Earlier in March 2024, the Secretary of State for Justice, Rt Hon Alex Chalk MP announced that the Government will introduce new legislation around litigation funding. For those who (understandably) don’t follow the twists and turns of litigation funding, and to illustrate its importance, without funding it may not have been possible for Alan Bates and the sub-postmasters to bring a legal claim against the Post Office.

What is litigation funding?

Broadly, litigation funding is when a third party with no connection to the litigation, funds all or part of a party’s legal costs associated with a piece of litigation. Depending on the terms of the agreement, the litigation funder would then receive a percentage of the damages or a multiplier of the costs spent, if the party whose case is being funded wins. Often (as was the case with Alan Bates), a litigation funder may offer funding for a group of litigants to bring a legal claim. Litigation funding provides  a variety of claimholders the opportunity to fund potentially expensive litigation, but without the risk of paying up front legal fees and therefore levelling the playing field.

What are the changes?

In the summer of last year, the UK Supreme Court handed down an important decision in R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal and others [2023] UKSC 28, or PACCAR as the case has become known. 

The court had to consider whether the litigation funding agreement (LFA), (which is the agreement between the litigants and the third-party funder) amounted to a damages-based agreement (DBA). For ease of reference, a DBA is a type of ‘no win no fee’ funding arrangement usually between a litigant and their solicitor. If the solicitor’s client wins, the solicitor is entitled to receive a percentage of any damages recovered from the losing party. If the solicitor’s client loses, the client will usually have nothing to pay to the solicitor, and the solicitor does not receive payment for their legal fees.

The UK Supreme Court decided in PACCAR that a litigation funding agreement is a DBA. There are strict rules around DBAs, and some current LFAs may not comply with those strict rules. This now means that many litigation funding agreements already in place are not enforceable.

What does the Government’s announcement mean?

Inevitably, litigation funders will look at other ways to recover their investment, such as by way of recovering their outlay on a multiple basis, rather than a percentage. We will likely see a rise in litigation following from this.

We will need to wait and see what the legislation says around litigation funding, but from what the Minister has said, it does seem that the Government will introduce new legislation that will in effect overrule the UK Supreme Court.