New UK law will provide clarity on funding for class action lawsuits

The UK government recently revealed plans to address uncertainties surrounding litigation funding agreements (LFAs) in investor class actions. These uncertainties arose following a July 2023 ruling in a class action case against PACCAR, a US vehicle manufacturer, where the Supreme Court deemed certain LFAs unenforceable. This ruling led to significant disruption in the litigation funding sector.
The case against PACCAR involved buyers of commercial trucks who alleged losses due to a cartel among major truck manufacturers. It was argued that the return for litigation funders depended on the damages awarded, making the funding agreement a ‘damages-based agreement’ (DBA). However, DBAs must adhere to regulations set in the 2013 DBA Regulations, which funding agreements typically do not comply with, leading the Supreme Court to rule them largely unenforceable.
Following this ruling, the industry worked on solutions to make litigation funding feasible for class actions. However, there was a decline in class action lawsuits, prompting the need for resolution on this matter. Last year, the Civil Justice Council provided recommendations aimed at restoring certainty for litigation funders and claimants.
The government’s proposed legislation seeks to clarify that LFAs are not considered DBAs, bringing relief to pension fund trustees in their litigation assessments. This move aims to establish statutory certainty, leading to an increase in investor redress cases and competing opt-in cases. Expectations include improved fee terms, simpler funding structures, and heightened competition in the market.
The legislation is anticipated to attract funders who withdrew from the UK market due to the previous uncertainties, resulting in more funding availability and a competitive market for investor claimants. This shift should also decrease enforceability risk for trustees entering LFAs and provide clear authority for engaging in funded securities actions under various commercial terms.
From an economic standpoint, the government highlighted that the Supreme Court ruling jeopardized the UK’s global status in dispute resolution, a vital component of the £42.6bn legal sector contributing to the economy annually. The planned legislation aims to mitigate repercussions of the PACCAR decision, restoring the standard position for funders to receive a percentage of claim proceeds on successful outcomes.
However, the legislative timeline remains uncertain, with the legislation expected to have prospective effects only, not retrospective. Ongoing cases under amended funding agreements will retain their status, emphasizing the urgency for funders to adjust agreements promptly. Looking ahead, more financing options are expected for future claims, though the impact may vary in practice for group claims under certain legislations.
In addition to the new legislation, the government is exploring further recommendations, including light-touch regulation of litigation funding that may replace the current self-regulatory approach. While the implementation of these recommendations is anticipated, specific timelines remain unclear. The Department of Justice spokesperson mentioned that parliamentary time will determine when the legislation will be introduced.