Investor Watch-Outs in the Commercial Litigation Finance Asset Class

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 Summary

  • Gross Returns Net Returns in this asset class and the differences can be material
  • Tail risk is more pronounced in litigation finance, misleading to infer performance from early results
  • Nascent and transparent market puts the onus on investors to dedicate time to understanding the asset class
  • Single litigation investments are impossible to value accurately, don’t rely on fair value estimates for performance measurement

Slingshot Insights:

  • Investors need to dedicate resources (internal or external) to a deep dive before allocating capital
  • Managers need to ensure transparency and alignment of interests in order to attract long-term capital partners
  • Managers need to be very careful in the figures they provide to potential investors and ensure they disclose net fund returns if they are going to disclose gross case returns.

I recently moderated Litigation Finance Journal’s digital conference entitled Investor Insights into Litigation Funding, and the panelists delivered a clear message that the asset class needs to be more transparent.  Accordingly, I decided to pen this article to explore the more opaque aspects of the asset class and the reasons underlying that opacity, and what this means for investors, as well as provide some “watch-outs” for those looking to invest in the industry.

Clearly, the conference left the impression that the investor community is savvy to the fundamental economics of commercial litigation finance, despite the relative nascency of the industry.  While many investors have made investments in the asset class over the last five years, those same investors would say, when it comes to concluding about the overall merits of the asset class, that “the jury is still out” (pardon the litigation pun).  After having spent several years investing, reviewing troves of litigation finance realization data, I have come to the conclusion that it is a fundamentally strong asset class that has the extra benefits of being (i) non-correlated and (ii) ESG compliant.  However, investors should be aware that the application of portfolio theory (I have explored these concepts in-depth in a three-part series, here, here and here) and manager selection are both critical elements (emphasis added) to successfully investing long-term in the asset class.

So, why is it that after decades of investing experience, the investor community still has some trepidation about the asset class?  The answer lies in a few fundamental truths about the asset class, along with a lack of transparency—which panelists called for an increase in, and is core to the litigation finance articles I write for the industry.

Let’s start by exploring the cold hard truth about the asset class based on what we know today. It is important to note that this article makes specific reference to commercial litigation finance as distinct from the consumer side of the asset class (personal injury, divorce, inheritance/estate, etc.), which exhibits some very different characteristics as it relates to the risks highlighted below.  This article also mainly deals with portfolios of pre-settlement single case risks, as later stage cases and portfolio financings also exhibit very different risk profiles compared to those discussed herein.

Gross Net

Perhaps one of the biggest mistakes that fund managers make is not specifically referencing net returns in their fund documentation. And one of the biggest mistakes investors make is assuming that strong gross case returns will lead to strong net fund returns.

Every single manager presentation deck in litigation finance I have reviewed, with perhaps one or two exceptions, has focused solely on gross case returns.  Now, in many asset classes, there is a relatively high correlation between gross investment returns and net fund returns, and investors can extrapolate with a great degree of certainty from the gross return what the likely net fund return will be, and rules of thumb have even been developed to estimate that relationship.  This is not the case in commercial litigation finance.  Indeed, managers that market their gross case IRRs and MOICs without also referencing their net fund IRRs and MOICs are misleading investors, and this may have ramifications for their fundraising efforts and the extent to which they are in breach of securities regulations.  Managers should seek the advice of securities counsel (and perhaps litigation counsel) prior to communicating any results to potential investors, and ensure that counsel understands how the proposed data was calculated and what it does and doesn’t include.

The differences between gross case and net fund returns in commercial litigation finance are far greater than those in other asset classes, and the differences can transform high positive gross case internal rates of return (“IRR”s) into negative fund IRRs, depending on when the returns are being measured relative to the fund’s life.

So, let’s explore why this discrepancy exists.

Deployment Risk

In the commercial litigation finance asset class, there are two levels of deployment risk.  The first is the common risk among many alternative asset classes, which is the risk of whether or not the manager will be able to allocate investors’ commitments during the proposed investment period. If not, investors will be stuck paying fees on a commitment that is not capable of being allocated in a timely manner, thereby making their effective fee drag much greater than anticipated (a concept I explore in a two-part article that can be found here and here), which I will refer to as Deployment Allocation Risk. To a large extent, Deployment Allocation risk can be somewhat controlled by the activities of the manager, in the sense that they are responsible for their fund’s origination efforts.

The second deployment risk emerges once the manager has allocated (or committed) its monies to a case: What is the risk that the commitment will not be fully drawn upon? I will refer to this form of deployment risk as Deployment Draw Risk.  The real problem with Deployment Draw risk is that it is largely uncontrollable by the manager, and can have a significant effect on effective management fees. The other issue with Deployment Draw Risk is that it can have a meaningful impact on the diversification of the overall fund and thereby add volatility to a fund’s return profile.

The lack of controllability stems from the fact that once the manager has decided to invest in the case, the case is generally beyond the control of the funder, as many jurisdictions prohibit the concept of “wanton or officious intermeddling”, which would put the funder offside legal doctrines of “maintenance”. As a result, some investors view the asset class as “passive” in that once the investment is made, the manager (and hence the investor) is simply ‘along for the ride’.  While true to a degree, the degree of passivity is dependent on the jurisdiction in question, with certain jurisdictions being more permissive with respect to the influence the funder can have on determining the outcome of settlement negotiations.

In addition to the effective management fee issue, the other problem with Deployment Draw Risk is that it can have a profound impact on the diversification of a portfolio when viewed on a drawn basis as compared to a committed basis.  Take, for example, a portfolio of ten equal sized commitments where five of the commitments only draw on 50% of the commitment, and the other five draw on 100% of the commitment.  This means that the portfolio will contain five cases with 13% exposure each, and five cases with 6.5% exposure each, which means that five cases represent 67% of the drawn capital of the fund (assuming no other fund expenses).  When you then apply an overall industry win rate of 70%, you quickly see that the ultimate outcome of the fund will largely depend on whether one of five large cases is a winner or a loser (i.e. will those five have a 60% win rate (three wins) or 80% win rate (four wins), because you can’t win half of a case, and the difference is material).  This is far too much quasi-binary risk for my liking, which is why I believe a more appropriate concentration limit for this asset class is one based on 5% of capital available for commitment (after deducting a provision for management fees and operating expenses of the fund).  Unfortunately, concentration limits of 10-15% of a fund’s committed capital (not available capital), which have been borrowed from other asset classes, are more common in litigation finance funds, which is a mismatch given the risk profile of the asset class.

Duration Risk

The other non-controllable feature of litigation finance is duration risk, which is the risk that particular cases take a longer time to settle, or obtain an arbitral/trial decision than that which was underwritten. Why is this an issue?  The reason is that many times there are caps or limits on the upside available to litigation funders, because while the plaintiffs are willing to reward the funder for the risk they assume, there is a limit to their generosity which often comes in the form of economic caps on the funder’s return.  When gross dollar profits are limited, IRRs are negatively correlated with case duration, although multiples of invested capital (“MOIC”) are not impacted, unless there is also an IRR limit contained in the funding agreement (which is also common).

Tail’ Risk

In commercial litigation finance, tail risk can be significant.  According to Investopedia, “tail risk is a form of portfolio risk that arises when the possibility that an investment will move more than three standard deviations from the mean is greater than what is shown by a normal distribution.  Tail risks include events that have a small probability of occurring, and occur at both ends of a normal distribution curve.”

Applying this to litigation finance, the tail is influenced by both duration risk, outlined above, as well as case returns.  Since litigation finance has what I refer to as ‘quasi-binary’ outcomes (if not settled pre-trial, the longer the case goes and the further it moves down the path of a trial, the more binary it becomes), a normal distribution curve is not very applicable.  This is because the data set becomes bifurcated into winners and losers, hence, the concept of using a normal (bell shape) distribution to capture underlying portfolio dynamics (via mean and variance) is likely not appropriate, especially when infrequent but “extreme outcomes” materialize.

In litigation finance, managers can definitely find themselves in situations where they obtain favourable outcomes in the portfolio relatively quickly after the funder makes the commitment, which generally leads to strong IRRs but relatively low MOICs.

On the other end of the spectrum, a portfolio of litigation exposures, especially large ones or ones with specific attributes (international arbitration or patent), will contain cases that have longer durations, and have required more capital and have a higher propensity for a binary outcome. In addition, time is generally not your friend in litigation, as length of case duration indicates that either (i) the issue at hand is so significant or meaningful to the defendant (financially &/or operationally) that they may not have a choice but to fight until the bitter end, or (ii) the defense may be stronger (financially, counsel or case merits) than originally thought by the plaintiff.

These are the ‘tails’ of litigation finance! While a manager may not mind having a few on the front-end (early settlements), those will not likely materially contribute to your fund’s overall MOICs, but they sure make the fund’s early results seem (emphasis added) strong. This is a strong watch-out, as one should never conclude that a fund will ultimately perform consistent with its early returns, as there is no correlation of results within a fund, since each case has its own idiosyncratic risks.  In fact, I would venture to say that an investor should not get comfortable with a well-diversified fund’s performance until it is about 85% realized.  Why? Because the back-end of the tail is much riskier for the reasons articulated above, and can be very punitive to overall fund returns if the results don’t mimic those of the remainder of the fund.  It is conceivable that a fund trending toward a mid-teens IRR can ultimately turn negative, depending on the outcome of the performance of the tail if those investments are significant in size.  As an investor, if you committed to the first fund and then made another commitment to the second fund before the tail realized, you could be caught in a long tenure, double loss situation.

Portfolio Concentration

The application of portfolio theory is critical to successful investing in this asset class. As discussed previously, due to Deployment Draw Risk, estimating portfolio concentration on a drawn capital basis is inherently difficult and beyond the control of the manager.

Unfortunately, many managers don’t take this into consideration when building their portfolios, or believe that concentration limits in the 10-15% (of fund committed capital) range are more than adequate to create a diversified portfolio. They’re not!  Due to quasi-binary risk and Deployment Draw Risk, managers find it difficult to create diversified portfolios for this asset class, which means lower concentration limits than other asset classes are appropriate to protect the investor.  This was one of the main reasons for the design of the fund-of-funds I managed.

Mark-to-Market” or “Fair Value” Accounting

It is very common and sometimes required for accounting purposes for many asset classes to mark-to-market or fair value account for their investments.  The reasons for this request are simply because investors want an accurate estimate of the carrying value of their investment, so they can judge manager performance and concentration within their own portfolios, and to serve as an early warning system for avoiding future bad allocation/funding decisions.  Investors may also require this to judge their own performance internally.

In certain asset classes there is sufficient and current data available to undertake this exercise with some degree of certainty.  However, in the litigation finance asset class, each case has its own idiosyncratic risk, and there is an element of bias in any decision-making process that makes it impossible to accurately determine outcome or damages, and hence value a piece of litigation (especially commercial litigation).  Investors should also be aware of valuations established by secondary sales in the marketplace as they do not necessarily establish credible value for a case, but rather are more likely a reflection of a fund manager’s ability to convince others that the case has a higher probability of success and collection (i.e. I wouldn’t want to borrow against that value).

As investors consider investing in the asset class, while they should look at the fair value figures provided by managers as part of their overall assessment, they should focus their decision-making on cash-on-cash returns, and understand that fair value calculations cannot be relied upon (portfolio financings have different characteristics which may make fair value less risky in this regard, as long as the portfolio is cross-collateralized and diversified).

Managers need to be very careful using fair value accounting as their basis of investor reporting, as they may assume liability in the event the portfolio’s ultimate performance does not coincide with the fair value estimates. My suggestion is that if the manager insists on providing fair value accounting estimates, they also provide cash-on-cash returns for the realized portion of the portfolio, along with associated fund fees and expenses.

Asset Class Nascency & Transparency

For those of you who have been toiling in the asset class since inception, you may have come to the conclusion that the asset class is maturing, and have gotten quite comfortable with the risk/reward profile.  However, for many investors who have been investing for the last five years, they still have yet to experience fully realized fund returns from their investing efforts, and while they have made a significant dedication to the asset class (kudos to them for believing), they are data-driven organizations that require data to make sound long-term investment decisions.  In this regard, the entire industry is very nascent in terms of having produced fully realized funds – I can only think of a handful of managers who have done so, and as I have articulated above, an investor cannot infer returns from early fund results.

However, the nascency of the industry has been aided by the transparency of the publicly-listed managers that operate in the industry (Burford, Omni, LCM, etc.).  Accordingly, the entire industry owes a debt of gratitude to the public players who have paved the way for the private players by ensuring a degree of transparency is disseminated in the market, as a result of their regulatory disclosure requirements.  Were it not for those players making their results public out of necessity, the industry would likely not have attracted the level of interest it has, and definitely not as quickly.  However, we must remember that the publicly-listed companies mainly invest from their permanent capital, and do not have fund horizons or fund management fees, performance fees and operating expenses to factor into their results (or at least they get buried within their own profit and loss statements, which are co-mingled with the costs of managing a portfolio).  Accordingly, the gross returns we see from the publicly-listed players need to be proforma’d for the expenses associated with running private funds, and those expenses are not immaterial.

In a nascent and opaque asset class with a relatively small number of managers, manager selection becomes critical. Investors who are considering investing in the asset class need to spend the upfront time to take a deep dive in the global manager community, so they can ultimately select the best stewards of their capital.  This is something I have done over the last five years, and I can definitively say it has expanded my knowledge immensely and provided me with an enhanced perspective that has served my investors well.

Slingshot Insights

For investors, the asset class presents a unique opportunity to add an asset that has true non-correlation, along with inherent ESG attributes.  This makes litigation finance a very attractive asset class.  However, an investor needs to do their homework prior to executing an investment, and needs to think about this asset class in a very different way than others in which they may have invested.  If the investor doesn’t have the internal capabilities to devote to the effort, they should consider hiring an advisor to guide their decision making, or selecting a lower risk vehicle to ‘dip their toe in the water’.

For fund managers, transparency is critical to raising significant investments from institutional investors.  The more data you can provide, and the more upfront you are about your net returns, the more success you will likely achieve.  Managers that address the risks inherent in the asset class through their fund structures and decision-making processes will likely be more successful. Aligning your fund economics as closely as possible to those of your investors will lead to long-term successful partnerships that may take managers in directions never contemplated during the early stages of the fund.

As always, I welcome your comments and counter-points to those raised in this article.

 Edward Truant is the founder of Slingshot Capital Inc. and an investor in the consumer and commercial litigation finance industry. Currently waiting out his non-compete agreement, Ed is designing a new fund for institutional investors who are interested in investing in the asset class.


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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.


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: <>.

[4] Press release, ‘New law to make justice more accessible for innocent people wronged by powerful companies’ (GOV.UK, 4 March 2024) Available at <>.

[5] Litigation Funding Agreements (Enforceability) Bill (Government Bill originated in the House of Lords, Session 2023-24) Available at <>.

[6] Alan Bates, ‘Alan Bates: Why I wouldn’t beat the Post Office today’ (Financial Times, 12 January 2024) <>.

[7] Alex Chalk, ‘Cases like Mr Bates vs the Post Office must be funded’ (Financial Times, 3 March 2024) <>.

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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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