Litigation Funding Agreements (Enforceability) Bill [HL]

Lord Ponsonby of Shulbrede Excerpts

2nd reading
Monday 15th April 2024 Lords Chamber

[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.