected, I say, while hesitating to use the word “surprising” suggested and then withdrawn by the noble Lord, Lord Wolfson—in PACCAR has left us in an unsatisfactory position, with nearly all LFAs unenforceable on the basis that they generally do not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?

Litigation Funding Agreements (Enforceability) Bill [HL]

Lord Marks of Henley-on-Thames Excerpts

Committee stage
Monday 29th April 2024 Grand Committee

[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 ---

Against that background of timings and the view that much of what the noble Lord seeks is foreshadowed by the CJC in its terms of reference, I respectfully submit that his amendment is not necessary and will duplicate efforts, so I urge him not to press it at this stage.

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

My Lords, I have seldom had such pleasure in not pressing an amendment. As the noble and learned Lord said, the CJC review is precisely what we were looking for. Having looked at who is concerned and how they will deal with it, I have no doubt at all that it will be thorough, and we have had some very helpful remarks from everybody this afternoon, so I will not press my amendment.

Amendment 1 agreed.