Delay of PACCAR-Reversal Bill Extends U.K. Litigation Funding Uncertainty

Article co-authored by Kaitlyn Kugel

Shortly after the UK Supreme Court’s decision in the PACCAR case, [1] we wrote about its potential impact on pending and future UK securities recovery efforts. [2] Now, roughly two years later, we update you on its actual impact, delayed attempts to legislatively address the decision, and the future timing of any reversal.

The PACCAR Decision and Its Effects

Section 58AA of the Courts and Legal Services Act 1990 states that contracts for “advocacy services, litigation services or claims management services” are Damages Based Agreements (“DBAs”) and subject to a number of specific regulatory requirements. [3] In PACCAR, the court held, for the first time, that Litigation Funding Agreements (“LFAs”), in which third-party litigation funders pay for legal fees in exchange for a share of a successful litigant’s recovery, are DBAs subject to these additional regulations.  LFAs are widely used by law firms and funders to bring group shareholder actions in the UK, and this decision has had significant impacts on the way these actions are structured, since many existing LFAs could violate DBA rules.  DBA regulations, for example, prohibit funding agreements with contingency fees from participating in Competition Action Tribunal (“CAT”) opt-out collective proceedings and cap contingency fees at 50% of net recovery in opt-in cases, meaning that some LFAs in ongoing cases now potentially violate these rules.

The PACCAR decision caused organizers to scramble to review their existing agreements and revise fee structures in future cases to ensure compliance.  This resulted in some delays in ongoing actions, as organizers review their LFAs, and impacted the number of new actions filed, since organizers have been forced to revise their agreements and rearrange existing fee structures before filing new cases.  Some have been slower than others to do so.

It has also added uncertainty around litigation funding in the UK, making some cases potentially less attractive for litigants.  The UK already faces significant obstacles to investor involvement due to risks relating to adverse costs and reliance evidence and the DBA issue adds a further challenge that may reduce participation as investors consider it a jurisdiction in flux.

Political Setback for a Legislative Reversal

This turmoil prompted Parliament to draft the Litigation Funding Agreements (Enforceability) Bill (the “Bill”).  The Bill changes the definition of DBAs in Section 58AA to specifically exclude LFAs. [4] It also applies retroactively, eliminating any potential PACCAR challenges to existing LFAs.  The bill had broad cross-party support and was expected to pass into law, but there were still points of contention that needed to be resolved.

On May 22, 2024, UK Prime Minister Rishi Sunak delivered a surprise announcement dissolving Parliament and calling for a snap general election on July 4, despite having until next January to hold such elections.  This move forced Parliament into a two-day “wash-up” session in which it had to quickly decide whether to pass or reject all outstanding bills before all legislating was suspended until the new government is elected.  Faced with the short time during the wash-up session in which to resolve disputes, however, Parliament voted to reject the bill.

Future Timing for Legislative Change

The bill will now have to be reintroduced and considered by the new government, which will formally begin on July 17, 2024. [5] Then it will begin the slow process toward becoming law.  While we think it is still likely to be approved, there are always unknown variables when a new government is elected and it is impossible to determine whether the new government will look as favorably on the bill as the prior government.  In the meantime, there will continue to be uncertainty over whether organizers’ LFAs comply with DBA requirements, which destabilizes the litigation environment in the UK, likely reducing the pace of new litigation and investor interest in such cases.

FRT will continue to monitor the political environment in key jurisdictions like the UK to keep its clients informed on how such forces impact shareholder litigation.

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Related: Impact of PACCAR on UK Securities Claimants

Appendix:

[1] R (on the application of PACCAR Inc) v. The Competition Appeal Trial [2023] UKSC 28.

[2] Michael Lange, Esq., Impact of PACCAR on UK Securities Claimants (August 31, 2023).

[3] Courts and Legal Services Act 1990, c. 41, §58AA.

[4] Litigation Funding Agreements (Enforceability) Bill 2023-4, HL Bill [72].

[5] “General Election 2024 timetable.” UK Parliament, https://www.parliament.uk/about/how/elections-and-voting/general/general-election-2024-timetable/