Is Third-Party Funding a viable solution to help resolve the financial risks involved in Commercial Litigation disputes?

John Flint, in the commercial litigation team at national law firm Clarke Willmott LLP, frequently encounters businesses and individuals embroiled in disputes that require resolution. Unfortunately, the costs of fighting (and the risks of losing) are too great, inevitably denying access to justice for many of his clients.

My experience of litigation funding has been a mixed bag. Unfortunately, it rarely provides a workable option for the vast majority of mid-value commercial disputes.

Often the premiums are too high and inevitably off-putting for the client. For these disputes we explore different options with our clients including contingent fee arrangements.

Where my clients have undoubtedly been helped is in higher value commercial, arbitration, or group litigation claims. These claims often involve complex legal matters and substantial financial stakes. I have found that with these cases litigation funding can play a key role in ensuring access to justice.

Notably, it played a prominent role providing the financial backing in the case against the Post Office regarding issues related to the Horizon IT system (Alan Bates v The Post Office).

However, a recent landmark decision in the Supreme Court has raised concerns and challenges to third-party litigation funding arrangements. In Paccar Inc v Road Haulage Association Ltd, the Supreme Court examined the enforceability of litigation funding agreements that involve third parties who are not actively involved but stand to gain from damages that might be recovered in the case.

The Court held that such funding agreements fall under the definition of a damages-based agreement (DBAs) as set out in specific legislation that governs such funding arrangements. As a result, these litigation funding arrangements are subject to the strict statutory regulatory regime that governs DBAs. A failure to comply can render the DBA unenforceable or subject to challenge, potentially resulting in financial losses for both the lawyer and the client.

The litigation funding agreements in PACCAR failed to meet the DBA regulatory standards, so they were unenforceable.

Beyond the implications for the parties in PACCAR, the ruling sent ripples through the legal community. The ruling impacted the viability of existing funding arrangements and the risks associated with non-compliance. The case raised questions about the future of litigation funding, with legal professionals and funders needing to assess the implications of the decision on funding models, strategies and consider potential adjustments to ensure compliance with the regulatory requirements.

The Ministry of Justice has now introduced a concise, two-clause bill aimed at reversing the Supreme Court's ruling.

The Litigation Funding Agreements (Enforceability) Bill revises section 58AA of the Courts and Legal Services Act (which sets out the definition of a DBA and its criteria and conditions for enforceability).

The change clarifies that litigation funding agreements fall outside the realm of DBA regulations. The Bill retroactively excludes existing litigation funding agreements from being classified as DBAs, so they will not have to be scrutinised for their enforceability.

The explanatory notes set out that the Supreme Court's decision posed a risk to the attractiveness of England and Wales as a global hub for commercial litigation and access to justice. Although the repercussions of PACCAR have been promptly addressed, the clarity of the regulations governing DBAs has been under ongoing scrutiny and debate among legal professionals since their inception in 2013. While these regulations establish a framework for DBAs, concerns regarding clarity and interpretation persist, with calls for legislative refinement remaining largely unmet.

 At Clarke Willmott we provide a wide range of flexible, affordable and innovative options to help clients afford commercial litigation and gain access to justice. As a commercial litigator I am passionate about helping my clients get that access and righting the wrongs that have been done to them or helping them to defend claims which have been brought against them in an affordable way. It is important that litigation funding remains part of the solution.

For more information or to discuss your business’s circumstances, you can contact John here.

Clarke Willmott is a national law firm with offices in Birmingham, Bristol, Cardiff, London, Manchester, Southampton and Taunton and is this year celebrating its 135th anniversary.