Court of Appeal ruling is a boost for litigation funders

A powerful Court of Appeal ruling unanimously dismissing a challenge to the validity of litigation funding agreements (LFAs) based on a multiple of funding provided will provide relief to the funding industry.

In Sony Interactive Entertainment Europe Ltd & anr v Alex Neill Class Representative Ltd, the chancellor of the High Court Sir Julian Flaux, deputy head of civil justice Lord Justice Birss and Lord Justice Green rejected the appellants’ arguments, which would lead to an ‘absurd result’.

The judges were ruling in a joint appeal being brought by defendants in relation to several class actions currently being brought in the Competition Appeal Tribunal. Defendants Sony, Visa, Mastercard and Apple argued that the various claimants’ funding arrangements were invalid because their LFAs amounted to damages-based agreements (DBAs), which are not permitted in the CAT. 

Sir Julian Flaux said: ‘The appellants [defendants] argue that where there is an express or implied cap on the funder’s return by reference to the amount of the proceeds or the undistributed damages, then the amount of the payment to the funder is “determined by reference to the amount of the financial benefit obtained” within section 58AA(3)(a)(ii) of the [Courts and Legal Services Act], making the LFA a DBA, which is unenforceable unless it complies with the DBA Regulations 2013.

‘Since the entire system of litigation funding is predicated upon the return which a funder makes being paid out of damages or the subset of undistributed damages, it is difficult to envisage in what scenarios, as a matter of practical reality, there would not be an implied cap even if there were no express one… the logical consequence of the appellants’ submission… is that it is difficult to see how any LFA could avoid being a DBA.’

The judge added: ‘Given that the entire landscape of collective proceedings in the CAT is one where third-party litigation funding of claims is required… the effect of the appellants’ argument is to produce the absurd result that funding under LFAs in the CAT would become practically impossible… Furthermore, given that an LFA which provided for a funder’s return as a multiple of the outlay without any sort of cap as an outer limit, if that were practically possible, would be an enforceable LFA, the equally absurd result is reached on the appellants’ case, that a cap on the funder’s recovery, which by definition protects the class and the class representative from having to pay excessive amounts to the funder, renders the LFA an unenforceable DBA.’

Flaux made clear that DBAs are agreements under which the representative’s fees are calculated or determined as a percentage of the damages recovered, and an LFA under which the funder’s fee is calculated as a multiple of its outlay is not a DBA. Agreeing with the submissions of Nicholas Bacon KC for the claimants, he said: ‘[T]he fee is determined by reference not to the damages recovered, but by reference to the amount of funding provided. The fact that the source of the fee paid is the damages does not turn it into a DBA, nor does the fact that there is an upper limit or cap on the funder’s fee recoverable by reference to the amount of damages recovered. The fee is still calculated or determined by reference to the amount of funding provided.

The Court of Appeal ruling will warmly welcomed by the broader funding industry because since the Supreme Court’s ruling in PACCAR, the vast majority of LFAs now provide for payment based on a multiple of the capital deployed or committed. Had the appeal succeeded, such agreements would have been rendered invalid, causing chaos for the industry. It remains to be seen whether the ruling will be appealed to the Supreme Court.

The cases in the joint appeal are: Sony Interactive Entertainment Europe Ltd & anr (appellants/defendants) v Alex Neill Class Representative Ltd (respondent/class representative); Visa Inc & ors (appellants/defendants) v Commercial & Interregional Card Claims II Ltd (respondent/class representative); Visa Inc & ors (appellants/defendants) v Commercial & Interregional Card Claims I Ltd (respondent/class representative); Mastercard & ors (appellants/defendants) v Commercial & Interregional Card Claims I Ltd (respondent/class representative); Apple Inc. & Apple Distribution International Ltd (appellants/defendants) v Kent (respondent/class representative); Apple Inc & ors (appellants/defendants) v Gutmann (respondent/class representative).