Supreme Court has set back access to justice

When the brilliant legal minds acting for PACCAR and DAF thought of pursuing the argument that litigation funding agreements (LFAs) were damages-based agreements (DBAs), one does wonder what they really thought their prospects of success were.

Until very recently, very few had seriously considered LFAs to be DBAs. The primary focus had instead been on the paucity of the DBA Regulations 2013. As Lord Justice Coulson said in the Court of Appeal’s decision in Zuberi v Lexlw Ltd, 'nobody can pretend that these Regulations represent the draftsman’s finest hour', prompting constant talk of reform over the last decade, which had as one of its core issues the need to clarify that LFAs were not DBAs.

As early as 2015, the DBA Reform Project’s Drafting and Policy Issues included a chapter (10) titled 'Excluding Third Party Funders’ Litigation Funding Agreements from the Ambit of the DBA Regulations', in which the issue was set out as follows: 'It was argued in some quarters that LFAs were inadvertently caught up by the 2013 DBA Regulations (although, as a matter of statutory drafting and interpretation, it is very strongly arguable that the Regulations do not cover LFAs). However, for the removal of any slight prospect of satellite litigation on this point, however vainly pursued, the Ministry of Justice has conveyed the view to the working group that LFAs should be expressly omitted from the scope of the 2015 DBA Regulations.'

The proposed DBA Regulations 2019, prepared by Nicholas Bacon KC and Professor Rachel Mulheronwhich, also reiterated the MoJ’s view that LFAs should be expressly excluded.

So all things considered then, hats off to the PACCAR and DAF legal teams for persevering with the unlikely and yielding this week's Supreme Court judgment. Now to the consequences.

Much to the annoyance of the industry doomsayers, the litigation funding industry will adapt rapidly in the best evolutionary traditions of financial services industries, whether it be moving to a multiple-based model, adapting LFAs to be DBA compliant or operating LFAs under DBAs. Some in fact are already ahead of the game – Litigation Capital Management Ltd’s RNS to the London Stock Exchange the day after judgment was handed down, stated it would have 'very limited or no impact on LCM’s portfolio'.

A more serious consequence arises from Lord Sales stating in his leading judgment that 'even if … it is desirable in public policy terms that third party funding arrangements … should be available to support claimants to have access to justice … this is not a reason why there should be any departure from the conventional approach to statutory interpretation'. So when funding is involved, it will give defendant lawyers encouragement to 'vainly pursue' technical arguments which disregard intent or access to justice. How might this manifest itself?

Given a financing agreement does not fit a regulatory framework designed for solicitor’s instruction terms (and a poor one at that), defendant lawyers will no doubt look to exploit any potential gaps in DBA-compliant LFAs. They may also be encouraged to run arguments that funders are inadvertently caught up by champerty and maintenance by virtue of being a representative under the regulation, or that multiples somehow equate legally to a percentage share of the damages. While these are obviously not the intention of the DBA Regulations, neither was it the intention to cover LFAs and it didn’t stop defendant lawyers from that 'vain pursuit'.

Opportunities for attack on funding could also stem from litigation funding now being considered to be claims management services. Does that make litigation funding a VAT-able service? It would naturally seem to fall under standard financial services exemptions but as the Supreme Court has deemed it a claims management service, would the HMRC give such an exemption? Until HMRC does, why would a defendant lawyer not vainly pursue an attempt to make litigation funding VAT-able, so as to make it less economic for funders and weaken their claimant opponents?

On the regulatory front, the judgment specified that claims management services did not have to include 'regulated claims management services' companies. However, does the FCA now need to regulate the industry on the basis it is providing claims management services? If so, that will take time as the FCA is not set up at the moment to regulate the industry. And while that happens, what stops a defendant lawyer from vainly pursuing an argument that LFAs should be voided because funders are insufficiently regulated?

Some of these scenarios may seem unlikely but none more so than LFAs being considered DBAs was likely until recently. But what this has achieved is a significant hit on the credibility of this jurisdiction in commercial terms. The judgment may have explained why this was not a legal absurdity but there is a degree of commercial absurdity that undermines confidence in the jurisdiction as an investable area. The fact that there is a risk that every winning LFA that received a return linked to a percentage share of the damages may now become targets for recovery by claimants who have already paid in itself undermines the basic principles of business integrity. With other jurisdictions opening up to funding and more capital flowing into the sector, litigation funding capital will simply move to more commercially sensible jurisdictions, like any other form of investment capital would. And arguably, this seems to be a far greater threat to London’s pre-eminence in law, than Brexit does to London’s status as a global financial centre.

But the biggest loser of them all is access to justice. This judgment affects funded group action and competition claims – claims which gives thousands of people who otherwise cannot pay for the cost of accessing justice the opportunity to seek recourse. Regardless of the legal or commercial arguments that follow, on the ground level, this judgment can only be seen as a step back in respect of access to justice.

Tets Ishikawa is managing director of LionFish Litigation Finance