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The Secret Weapon in David and Goliath: Litigation Funding




By Chrisllynn Siah


Introduction

One of the most popular ways the Horizon Post Office scandal has been described is “the most widespread miscarriage of justice the [Criminal Cases Review Commission] has even seen”.[1] When we try to materialise the idea of justice, our attention is often drawn to Article 6 of the Human Rights Act 1998, which protects citizens’ right to a fair trial.[2] Ensuring a fair trial is one of the most fundamental pathways of delivering justice, but the reality is that access to courts is disproportionately accessible to those with deep pockets. In the case of the Horizon Post Office scandal, taking legal action against the United Kingdom Post Office naturally meant high legal costs, increasing the barriers to justice. The litigation funding sector, however, created a more level playing field for sub-postmasters and sub-mistresses in the UK. The Post Office scandal is one of many examples of how litigation funding has facilitated greater access to justice, but the recent case of R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents) [2023] UKSC 28 (“PACCAR”) raises doubts on the future of the litigation finance sector and has far-reaching consequences for access to justice in the UK.

 

What is litigation funding?

Put simply, litigation funding is when an external party “with no prior connection to the litigation” provides financial assistance for all or part of the legal costs of the litigation.[3] The umbrella term

encapsulates multiple funding methods, including: third party or commercial litigation funding agreements, retainer-based funding agreements, insurance policies, and disbursement funding loans.[4] An example of a retainer-based funding agreement is a damages-based agreement (“DBA”). This is a “no win, no fee” arrangement that is generally entered into by a claimant and their solicitor.[5] The solicitor’s entitlement to payment for their legal services will only arise if the claimant wins their case and is able to recover damages from their opponent.[6] This payment is calculated by taking a percentage of the total damages recovered and is capped at 50%.[7] 

 

Litigation funding is a sector that has grown extensively in recent years. In 2022, the top 15 funders in the UK controlled £2.2 billion in assets. This was nearly double of the £1.3 billion reported in 2018.[8] 

 

The Horizon Post Office scandal

Shortly after Horizon, the computer system, had been implemented by the Post Office in 1999, staff began raising issues with it, stating that the system would falsely report cash shortfalls.[9] The Post Office Management paid no attention to these concerns and branch accounts around the country continued to show financial irregularities.[10] Due to the lack of support, many sub-postmasters and mistresses used their own money to make up for the financial discrepancies.[11] More significantly, between 1999 and 2015, 900 sub-postmasters and sub-mistresses were wrongly prosecuted for false accounting and theft because of errors in information provided by Horizon.[12] 

 

In 2017, 555 sub-postmasters took legal action against the Post Office, which then agreed to pay £58 million in compensation. While campaigners have won the right for their cases to be reconsidered, the courts have been slow to catch up – only 95 convictions have been overturned as of 15 January 2024.[13] In response to the public outcry about the gross injustice that had been committed, Post Office Minister Kevin Hollinrake has said that a £1 billion budget has been allocated for compensation payments, and Prime Minister Rishi Sunak told the House of Commons in early January 2024 that sub-postmasters and postmistresses who were convicted in England and Wales “would be cleared of wrongdoing and compensated under a new law.”[14] The details of the law have yet to be fully published, but Downing Street has said that “it would amount to a blanket overturning of convictions tied to the faulty Horizon IT system.”[15] 

 

It is fair to say that without litigation funding, the sub-postmasters would not have been able to take their case from Fenny Compton Village Hall to the High Court, achieving their “David and Goliath” style victory[16] 

 

The PACCAR Case

The future of litigation funding, however, has been made murky after the Supreme Court ruling in PACCAR.

 

PACCAR is a competition class action that went before the Competition Appeal Tribunal. The class action was brought on behalf of a group of heavy goods vehicles buyers who claimed to have suffered loss due to a cartel between major truck manufacturers that was discovered by the EU commission.[17] Third party funding was relied on to pay lawyers and purchase insurance to protect against an adverse costs award in case the claim failed.[18] 

 

The main issue arose when the defence argued that the litigation funding agreements in this case should be classified as damages-based agreements under Section 58AA(3)(a) of the Courts and Legal Services Act 1990 (“CSLA”).[19] This section defines a DBA as an agreement “between a person providing advocacy services, litigation services or claims management services”, and the recipient of the services. Additionally, under the agreement, the recipient must make a payment to the one providing the service if they receive a “specified financial benefit” related to the matter that the services were provided for, and the amount paid must be calculated using reference to the “amount of financial benefit obtained”.[20] Under the CLSA, the DBA would only be enforceable if it complies with the rules set out in the Damages-Based Agreements Regulations 2013 (“the 2013 regulations”).

 

The Supreme Court ultimately decided that the funders for the appellant did indeed provide “claims management services” as this includes “financial services or assistance, even when not directly involved in managing a claim by lawyers”.[21] Furthermore, the return on the funders’ investment was dependent on the level of damages acquired by the action.[22] The funding agreements fulfilled section 58AA(3)(a), which meant that they were considered DBAs under the CLSA.[23] However, since they did not comply with the rules set out in the 2013 regulations, they were unenforceable.[24] 

 

Repercussions of PACCAR

PACCAR set the precedent that the term “claims management services” in Section 58AA(3)(a) covers litigation funding agreements. These agreements need to comply with the conditions set out in the 2013 regulations in order to be enforceable. This came as a shock to the legal world, as industry practice did not typically require adherence to the 2013 Regulations. Funders instead worked on the assumption that the funding agreements were “ordinary binding contractual agreements”.[25] 

 

Funders and claimants must now draft amendments to existing funding arrangements to ensure that they are enforceable. This includes ensuring that the agreement includes pricing justifications (pursuant to Regulation 3(c) of the 2013 regulations) and altering the amount of remuneration payable to the funder to be under 50% of the sums recovered by the claimant (pursuant to Regulation 4(3) of the 2013 regulations).[26] 


Access to justice

Ultimately, while the Supreme Court’s decision will lead to delays and problems, it is not an Armageddon either. Concerns have mostly arisen from the ambiguity that the judgement has caused, and the government has expressed their commitment to preserving the existence of litigation funding. Justice Secretary Alex Chalk intends to reverse “the damaging effects of the PACCAR judgement “at the first legislative opportunity”. In December 2023, several peers in the House of Lords proposed an amendment to the Digital Markets, Competition and Consumers Bill to reverse the effects of the PACCAR judgement.[27] The amendment was decided to be outside of the bill’s scope, but the government remains supportive towards any change to protect this sector.

 

Questions have also been raised about how this impacts access to justice. An immediate issue stems from the fact that litigation funding agreements now have to adhere to the 2013 regulations. This means that firms that continue to engage in litigation funding will be doing the same amount of work for fewer returns because the remuneration payable to them has now been restricted to 50% or less of the awarded fee. Despite the reduction in profits, firms will still have to bear the same costs. Litigation funding has now been made significantly less lucrative because the possibility of making large profits has been eradicated. If funding arrangements become less appealing and fewer firms decide to engage in the practice, access to justice would undoubtedly be hindered.

 

This is, of course, not to say that access to justice will be made more challenging for everyone. Wealth disparity has created a reality where not everyone has an equally smooth path to justice. The argument being made here is that those in a similar financial situation as the claimants in the Post Office Scandal will be disproportionately impacted by the PACCAR ruling and its consequential impact on litigation funding. Alan Bates, former sub-postmaster and lead claimant of the 2017 High Court Action, and his fellow sub-postmasters are testimony to how funding can turn the tides of justice. In his recent Financial Times article, Bates highlighted that taking legal action against the Post Office was a “hugely expensive and gruelling legal battle” that they “would almost certainly have lost” without the financial assistance they received from litigation funding.[28]

 

People will likely be forced to pursue the more traditional approach to accessing justice: financing the entire litigation process with their own money. However, the Post Office Scandal shows us why this will simply not be feasible for some. The 555 sub-postmasters were awarded £57.75 million for the 2017 High Court victory.[29] Despite the hefty sum, each sub-postmaster only received around £20,000– the other £46 million went towards legal fees.[30] The complex nature of the court case undoubtedly contributed to the extensive legal costs, but the stark discrepancy illustrates that the exorbitant legal fees are not something average UK citizens have deep enough pockets to cover. Even if the fees were financed with the damages awarded, this would inevitably be a trade-off between legal fees and vindicated rights, going against the very notion of “justice”.

 

Assuming the PACCAR judgement had impacted the High Court Action, the litigation funder would have only been able to charge £28.875 million (50% of the awarded £57.75 million) or an amount that was deemed “reasonable”. Had this been the case, each of the 555 claimants would have received an approximate additional £30,000 each. This certainly would have been beneficial to the claimants, but likely not for the funding firm, who possibly incurs a loss in such a situation. Firms who choose to continue funding cases while acknowledging the risk that they may incur a loss could potentially devote less resources to the case in order to maximise profits. Comforting as it may be to know that they still choose to engage in litigation funding, the compromise in quality of legal counsel and justice is worrying. One wonders: is there any way that claimants can retain a larger share of the damages without receiving lower quality legal aid?

 

Exemplary damages

A potential solution is giving courts the power to grant exemplary damages. These would be awarded not to the claimant, but towards funders and other legal aid avenues.[31] Exemplary damages prevent claimants from losing a sizable portion of their compensation to legal fees and simultaneously ensures that funders still make profit. This aligns with the fundamental principle of justice: damages are meant to return the claimant to the same position as though no wrong was done to them. At the same time, firms can continue to provide the same high quality legal aid with the knowledge that they will be duly compensated. However, it is unlikely to see exemplary damages being implemented in the foreseeable future, considering that UK courts do not have a culture of granting exemplary damages. Nevertheless, exemplary damages are a potential avenue to mitigate the damage that PACCAR causes without reversing the actual consequences of the judgement.

 

Additionally, exemplary damages could foster more corporate responsibility. Claimants would not need to cough up the funds to finance a legal battle if there was no corporate wrongdoing to seek justice for. Exemplary damages would also deter corporations from pursuing complex legal action if they knew that the monetary loss they stand to incur is now significantly higher. It might encourage them to seek other methods of dispute resolution that are less costly and time consuming, such as a settlement.[32] This results in less pressure on litigation funders because settlements are still a legitimate avenue to justice despite requiring less time and fewer resources. Justice can continue being made more accessible without taking funders being required to shoulder as great of a financial risk.

 

Conclusion

It is true that PACCAR does not explicitly hinder access to justice. The judgement does not say, “It will become harder for the average British claimant to access justice because of the additional regulations litigation funding agreements now have to adhere to.” However, it would be prudent to recognize the obstacles PACCAR creates for average British citizens trying to access justice. Litigation funding upholds the principle that the financially powerful should help the financially powerless, and the Horizon Post Office scandal underscored this. The challenge now is ensuring that funders do not compromise on the quality of legal service they provide in a bid to lessen their costs and potential losses. Whether that be through exemplary damages or another method, it is imperative that litigation funding continues to exist. It is by no means the panacea for the justice gap, but if nothing is done, the less financially able will find no recourse in the law, despite it being promised to them.






References

[1] Race M, Kevin K and Sri-Pathma V, ‘Post Office Scandal Explained: What the Horizon Saga Is All About’ (BBC News, 23 January 2024) <https://www.bbc.co.uk/news/business-56718036> accessed 4 February 2024

[2] Human Rights Act 1998, s 6

[3] Practical Law Dispute Resolution, Amey M and Breckenridge S, 'Third party litigation funding in England and Wales: an overview' (Practice Note, Practical Law) <uk.practicallaw.tomasonreuters.com> accessed 4 February 2024

[4] ‘Funding arrangements—overview’ (Lexis+ UK) <https://plus.lexis.com/api/permalink/883e134d-158b-461d-b9ca-795a43cd9203/?context=1001073> accessed 5 February 2024

[5] ‘Supreme Court Deals Blow to Litigation Funders in the Cat’ (Slaughter and May, 1 August 2023) <https://my.slaughterandmay.com/insights/client-publications/supreme-court-deals-blow-to-litigation-funders-in-the-cat> accessed 5 February 2024

[6] Ibid

[7] Ibid

[8] ‘Litigation Funding – the UK and US Rankings 2023’ (The Legal 500) <https://www.legal500.com/practice-areas/litigation-funding-2023/#:~:text=In%20the%20UK%20alone%2C%20the,new%20entrants%20to%20the%20space> accessed 4 February 2024

[9] Soussi A, ‘The Great British Post Office Scandal Explained’ (Al Jazeera, 10 January 2024) <https://www.aljazeera.com/news/2024/1/9/the-great-british-post-office-scandal-explained> accessed 4 February 2024

[10] Ibid

[11] Ibid

[12] Ibid n 1

[13] Ibid n 1

[14] Seddon S and Wright G, ‘Post Office Scandal: Hundreds Could Have Convictions Overturned This Year’ (BBC News, 11 January 2024) <https://www.bbc.co.uk/news/uk-67932595> accessed 4 February 2024

[15] Ibid n 8

[16] Bates A, ‘Alan Bates: Why I Wouldn’t Beat the Post Office Today’ (Financial Times, 12 January 2024) <https://www.ft.com/content/1b11f96d-b96d-4ced-9dee-98c40008b172> accessed 3 February 2024

[17] ‘PACCAR – Supreme Court Throws Litigation Funders under a Truck’ (Simmons & Simmons, 26 July 2023) <https://www.simmons-simmons.com/en/publications/clkjuwvwa00buth1s7g02mp4v/paccar-supreme-court-throws-litigation-funders-under-a-truck> accessed 3 February 2024

[18] Ibid

[19] Diamond J, ‘Why Paccar Is a Catastrophic Decision’ (Law Gazette, 6 October 2023) <https://www.lawgazette.co.uk/practice-points/why-paccar-is-a-catastrophic-decision/5117468.article> accessed 5 February 2024

[20] Courts and Legal Services Act 1990, s 58AA(3)(a)

[21] Ibid n 19

[22] Ibid n 17

[23] Ibid n 19

[24] Ibid n 19

[25] Wheal R and others, ‘Upheaval in the Litigation Funding Industry: UK Supreme Court Rules That Many Litigation Funding Agreements Are Unenforceable’ (White & Case LLP, 2 August 2023) <https://www.whitecase.com/insight-alert/upheaval-litigation-funding-industry-uk-supreme-court-rules-many-litigation-funding> accessed 4 February 2024

[26] The Damages-Based Agreements Regulations 2013, regulation 3 and regulation 4(3)

[27] Ibid n 10

[28] Ibid n 10

[29] Business, Energy and Industrial Strategy Committee, ‘Post Office and Horizon - Compensation: Interim Report’ (UK Parliament, 17 February 2022) <https://publications.parliament.uk/pa/cm5802/cmselect/cmbeis/1129/report.html> accessed 25 February 2024

[30] Ibid

[31] Ishikawa T, ‘Post Office Scandal: Litigation Funding Is Not the Villain’ (Law Gazette, 19 January 2024) <https://www.lawgazette.co.uk/commentary-and-opinion/post-office-scandal-litigation-funding-is-not-the-villain/5118419.article> accessed 1 March 2024

[32] Ishikawa T, ‘Could Exemplary Damages Discourage Corporate Wrongdoings?’ (Law Gazette, 14 June 2023) <https://www.lawgazette.co.uk/commentary-and-opinion/could-exemplary-damages-discourage-corporate-wrongdoings/5116102.article> accessed 1 March 2024 

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