Investor Evolution in Commercial Litigation Finance

By John Freund |

The following article is part of an ongoing column titled ‘Investor Insights.’ 

Brought to you by Ed Truant, founder and content manager of Slingshot Capital, ‘Investor Insights’ will provide thoughtful and engaging perspectives on all aspects of investing in litigation finance. 

EXECUTIVE SUMARY

  • The investor base in litigation finance continues to evolve
  • The asset class is becoming more institutional as it produces more data and enhances transparency
  • Litigation finance is entering its institutional capital phase

INVESTOR INSIGHTS

  • Restrictive capital sources will be replaced by less restrictive capital sources
  • Fund managers must ensure their equity value is not impaired through their fundraising decisions
  • Investors should monitor supply / demand characteristics of the asset class to ensure pricing is not eroded through excess capital supply

As with any new industry, there is much risk and trepidation with respect to whether (i) the concept will work, (ii) the concept will be profitable, (iii) the concept will be scalable and (iv) the concept will attract investment support.  Oh, and in the case of litigation finance, (v) whether the concept is in fact legal.

Let’s tackle legality first.  Without going into a long dissertation on champerty, maintenance and barratry, justice systems around the world have understood the stark reality of the construct of their respective modern day justice systems. That is to say, the playing field is in no way even – it is markedly tilted in favour of those parties with deep pockets that can afford some of the best lawyers in the world.  Recognizing the inequality of their own systems, the fact that litigation costs are increasing at more than three times the rate of inflation (about 9% per annum in the US), and the fact that litigation is being used as a business tool to extract advantage, justice systems globally have been increasingly receptive to a third party providing financing to support “David” in his fight against “Goliath”.  The outcome of this global judicial reform (mainly driven by precedent, but in some cases by legislation) is that the little guy is fighting back and now stands a chance at winning against the large corporation which has much more time, money and resources at its disposal.

The trend is strong and increasing, so much so that it has become a political issue in certain jurisdictions (as evidenced by Australia’s recent ruling to force funders to become licensed), and has attracted regulation in both consumer and commercial segments of the market.  One could cite efforts by many funders, including Omni Bridgeway (formerly IMF Bentham) in Australia (and recently in Canada – Bluberi) and Burford Capital in the USA, for funding cases that ultimately went on to create an environment in which litigation finance has flourished.  And the industry is just getting started.

As it relates to the first three concerns about whether the concept will work, will it be profitable and is it scalable, empirical results indicate that the answer has been a resounding “YES!” to all three. So, let’s take a deeper look at how the industry got to the point where it was able to validate litigation finance as an asset class, how the investor base has evolved over time, and what the implications are for the investors of the future.

Humble Beginnings

Risky strategies attract risky money.  In the early days of most litigation finance funds, fund managers are selling a concept and their own capabilities, but not much else.  When the risk level is that high, it attracts a certain type of capital.  On the one hand, it attracts high net worth individual capital that has been created by those who have taken a certain degree of risk in creating their own nest eggs and are very comfortable assuming similar risks.  These investors tend to start off taking a bit of a “flyer” on investing in single cases where the risk/reward dynamic is asymmetrical, meaning the probability weighted upside is much lower than the probability-weighted downside.  Let’s put some numbers around this concept to illustrate:

Assume I have a case that requires $1MM in financing and would pay out as much as $10MM to the funder if the case is successful.  If the probability of winning is 50% and the probability of losing is 50% (as is the case with most trial outcomes), then the probability weighted outcomes are as follows:

Losing:       50% * $1,000,000 = $500,000 probability-weighted loss

Winning:     50% * $10,000,000 = $5,000,000 probability-weighted win

Investors would view these outcomes as asymmetrical meaning the gain that would be generated in a win scenario is multiples of the loss that could get experienced.

On the other hand, asymmetric investments are also very attractive to sophisticated hedge funds who get paid to take risk, but in a methodical and calculated way (at least that is the theory).

Accordingly, if you look at the early days of the larger fund managers in the asset class, many of them started off by raising capital initially for single cases and eventually for portfolios of investments, as this asset class is particularly well-suited to portfolio theory (as discussed in my three-part series on portfolio theory).  In particular, those hedge funds that had a distressed credit background and who were accustomed to investing in sticky situations involving litigation were particularly comfortable with and attracted to the asset class.

While I don’t view the asset class as a “credit” based strategy due to the non-recourse nature of the investments (that is “equity” in my mind), it has nonetheless attracted credit hedge funds. Then there are hedge funds that have more discretion as to what they can invest in, and some of those fund managers invest in debt and equity of public companies where the outcome of a litigation has a significant impact on the value of the underlying securities.  So, while they are investing in publicly-listed securities, they are ultimately making a call on the outcome of the underlying litigation, which is a natural investor for litigation finance given the similarity of the risk/reward profile and their understanding of litigation.

Public Markets

An interesting dynamic was at play in the early days of litigation finance in the public markets, specifically the UK markets.  Typically, you don’t see business in new industries being established in the public markets (although Canada’s cannabis market would prove me wrong), other than perhaps venture exchanges or through reverse take-overs which create a ‘liquid currency’ (freely tradable shares) to help raise capital, provide investors with liquidity to sell their shares if the thesis was flawed and to use as acquisition currency where an acquisition strategy was relevant.

In the UK, litigation finance took a non-conventional path.  First to ‘go public’ was Juridica through a closed-end fund structure.  In speaking with Tim Scrantom, a founder of Juridica and a pioneer in the litigation finance industry, the public vehicle structure was a condition of raising capital from wealth management firms, specifically Neil Woodsford’s Invesco Perpetual fund which could not invest in private structures at the time, but loved the idea behind the litigation finance industry.  With Neil, who was described as the ‘Warren Buffet of the UK’ at the time, the rest of the market followed to the point where Juridica was able to raise a significant amount of capital in a very short period of time, all with the condition that the vehicle be publicly listed to ensure investor liquidity.  With Juridica paving the way for a public listing, and with all of the hype around the opening of the UK litigation finance space, Burford was soon to follow with a more traditional common stock offering.

On the other hand, many fund managers who were raising money through private vehicles found it frustrating to raise capital from private individuals as it invariably took a lot of time and attention away from running the operations of the business, and they would ultimately churn through their investors, especially if they didn’t produce sufficient cashflow before their next tranche of investments required capital.  In order to solve the problem of constantly fundraising while scaling their operations, some groups decided to raise permanent capital through public markets.  First to list publicly was Omni Bridgeway in 2001 (formerly IMF Bentham) in Australia, then Juridica in 2008 and Burford Capital in 2009, as previously referenced, and most recently LCM Finance, which originally listed in Australia and then moved executive offices and its listing to the UK markets.  Accordingly, I would suggest there are a disproportionate number of fund managers in litigation finance that are publicly listed in relation to the nascency of the asset class.

Many other alternative asset classes have ultimately made their way into public markets, but typically have only sought a public listing when their enterprises approached a sufficient scale such that there was a dependable cycle to their financial results and cashflows and sufficient diversification in their portfolios.  Some litigation finance managers ‘grew up’ in the public markets, which is not always the most comfortable training ground for companies. Nevertheless, the public market participants have so far been successful with a few bumps along the way.  The speed at which litigation finance has tapped the public markets was always a surprise to me, but having undertaken fundraising in the past, I clearly see the benefits of a permanent capital vehicle.  The issue of whether or not litigation finance is an asset class well suited for public markets is a topic for another day, as there is a certain non-recurring nature to the underlying cases and volatility in cashflows that make it a bit of a misfit, but then the attractiveness stems from the non-correlated nature of the investments.  Oddly, being publicly listed adds an element of correlation to an otherwise non-correlated investment. Let’s not even talk about the issue of ‘marking-to-market’ litigation investments, also a topic for another article.

The other benefit of having a public vehicle is that it has allowed these managers to issue relatively inexpensive public debt to reduce their overall cost of capital (this issue will be revisited when we speak to the next wave of investors), which would be difficult to impossible in the private markets.  Lastly, most managers have since raised private partnership vehicles to leverage (not in the debt sense of the term) their public equity and to smooth out their earnings, although recently, and surprisingly, some managers are foregoing management fees in exchange for greater upside participation through an enhanced carried interest in the outcomes of their portfolios (which eliminates one of the benefits of using management fees to smooth earnings).

The ability for fund managers to raise public capital was also an important evolution for the industry as it brought litigation funding to the forefront within the investment community, and by virtue of their financial disclosure requirements, provided a level of transparency that other litigation funding companies could leverage to raise their own private funds.  Never underestimate the value of data when raising capital. The industry owes a debt of gratitude to the pioneers that broke new ground and laid the foundation for the rest of the industry.

Institutional Investors

A key part of the evolution of the asset class has also been the active participation of family offices who have made a meaningful impact to the industry.  Some of these family offices, like those that created Vannin and Woodsford, have made a significant investment to the industry by starting and investing in their own litigation finance companies.  Others have decided to construct their own portfolio across a number of different funds and/or managers and strategies to achieve different objectives, with the overarching interest of being exposed to a non-correlated investment strategy that produces strong risk-adjusted returns.  Private equity groups are also actively investing in the sector, either as passive LPs in “blind pool” funds or investing directly into new managers.

Endowments and Foundations

Within the endowment and foundation world, there is a bifurcation between those groups that are early entrants and those that follow the broader market.  In the litigation finance space, endowments like Yale, Harvard and Columbia, moved decisively a number of years ago to make significant investments in a number of litigation finance managers and continue to invest to this day, which speaks volumes of their experience with the asset class (although it may still be ‘early days’ in terms of fully realized portfolios).

Many endowments and foundations have been sitting on the sidelines with good reason.  While the industry has been in existence for upwards of two decades, depending on the jurisdiction, there are few fund managers that have more than one fully realized portfolio (beware duration risk) and many fund managers market their funds off of a handful (or fewer) of case realizations.  Having been on the reviewing side of the ledger, I know enough to know that a few cases does not a fully realized portfolio make.  These investors have been patiently learning and investigating what the asset class is all about and waiting for the best entry point.  I expect to see a whole new series of entrants from the endowment and foundation space as more data is produced by the industry and more comfort is gained from the consistency of returns and manager’s ability to replicate their initial performance (termed “persistency” in private equity circles).

Pension Plans and Sovereign Wealth Funds

Until recently, it was felt that the industry was not large enough to be attractive to large sovereign wealth funds and pension plans that typically have minimum investment allocations in the hundreds of millions. However, as Burford and Omni Bridgeway have recently launched funds in the $500 million to $1 billion range, we are starting to see interest from this part of the market.  In fact, a sovereign wealth fund, is a single investor in a $667 million separately managed account managed by Burford pursuant to its recent capital raise.  Many of the top five sovereign wealth funds in the world are rumoured to be actively looking at investing in the litigation finance market.  While I expect continued interest, the industry is not so large as to allow for many large sovereign wealth funds and pension plans, and so I don’t expect this to be a large segment of the investing market, as measured by number of investor (but it will be, as measured by dollars).  Of course, the concern with attracting large amounts of capital is that it forces managers to accept larger amounts of capital than they can responsibly invest, which creates distorted incentives and a misalignment between investors and managers.  I hope the industry continues to maintain its discipline in this regard, but I know some will succumb to the lure of larger amounts of capital at their own peril.

Beware Conflicts

One of the very early entrants into litigation finance in Germany was Allianz, a large German insurance company with over $100 billion in gross written premiums (at the time). It stands to reason that an insurance company would be an early mover in the marketplace as there is no entity better placed than an insurance company to have a significant depth of data about case outcomes upon which they can analyze risk and reward.  The following excerpts are from an article written by Christian Stuerwald of Calunius Capital LLP in January 2012 which aptly describes the reasons for their exit:

“The business grew, quickly became profitable and expanded into other jurisdictions, mainly Switzerland, Austria and the UK….

“…, with time and growing market penetration and acceptance the cases became bigger; as claim values grew, so did the size of the defendants,” …”that meant that more and more often cases would be directed against large corporate entities.” “This is really where the problems began, because most corporate entities, certainly the ones that are domiciled in Germany, are customers of Allianz, typically of course in the insurance sector.”

“Because of the nature and sheer size of the organisation it was not always easy to detect potential business embarrassment risks in time, as the checks needed to be done on a global basis. This led to some instances where a litigation funding agreement was entered into when it was discovered that the case was directed against a long standing corporate client, who declared himself not amused when the fact of funding was disclosed.”

Which led to the ultimate conclusion:

“…it was decided to keep the business and place it into run off,”.

The same phenomenon applies to hedge funds that have many similar relationship conflicts.  Hedge fund conflict checks have presented significant issues for certain funders who have spent time analyzing cases only to find out at the last minute that the case presents a conflict for their main investor, with many of these investors having veto rights to avoid this very situation.  For funders, this is a bit of a double whammy, as not only are they prevented from making a good investment, but they also suffer reputationally with the law firm that brought them the case, which may have longer term implications for origination.

It is my opinion that anyone that imposes investment restrictions on their fund managers will not be long for the world of investing in litigation finance funds, as there will be many new investors that do not impose the same restrictions on their fund managers.  As a fund manager, I would never accept specific case restrictions (other than concentration limits) as they would interfere with my ability to produce returns, foster relationships within the legal community and ultimately make me uncompetitive.

I further believe that the investors who invest in hedge funds should not be concerned with the specific contents of the hedge funds’ litigation finance portfolio.  Rather, they should take the enlightened perspective of their investment as a financial hedge against any other pieces of litigation in which they otherwise find themselves (i.e. they may lose their case, but their hedge fund investment just increased in value because it won another litigation).  I think it is naïve to believe a case with good merits will not get funded if one hedge fund does not provide the funding due to a conflict, as meritorious claims are the very reason the industry exists, and so relationship-based restrictions are not effective in the context of the industry.   Nevertheless, capital will chase away restrictions in time, it always does.

More Investors are Better

The other aspect of the litigation finance community that I have found a bit perplexing is that certain managers, presumably in an effort to expedite their fundraising efforts, have accepted significant investments from one or two large investors, typically hedge funds.

On the upside, it makes for a more efficient fundraise – a few meetings and you are done (believe me, I understand the allure).  On the downside, those investors now control your business and have a significant influence on the Management company’s equity value.

It has long been known in private equity that you never want a limited partner to ‘own the GP’.  I am not referring to ownership in the traditional sense, although that occurs too.  Rather, in the sense that if you have one or two meaningful investors and they decide to stop funding your business plan, you are then scrambling to find a replacement with a big question mark hanging over the managers’ head – “why did your prior investor stop investing?”.

Instead, if you have a broad-based set of investors in your fund (with no single investor providing more than, say, 15% of your capital), you can easily explain why a specific investor exited.  The persistency in capital raising and fund performance is what gives rise to equity value for the GP.  If you don’t have one of the two under your control, the equity value of the GP is significantly impaired.

So, my advice to litigation finance managers is to ensure diversification in your investor base as well as your investment portfolio.  Of course, I appreciate that in the early days of a fund manager’s evolution, they may have to accept some investor concentration to establish the business. This is perfectly acceptable as long as the capital doesn’t have too many conditions that limit your ability to raise capital from others in the future.

Investors of the future?

In the current Covid environment, I would expect to see hedge funds that have increasingly played a role in litigation finance pivot out of litigation finance to chase their more typical distressed credit opportunities that may provide a superior potential return profile. While this dynamic may not last long, it does remove one competitor type from the litigation finance community which should benefit all other litigation finance funders.  For now, I view this as a short-term phenomenon.

The more significant trend, I believe, will be the emergence of the pension plans fueled by their relatively low cost of capital.  For pension plans whose cost of capital is dependent on the discount rate applied to their pension liabilities to determine the return profile necessary to ensure the plan remains well capitalized and preferably growing, litigation finance has not been an active investment to date.  However, as more and more data is produced and the level of transparency becomes elevated, pension plans will apply their deep analytical skills to the industry and make the decision that this is a viable asset class in which to invest and has the benefit of non-correlation which may be a very important characteristic depending on the specific plan’s life cycle.

I would also expect to see continued strong interest from the endowment, foundation, family office and hedge fund markets as the industry becomes more transparent and data-centric, and the investors that heretofore have been educating themselves about the market start to allocate capital.  I would also not be surprised to see sizable asset managers (think Blackstone, KKR, Apollo, etc.) and sovereign wealth funds enter the market and perhaps even make a move to take some of the publicly listed companies private and internalize the operation so they can not only invest a significant amount of their own money in the platform itself, but also as a permanent vehicle to continue to recycle and compound the returns they are achieving, perhaps at the exclusion of other investors or perhaps as a platform from which to scale further.

Of course, technology has traditionally proven to ‘throw a wrench in the works’ by disintermediating many industries, and I expect litigation finance will be no different.  As an example, crowd funding is nascent but becoming a popular investor platform that appears to be attracted to litigation finance.  I say this because I think we need to be open about the possibilities for sources of financing in the future.  I would also look to the private equity markets for guidance in terms of alternative avenues for fundraising as they are some of the more sophisticated alternative investors in the world (in the words of Wayne Gretzky “…skate where the puck is going…”).

Investor Insights

It perhaps goes without saying that the litigation finance asset class is here to stay.  While there may be challenges, regulatory, judicial and otherwise, the asset class has shown to prevail against formidable challengers to date because the asset class is both efficacious and beneficial for society.  As I have written before, this is an Impact Investing asset class.

As the asset class gains scale and awareness, the investor base will change and the changes may be dramatic.  Fund managers who will be raising money should be aware of these changes so they can anticipate and adapt and position their fund offerings to maximize success.  As always, diversification is critical to prudent investing in the asset class, whether from the perspective of fundraising or case investing.  Accordingly, fund managers should be thinking somewhat selfishly about their own equity value when fundraising and investing their capital.

Edward Truant is the founder of Slingshot Capital Inc., and an investor in the consumer and commercial litigation finance industry.  Ed is currently designing a product to appeal to institutional investors.

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PACCAR’s tidal wave effects: Understanding the Legal, Financial and Policy impacts of a highly controversial ruling

By Ana Carolina Salomao |

The following is a contributed piece by Ana Carolina Salomão, Leila Zoe-Mezoughi, Micaela Ossio Maguiña and Sarah Voulaz, of Pogust Goodhead.

This article follows our previous publication dated 10 October 2023 regarding the Supreme Court ruling in PACCAR[1] on third-party litigation funding agreements which, very simply put, decided that litigation funding agreements (“LFAs”), permitting funders to recover a percentage of damages, amounted to (“DBAs”) damages-based agreements by virtue of s.58AA of the Courts and Legal Services Act 1990 (the “1990 Act”). As such, all LFAs (including those retrospectively drafted) were consequently required to comply with the Damages-Based Agreements Regulations 2013 (the “2013 Regulations”) or be deemed, unenforceable.

In this article, we explore the three main industry-wide changes that have arisen as a direct result of the PACCAR ruling:

  1. The diverse portfolio of LFA reformulation strategies deployed by litigation finance stakeholders.
  2.  The government response, both in terms of official statements and policy changes, which have ultimately led to the draft bill of 19 March 2024.
  3.  The wave of litigations subsequent to the PACCAR ruling, giving insight into the practical market consequences of the ruling.

Ultimately, the PACCAR impact and its proposed reversal has not undermined the UK litigation finance market, in fact the contrary; it has promoted visibility and adaptation of a litigation finance market that continues to gain significant traction in the UK. As a result, despite the concern shown by most UK industry stakeholders about the negative impacts of the PACCAR ruling, this article argues that proper regulation could indeed be highly advantageous, should it incentivise responsible investment, whilst protecting proper access to justice. However, the question does remain, will we ever get there?

The LFA reformulation storm.

As expected, the first reaction to PACCAR came from the litigation finance market. As anticipated, LFAs (those with an investor return formula based on a percentage of the damages recovered) are being amended by parties to avoid their potential unenforceability.

The majority of amendments being implemented are aimed to design valuation methodologies for the amount recovered, which are not directly related to the damages recovered, but are rather a function of some other metric or waterfall, therefore involving a process of alteration of pricing. The intention is for the agreements to fall out of the scope of the definition of ‘claims management services’ provided by section 58AA of the Courts and Legal Services Act 1990 (CLSA), which stipulates two main criteria: (i) the funder is paid if the litigation succeeds, and (ii) the amount paid back to the funder is a function of the amounts recovered by the claimant in damages. As such, novel pricing structures such as charging the amount granted in third-party funding with accrued interest; a multiple of the funded amount; or even a fixed pre-agreed amount recovered in the form of a success fee, would not meet both criteria and would hence fall outside of the legal definition of claims management services. These options would avoid the risk of an LFA being bound to the same requirements of a DBA and potentially rendered unenforceable.[2]

Another option to render LFAs enforceable following PACCAR is of course to make these compliant to the definition of DBA provided in s.58AA(2) of the 1990 Act. As such, LFAs would be subjected to stringent statutory conditions as per the Damages-Based Agreements Regulations 2013 (the “2013 Regulations”). This option has however not been the most attractive for funders, firstly due to funders not necessarily conducting claims management services and, secondly, because LFAs would automatically become subject to highly stringent rules to structure the agreements and pursue recovery. For example, such LFAs would need to comply with the cap requirements outlined in the 2013 Regulations such as: 25% of damages (excluding damages for future care and loss) in personal injury cases, 35% on employment tribunal cases and 50% in all other cases.

Ultimately, it can be argued that the choice for restructuring a single LFA or a portfolio of LFAs will vary on a case-by-case basis. Those parties who find themselves at more advanced stages of proceedings will be disadvantaged due to the significant challenges they are likely to face in restructuring such LFAs. From the perspective of the legal sector, on the one hand, we can see an increase in law firms’ portfolio lending, whereby the return to funders is not directly related to damages recovered by the plaintiff. On the other hand, there are certain actors who are remaining only superficially affected by the ruling, such as all funding facilities supporting law firms which raise debt capital collateralised by contingent legal fees.

The introduction of the proposed bill by the government (which is discussed below), is a reflection of the enormous burden the Supreme Court ruling has placed on critical litigation funder stakeholders who are likely to have invested disproportionate sums to amend their LFAs and restructure their litigation portfolios. However, the bill has also given momentum to the sector and is helping to highlight the importance of diversification in litigation funding to protect the interests of low-income claimants. The medium-term net balance of the regulation might be rendered positive if redirected at perfecting and not prohibiting third-party funding agreements to protect access to justice.

The UK Government Intervention.

The UK government has raised concerns regarding the legal and financial impacts of PACCAR relatively swiftlyfollowingthe 26 July 2023 judgement. Their first response to PACCAR came from the Department of Business and Trade (DBT) at the end of August 2023. The DBT stated that, being aware of the Supreme Court decision in PACCAR, it would be “looking at all available options to bring clarity to all interested parties.[3]

In the context of opt-out collective proceedings before CAT, the government proposed in November 2023 amendments to the Digital Markets, Competition and Consumers Bill (DMCC) through the introduction of clause 126, which sought to implement changes to the Competition Act 1998 (CA) to provide that an LFA would not count as a DBA in the context of opt-out collective proceedings in the CAT. This proposal came from the understanding that after PACCAR opt-out collective proceedings would face even greater challenges considering that under c.47C(8) of the CA 1998 DBAs are unenforceable when relating to opt-out proceedings. Proposals for additional amendments to the DMCC soon followed, many of which await final reading and approval by the House of Lords. However, in December 2023 Lord Sandhurst (Guy Mansfield KC) noted that while amendments to the DMCC would mitigate PACCAR’s impact on LFAs for opt-out collective proceedings in the CAT, “the key issue is that the Supreme Court’s PACCAR ruling affects LFAs in all courts, not just in the CAT, and not just, as this clause 126 is designed to address, in so-called opt-out cases.”

As a response to this, the Ministry of Justice announced last March that the government intended to extend the approach taken for opt-out collective proceedings in the CAT to all forms of legal proceedings in England and Wales by removing LFAs from the DBAs category entirely. The statement promised to enact new legislation which would “help people pursuing claims against big businesses secure funding to take their case to court”and“allow third parties to fund legal cases on behalf of the public in order to access justice and hold corporates to account”.[4]

Following this announcement, the Litigation Funding Agreements (Enforceability) Bill was published and introduced to the House of Lords. As promised by the government’s previous statements, the primary purpose of the Bill is to prevent the unenforceability of legitimate LFAs fitting into the amended DBA definition of PACCAR. Indeed, the bill aims to restore the status quo by preventing litigation funding agreements from being caught by s.58AA of the 1990 Act.[5]

The litigation wave.

As parliamentary discussions continue, all eyes are now in the Court system and the pending decisions in litigations arising from PACCAR. Despite the government’s strong stance on this matter, the bill is still in early stages. The second reading took place in April 2024, where issues such as the retrospective nature of the Bill, the Civil Justice Council’s (CJC) forthcoming review of litigation funding, and the need to improve regulations on DBAs, were discussed. Nevertheless, despite the arguable urgency of addressing this issue for funders and the litigation funding market, there is no indication that the bill will be expedited; hence the next step for the bill passage is the Committee stage. The myriad of cases arising from PACCAR may need to stay on standstill for a while, as Courts are likely to await the outcome of the proposed bill before deciding on individual matters.

The UK has a longstanding history of tension between the judiciary power and the two other spheres of the government, the Executive and Parliament. Most of these instances have sparked public debate and have profoundly changed the conditions affecting the market and its players. For example, in the case of R (on the application of Miller and another) (Respondents) v Secretary of State for Exiting the European Union (Appellant) [2017] UKSC 5, Gina Miller launched legal proceedings against the Johnson government to challenge the government’s authority to invoke Article 50 of the Treaty of European Union, which would start the process for the UK to leave the EU, without the Parliament’s authorisation. The High Court decided that, given the loss of individual rights that would result from this process, Parliament and not the Executive should decide whether to trigger Article 50, and the Supreme Court confirmed that Parliament’s consent was needed.

Another example is the more recent case of AAA (Syria) & Ors, R (on the application of) v Secretary of State for the Home Department [2023] UKSC 42 regarding the Rwanda deportation plan. In this case the Supreme Court ruled unanimously that the government’s policy of deporting asylum seekers to Rwanda was unlawful – in agreement with the Court of Appeal’s decision which found that the policy would pose a significant risk of refoulement.

Nevertheless, rushing the finalisation of a bill reversing PACCAR would probably be a counterproductive move. The recent developments suggest that policy makers should focus on deploying a regulatory impact assessment on any regulations aimed at improving access to finance in litigation. Regulators and legislators should ensure that, before designing new regulatory frameworks for litigation finance,  actors from the litigation finance industry are consulted, to ensure that such regulations are adequate and align with the practical realities of the market.

As the detrimental impacts of PACCAR become ever more visible, public authorities should prioritise decisions that favour instilling clarity in the market, and most importantly, ensuring proper access to justice remains upheld in order to “strike the right balance between access to justice and fairness for claimants”.  

A deeper look into the post-PACCAR’s litigations and their domino effects

Even though the English court system is yet to rule on any post-PACCAR case, it is important to understand the immediate effects of the decision by looking at a few landmark cases. We provide in this section of the article an overview of the impacts of the rulingin perhaps the three most important ongoing post-PACCAR proceedings: Therium Litigation Funding A IC v. Bugsby Property LLC (the “Therium litigation”), Alex Neill Class Representative Ltd v Sony Interactive Entertainment Europe Ltd [2023] CAT 73 (the “Sony litigation”) and the case of Alan Bates and Others v Post Office Limited [2019] EWHC 3408 (QB), which led to what has been known as the “Post Office scandal” (also referred to as the “Horizon scandal”).

Therium litigation

The Therium litigation is one of the first cases in which an English court considered questions as to whether an LFA amounted to a DBA following the Supreme Court decision in PACCAR. The case concerned the filing of a freezing injunction application by Therium Litigation Funding I AC (“Therium”) who had entered into an LFA with Bugsby Property LLC (“Bugsby”) in relation to a claim against Legal & General Group (“L&G”). The LFA stipulated between Therium and Bugsby entitled Therium to (i) return of the funding it had provided; (ii) three-times multiple of the amount funded; and (iii) 5% of any damages recovered over £37 million, and compelled Bugsby’s solicitors to hold the claim proceeds on trust until distributions had been made in accordance with a waterfall arrangement set out in a separate priorities’ agreement.

Following a settlement reached between Bugsby and L&G, Bugby’s solicitors transferred a proportion of settlement monies to Bugsby’s subsidiary, and notified Therium of the intention to transfer the remaining amount to Bugsby on the understanding that the LFA signed between Therium and Bugsby was unenforceable as it amounted to a DBA following the PACCAR ruling. Therium applied for an interim freezing injunction against Bugsby under s.44 of the Arbitration Act 1996 and argued that, as the payment scheme stipulated by the LFA contained both a multiple-on-investment and a proportion of damage clauses, and the minimum recovery amount to trigger the damage-based recovery had not been reached, no damage-based payment was foreseen.

This meant that the DBA clause within the LFA could be struck off without changing the nature of the original LFA, so that it constituted an “agreement within an agreement”. As legal precedents such as the Court of Appeal ruling in Zuberi v Lexlaw Ltd [2021] EWCA Civ 16 allowed for parts of an agreement to be severed so as to render the remainder of the agreement enforceable, the High Court granted the freezing injunction, affirming that a serious question was raised by Therium regarding whether certain parts of the agreement could be severed to keep the rest of the LFA enforceable.

By declaring that there was a serious question to be tried as to whether the non-damage clauses, such as the multiple-based payment clauses, are lawful or not, the High Court opened the possibility of enforceability of existing LFAs through severability of damage-based clauses in instances where PACCAR may also apply. The Therium litigation presents an example of another possible structuring strategy to shape LFAs to prevent them from becoming unenforceable under PACCAR. Nonetheless, as the freezing injunction will now most likely lead to an arbitration, a final Court ruling on the validity of these non-damage-based schemes appears to be unlikely.

Sony litigation

The Sony group litigation is another example of one of the first instances where issues of compliance of a revised LFA have been addressed in the aftermath of PACCAR, this time in the context of CAT proceedings. In this competition case, Alex Neill Class Representative Limited, the Proposed Class Representative (PCR), commenced collective proceedings under section 47B of the CA 1998 against Sony Interactive Entertainment Network Europe Limited and Sony Interactive Entertainment UK Limited (“Sony”). The claimant alleged that Sony abused its dominant market position in compelling publishers and developers to sell their gaming software through the PlayStation store and charging a 30% commission on these sales.

The original LFA entered between Alex Neill and the funder as part of the Sony litigation amounted to a DBA and would have therefore been unenforceable pursuant to PACCAR. On this basis, the PCR and funder negotiated an amended LFA designed to prevent PACCAR enforceability issues. The LFA in place was amended to include references for funders to obtain a multiple of their total funding obligation or a percentage of the total damages and costs recovered, only to the extent enforceable and permitted by applicable law. The LFA was also amended to include a severance clause confirming that damages-based fee provisions could be severed to render the LFA enforceable.

The CAT ultimately agreed with the position of the PCR and confirmed that the revised drafting “expressly recognise[d] that the use of a percentage to calculate the Funder’s Fee will not be employed unless it is made legally enforceable by a change in the law.” In relation to the severance clause, the CAT also expressly provided that such clause enabled the agreement to avoid falling within the statutory definition of a DBA and referred to the test for effective severance clauses.

The CAT’s approach in recognising the PACCAR ruling and yet allowing for new means to render revised LFAs enforceable in light of this decision provides a further example of a Court’s interpretation of the decision, allowing another route for funders to prevent the unenforceability of agreements. Allowing these clauses to exempt litigation funders from PACCAR will in fact allow for such clauses to become market standard for LFAs, and in this case particularly for those LFAs backing opt-out collective proceedings in the CAT.

Post Office scandal  

Although the Post Office scandal occurred in 2019, this case was only recently brought back to light following the successful tv series ‘Mr Bates vs The Post Office’ which recounts the story of the miscarriage of justice suffered by hundreds of sub-postmasters and sub-postmistresses (SPM’s) in the past two decades. In short, the Post Office scandal concerned hundreds of SPM’s being unjustly taken to court for criminal offences such as fraud and false accounting, whilst in reality the Horizon computer system used by Post Office Ltd (POL) was found to contain errors that caused  inaccuracies in the system.

Mr. Bates, leading claimant in the case, brought the case on behalf of all the SMP’s which had been unfairly treated by POL. The issuing of the claim was only made possible thanks to a funding arrangement between litigation funders and the SPM’s, used as a basis for investors to pay up front legal costs. As outlined in a publication by Mr Bates in January 2024, such financing, combined with the strength and defiance of Mr. Bates’ colleagues, allowed the case to be brought forward, a battle which in today’s circumstances the postmaster believes would have certainly been lost.[6]

The sheer scale of the Post Office scandal, and the fact that traditional pricing vehicles for legal services would have negated the claimants access to justice, placed the case near the top of the government’s agenda and called again into question the effect of PACCAR on access to justice. Justice Secertary Alex Chalk MP relied on the example of Mr Bates and the Post Office scandal to affirm that that “for many claimants, litigation funding agreements are not just an important pathway to justice – they are the only route to redress.”[7]In light of this recent statement more radical changes to legislation on litigation funding and the enforceability of LFAs appear to be on the horizon.

Conclusion

Assessing the long-term impact of PACCAR will ultimately need to wait until the dust in the litigation finance market settles. Nonetheless, the immediate impacts of the decision have brought four key considerations to light.

First, the relevance of the litigation funding industry in the UK is substantial and any attempt to regulate it impacts not only those who capture value from the market but also the wider society. Regulation of litigation funding could inadvertently affect wider policy questions such as equal access to justice, consumer rights, protection of the environment and human rights.

Second, there is an undeniable intention of the regulators to oversee the litigation finance market, which could reflect in stability and predictability that would be much welcomed by institutional investors and other stakeholders. However, this conclusion assumes that regulatory efforts will be preceded by robust impact assessment and enforced within clear guardrails, always prioritising stability and ensuring proper access to justice.

Third, PACCAR serves to bring awareness that attempts to regulate a market in piecemeal can lead to detrimental outcomes and high adapting costs, far offsetting any positive systemic effects brought by the new framework. Any attempts to regulate a market so complex and relevant for the social welfare should be well-thought-out with the participation of key stakeholders.

Fourth, despite the recent headwinds, the market and government reaction further prove that the litigation finance market continues its consolidation as an effective vehicle to drive value for claimants and investors. The fundamentals behind the market’s growth are still solid and the asset class is consolidating as a strategy to achieve portfolios’ uncorrelation with normal market cycles. As private credit and equity funds as well as venture capitalists, hedge funds and other institutions compete to increase their footprint in this burgeoning market, it is safe to expect a steady increase of market size and investors’ appetite for the thesis.

In conclusion, despite a first brush view of the PACCAR decision, the reactions to this decision and the subsequent developments have evidenced how litigation finance continues to be a promising investment strategy and an effective tool to drive social good and access to justice.


[1] Ana Carolina Salomao, Micaela Ossio and Sarah Voulaz, Is the Supreme Court ruling in PACCAR really clashing with the Litigation Finance industry? An overview of the PACCAR decision and its potential effects, Litigation Finance Journal, 10 October 2023.

[2] Daniel Williams, Class Action Funding: PACCAR and now Therium – what does it mean for class action litigation?, Dwf, October 25, 2023.

[3] Department for Business and Trade statement on recent Supreme Court decision on litigation funding: A statement from the department in response to the Supreme Court's Judgement in the case of Paccar Inc. and others vs. Competition Tribunal and others. Available at: <https://www.gov.uk/government/news/department-for-business-and-trade-statement-on-recent-supreme-court-decision-on-litigation-funding>.

[4] Press release, ‘New law to make justice more accessible for innocent people wronged by powerful companies’ (GOV.UK, 4 March 2024) Available at <https://www.gov.uk/government/news/new-law-to-make-justice-more-accessible-for-innocent-people-wronged-by-powerful-companies>.

[5] Litigation Funding Agreements (Enforceability) Bill (Government Bill originated in the House of Lords, Session 2023-24) Available at <https://bills.parliament.uk/bills/3702/publications>.

[6] Alan Bates, ‘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>.

[7] Alex Chalk, ‘Cases like Mr Bates vs the Post Office must be funded’ (Financial Times, 3 March 2024) <https://www.ft.com/content/39eeb4a6-d5bc-4189-a098-5b55a80876ec?accessToken=zwAGEsgQoGRQkc857rSm1bxBidOgmFtVqAh27A.MEQCIBNfHrXgvuIufYajr8vp1jmn9z9H9Bwl0FC-u96h8f4LAiBumh82Jxp30mqQsGb71VSoAmYWUwo9YBO2kF5wuMP5QA&sharetype=gift&token=7a7fe231-8fea-4a0d-9755-93fc3e3689aa>.

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Fernando Gragera joins Aon to lead the litigation and contingency insurance practice in Iberia

By Harry Moran |

Aon strengthens its M&A and Transaction Solutions team and pioneers a local team specialising in the management of these risks

Aon plc (NYSE: AON), a leading global professional services firm, has appointed Fernando Gragera as Director of Litigation and Contingent Risks for Spain and Portugal. Fernando will join the Iberia M&A and Transaction Solutions (AMATS) team led by Lucas López Vázquez, and globally in Aon's international Litigation Risk Group. His role will be to develop the litigation insurance practice and assist Aon's clients in transferring risks arising from litigation and contingent situations.

Fernando Gragera, a Spanish lawyer and solicitor of England and Wales with more than 13 years of professional experience, comes from PLA Litigation Funding, a litigation funder specialising in the Iberian market. Previously, he worked as a lawyer in the litigation and arbitration department of Cuatrecasas and as in-house counsel at Meliá Hotels International, where he was responsible for the group's litigation and arbitration.

This appointment responds to the growing interest from investment funds, corporations and law firms in covering contingent and litigation-related risks and makes Aon the first professional services firm with a local team specialising in contingent and litigation solutions in Iberia.

Miguel Blesa, head of Aon Transaction Solutions in Iberia: "Fernando's appointment is a major milestone for the industry and embodies a commitment we have been working on for years. In this way, we reinforce our commitment to continue to support our clients and help them make the best decisions to protect and grow their business”.

About Aon

Aon plc (NYSE: AON) exists to shape decisions for the better — to protect and enrich the lives of people around the world. Through actionable analytic insight, globally integrated Risk Capital and Human Capital expertise, and locally relevant solutions, our colleagues provide clients in over 120 countries and sovereignties with the clarity and confidence to make better risk and people decisions that help protect and grow their businesses.

Follow Aon on X and LinkedIn. To learn more visit our NOA content platform. 

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Altroconsumo Secures Impressive 50 million Euro Settlement for 60,000 Participants to Dieselgate Class Action in Italy

By Harry Moran |

Altroconsumo and VW Group have reached a ground-breaking agreement, providing over 50 million euro relief to over 60,000 Italian consumers affected by the emissions fraud scandal. Celebrating this major win for Italian consumers, Euroconsumers calls on Volkswagen to now also compensate Dieselgate victims in the other Euroconsumers countries. 

The settlement reached by Altroconsumo, arising from a Euroconsumers coordinated class action which commenced in 2015 ensures that Volkswagen will allocate over 50 million euros in compensation. Eligible participants stand to receive payments of up to 1100 euros per individual owner.

This brings an end to an eight year long legal battle that Altroconsumo together with Euroconsumers has been fiercefully fighting for Italian consumers and marks a significant milestone in seeking justice for those impacted by the ‘Dieselgate’ scandal.

We extend our massive congratulations to Altroconsumo for reaching this major settlement in favor of the Italian Dieselgate victims. Finally, they will receive the justice and compensation they deserve. This milestone underscores the importance of upholding consumer rights and the accountability of big market players when these rights are ignored, something Euroconsumers and all its national organisations will continue to do together with even more intensity under the new Representative Actions Directive” – Marco Scialdone, Head Litigation and Academic Outreach Euroconsumers

Together with Altroconsumo in Italy, Euroconsumers also initiated Dieselgate class actions against the Volkswagen-group in Belgium, Spain and Portugal. While the circumstances are shared, the outcomes have been far from consistent.

Euroconsumers was the first European consumer cluster to launch collective actions against Volkswagen to secure redress and compensation for all affected by the emissions scandal in its member countries. After 8 years of relentless pursuit, we urge the VW group to finally come through for all of them and give all of them the compensation they rightfully deserve. All Dieselgate victims are equal and should be treated with equal respect.” – Els Bruggeman, Head Policy and Enforcement Euroconsumers

Consumer protection is nothing without enforcement and so Euroconsumers and its organisations will continue to lead important class actions which benefit consumers all across the single market. 

Read the full Altroconsumo press release here.

About Euroconsumers 

Gathering five national consumer organisations and giving voice to a total of more than 1,5 million people in Italy, Belgium, Spain, Portugal and Brazil, Euroconsumers is the world’s leading consumer cluster in innovative information, personalised services and the defence of consumer rights. Our European member organisations are part of the umbrella network of BEUC, the European Consumer Organisation. Together we advocate for EU policies that benefit consumers in their daily lives.

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