Operating Costs inherent in the Commercial Litigation Finance Asset Class (Part 1 of 2)

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

  • Article draws comparisons between commercial litigation finance and private equity (leverage buy-out) asset classes
  • Similarities and differences exist between private equity and litigation finance operating costs, but there are some significant jurisdictional differences to consider
  • Value creation is front-end loaded in litigation finance vs. back-end loaded in private equity
  • Litigation finance can be a difficult investment to scale while ensuring the benefits of portfolio theory

INVESTOR INSIGHTS

  • The ‘2 and 20’ model is an appropriate baseline to apply to litigation finance, but investors need to understand the potential for misalignment of interests
  • As with most asset classes, scale plays an important role in fund operating costs
  • Deployment risk and tail risk are not insignificant in this asset class
  • Investor should be aware of potential differences in the reconciliation of gross case returns to net fund returns
  • Up-front management fees may have implications for long-term manager solvency

My overarching objective for Slingshot is to educate potential investors about the litigation finance asset class and to improve industry transparency, as I believe increased transparency will ultimately lead to increased investor interest and increased access to capital for fund managers.  In this light, I was asked to write an article a few months back about management fees in the commercial litigation finance sector, and my immediate reaction was that it would be a controversial topic that may not even be in my own best interests—and so I parked the idea.  However, the seed was germinating and I began to think about an interesting discussion of the various operating costs, including management fees, inherent in and specific to the asset class, including geographic differences therein.

While I always attempt to provide a balanced point of view in my articles, I should first point out my conflict of interest as it relates to this article.  As a general partner of a commercial litigation finance fund-of-funds, and being in the design stages of my next fund offering, my compensation model is based on a combination of management fees and performance fees no different than litigation finance fund managers.  Accordingly, my personal bias is to ensure that I structure my own compensation to strike a balance between investor and manager so that each feels they are deriving value from the relationship.  If I overstep my bounds by charging excessive fees, I believe that a competitive market will recognize the issue and prevent me from raising sufficient capital to make my fund proposition viable.  I am also kept in check by a variety of other managers in the same and similar asset classes who are also out raising money which help to establish the “market” for compensation. I further believe a smart allocator, of which there are many, will know what fee levels are acceptable and appropriate based on the strategy being employed and the resources required to deploy capital into acceptable investments (they see hundreds, if not thousands, of proposals every year, and are focused on the compensation issue).  On the other hand, the litigation finance market is a nascent and evolving market with many different economic models, specific requirements and unique participants, and so a ‘market standard’ does not exist, therefore it is common to look at similar asset classes (leveraged buy-out, private credit, etc.) to triangulate an appropriate operating cost model.

At the end of the day, the most compelling philosophy of compensation is rooted in fairness.  If a manager charges excessive fees and their returns suffer as a result, that manager will likely not live to see another fund. However, if  a manager takes a fair approach that is more “LP favourable” in the short-term (as long as the compensation doesn’t impair its ability to invest appropriately), it can move its fees upward over time in lock-step with its performance as there will always be adequate demand to get into a strong-performing fund.  There are many examples in the private equity industry of managers who have been able to demand higher performance fees based on their prior performance.  So, if you have a long-term view of the asset class and your fund management business, there really is no upside in charging excessive fees relative to performance, but there is clear downside.

With my conflict disclosed, let’s move on to the issues at hand which are more encompassing than just fees.

Litigation Finance as a Private Equity Asset Class

For fund managers operating in the commercial litigation finance asset class, many view themselves as a form of private equity manager, and for the most part, the analogy is accurate.  Litigation finance managers are compensated for finding attractive opportunities (known as “origination”), undertaking due diligence on the opportunities (or “underwriting”, to use credit terminology) and then stewarding their investments to a successful resolution over a period of time while ensuring collection of proceeds.

Similarly, Private Equity (“PE”) investors (for purposes of this article I refer to “Private Equity” as being synonymous with “leveraged buy-outs”, although use of the term has been broadened over the years to encompass many private asset classes) spend most of their time on origination and diligence on the front-end of a transaction, and increasingly, on value creation and the exit plan during the hold period and back-end of the transaction, respectively.

In the early days of the PE industry, the value creation plan was more front-end loaded and centered around buying at X and selling at a multiple of X (known as “multiple arbitrage”), usually by taking advantage of market inefficiency, and accentuated through the use of financial leverage and organic growth in the business.  Over time, the multiple arbitrage strategy disappeared as competitors entered the market and squeezed out the ‘easy money’ by bidding up prices of private businesses.  Today, PE firms are more focused on operational excellence and business strategy than ever before (during the hold period of the transaction).  Having been a private equity investor for two decades I have seen a significant change in the PE value creation strategy.  While organic and acquisition growth still feature prominently in PE portfolio company growth strategies, the extent to which PE managers will go to uncover value opportunities is unprecedented.

This highlights a key difference between private equity and litigation finance.  In PE, the majority of the value creation happens after the acquisition starts, and ends when a realization event takes place.  In litigation finance, the fund manager, in most jurisdictions, is limited from “intermeddling” in the case once an investment has been made, so as to ensure the plaintiff remains in control of the outcome of the case and that the funder does not place undue influence on the outcome of the case.  Nonetheless, some litigation funders add value during their hold period by providing ongoing perspectives based on decades of experience, participating in mock trials, reviewing and commenting on proceedings to provide valuable insight, reviewing precedent transactions during the hold period to determine their impact on the value of their case, case management cost/budget reviews, etc.

Accordingly, it is easy to see that relative to private equity, the litigation finance manager’s ability to add value during the hold period is somewhat limited, legally and otherwise.  One could use this differential in “value add” to justify a difference in management fees, but a counter-argument would be that in contrast to private equity, litigation finance adds value at the front-end of the investment process by weeding out the less desirable prospects and focusing their time and attention on the ‘diamonds in the rough’.  Of course, private equity would make the same argument, the key difference being that in private equity there is much more transparency in pricing through market back-channeling (many of the same lenders, management consultants and industry experts know the status and proposed valuations of a given private equity deal) than what is found in the litigation finance industry. An argument can be made that inherent in litigation finance is a market inefficiency that is predicated on confidentiality, although I don’t believe that has been tested yet.

The other issue that differentiates litigation finance from PE is the scale of investing.  PE scales quite nicely in that you can have a team of 10 professionals investing in a $500 million niche fund and the same-sized firm investing $2B in larger transactions, while your operating cost base does not change much, which is what allows PE operations to achieve “economies of scale”.  In litigation finance, the number of very large investments is limited, and those investments typically have a different set of return characteristics (duration, return volatility, multiples of invested capital, IRR, etc.), so even if you could fund a large number of large cases, you may not want to construct such a portfolio, as large case financings will likely have a more volatile set of outcomes, so the fund would have to be large enough to allow diversification in the large end of the financing market during the fund’s investment period.  Accordingly, litigation finance firms typically have to invest in a larger number of transactions in order to scale their business, and doing so requires technology, people or both.  At this stage of the evolution of the litigation finance market, scale has been achieved mainly by adding people.  Accordingly, as the PE industry has been able to achieve economies of scale through growth, it is reasonable for investors to benefit from those economies of scale by expecting to be charged less in management fees per dollar invested.  The same may not hold true for litigation finance due to its scaling challenges, although there are niches within litigation finance that can achieve scale (i.e. portfolio financings & mass tort cases, as two examples) for which the investor should benefit.

The Deployment Problem

A third significant issue that litigation finance and investors therein have to contend with is deployment risk.  In private equity, managers typically deploy most of their capital in the investment on ‘day one’ when they make the investment.  They may increase or decrease their investment over time depending on the strategy and the needs of the business and the shareholders, but they generally deploy a large percentage of their investment the day they close on their portfolio acquisition.  Further, it is not uncommon for a PE fund manager to deploy between 85% and 100% of their overall fund commitments through the course of the fund.

Litigation Finance on the other hand rarely deploys 100% of its case commitment at the beginning of the investment, as it would not be prudent or value maximizing to do so.  Accordingly, it is not uncommon for litigation finance managers to ‘drip’ their investment in over time (funding agreements typically provide the manager with the ability to cease funding in certain circumstances in order to react to the litigation process and ‘cut their losses’).  The problem with this approach is that investors are being charged management fees based on committed capital, while the underlying investment is being funded on a deployed capital basis, which has the effect of multiplying the effective management fee, as I will describe in the following example.  This, of course, is in addition to the common issue of committing to a draw down type fund that has an investment period of between 2-3 (for litigation finance) and 5 (for private equity) years, for which an investor is paying management fees on committed capital even though capital isn’t expected to be deployed immediately.  Litigation finance adds a strategy-specific layer of deployment risk.

For purposes of this simplistic example, let’s contrast the situation of a private equity firm that invests $10 million on the basis of a 2% management fee model with that of a litigation finance manager that also invests $10 million, but does so in equal increments over a 3-year period.

 

Private Equity (PE) Model (based on a $10 million investment)

 Year 1Year 2Year 3
Capital Deployed1$10,000,000$10,000,000$10,000,000
2% Management Fee$200,000$200,000$200,000
Expressed as % of deployed capital (B)2%2%2%

 

Litigation Finance Model (based on a $10 million investment evenly over 3 years)

 Year 1Year 2Year 3
Capital Deployed1$3,333,333$6,666,666$10,000,000
2% Management Fee$200,000$200,000$200,000
Expressed as %1 of deployed capital (A)6%3%2%

 

Differences in Fees in relation to Capital Deployed

Absolute Difference(A-B)4%1%0%
Difference as a multiple of fees in PE ((A-B)/2%)2X0.5X0X

1 Calculated assuming the capital is deployed at the beginning of the year.

The difference highlighted above can be taken to extremes when you have a relatively quick litigation finance resolution shortly after making a commitment.  In this situation, you have deployed a relatively small amount of capital that hasn’t been invested for long, but has produced a strong return – this typically results in large gross IRRs, but a relatively low multiple of capital (although the outcome very much depends on the terms of the funding agreement).  While this phenomenon produces very strong gross IRRs, when the investor factors in the total operating costs of the fund, the negative impact of those costs can significantly affect net IRRs.  Accordingly, investors should be aware that this asset class may have significant ‘gross to net’ IRR differentials (as well as multiples of invested capital), and one could conclude erroneously that strong gross IRRs will contribute directly to strong Net IRRs, but the ultimate net returns will vary with capital deployment, case duration. extent of operating costs and timing thereof.

I wouldn’t want this observation to discourage anyone from investing in litigation finance, but awareness of this phenomenon is important and very much dependent on the strategy of the manager, the sizes and types of cases in which they invest, and of course, is in part a consequence of the uncertain nature of litigation.  As an investor, I do think it is appropriate and fair where a fund manager obtains a quick resolution, that the commitment underlying the resolution be recycled to allow the Investor a chance to re-deploy the capital into another opportunity and achieve its original portfolio construction objectives  – recycling is beneficial to all involved. However, I would argue that it is not necessarily fair to charge the investor twice for the same capital, as that capital has already attracted and earned a management fee.

Stage of Lifecycle of Litigation Finance

Perhaps litigation finance is at the same stage of development as private equity experienced 20 years ago in terms of finding the “multiple arbitrage” opportunities, but a key difference is that the success rates in litigation finance are lower and the downside is typically a complete write-off of the investment, whereas private equity has many potential outcomes between zero and a multiple of their initial investment.  Of course, the home runs in litigation finance can be quite spectacular.  The quasi-binary nature of the asset class does present a dilemma in terms of compensation for managers and the costs inherent in running the strategy. The scale and deployment issues raised above are other issues that need to be addressed by fund managers and their compensation systems.

Notwithstanding the aforementioned, it takes highly competent and well-compensated people to execute on this particular strategy which sets a floor on management fee levels. A well-run and diversified litigation finance fund should win about 70% of their cases, and if they underwrite to a 3X multiple for pre-settlement single cases, then they should produce gross MOICs of about 2X (i.e. ~70% of 3X) and net about 1.75X (after performance fees and costs).  This would be the type of performance that is deserving of a ‘2 and 20’ model as long as those returns are delivered in a reasonable time period.  Conversely, if the majority of a manager’s portfolio is focused on portfolio finance investing, there may have to be a different compensation scheme to reflect the different risk/reward characteristics inherent in the diversification, scale and cross-collateralized nature of this segment of the market. One size does not fit all.

Let’s also not forget that litigation finance is delivering non-correlated returns, and one could easily assess a significant premium to non-correlation, especially in today’s market.

In Part 2 of this two-part series, I will explore the application of the ‘2 and 20’ model to litigation finance in comparison to private equity, the implication of the private partnership terms of some of the publicly-listed fund managers, and other operating costs specific to litigation finance.

Investor Insights

Any fund operating model needs to be designed taking into consideration all of the operating costs inherent in the manager’s operational model in the context of expected returns and timing thereof.  Investors care about being treated fairly, sharing risk and sharing the upside performance in order to foster long-term relationships that reflect positively on their organizations’ ability to perpetuate returns.  Professional investors rely on data to make decisions, and in the absence of data which might get them comfortable with a manager’s performance, they will default to mitigating risk. Tail risk in this asset class is not insignificant, which makes investing that much more difficult.  A performing manager that does a good job of sharing risk and reward with investors will have created a sustainable fund management business that will ultimately create equity value for its shareholders beyond the gains inherent in its performance fees.

 Edward Truant is the founder of Slingshot Capital Inc., and an investor in the litigation finance industry (consumer and commercial).  Ed is currently designing a new fund focused on institutional investors who are seeking to make allocations to the commercial litigation finance 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.

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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