Once upon a time in the Supreme Court

There is an internet meme of Leonardo DiCaprio pointing at his television set from the movie Once Upon a Time in Hollywood (written and directed by Quentin Tarantino) known as “Pointing Rick Dalton”.
 

It is a meme that demonstrates feelings of animated recognition, perhaps the recognition of “I knew it” or “I told you so”. If you need a reminder have a look now on your favourite internet search engine and you will quickly get the idea.

When I first read the decision of the UK Supreme Court in R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents) [2023] UKSC 28 now commonly known as “PACCAR”, I could not help but think of Professor Rachel Mulheron and Nick Bacon K.C. reading the judgment and pointing at their computer screen and quite rightly saying “We told you so”. To recap, the UK Supreme Court, with a ratio of four to one, found that litigation funding agreements (“LFAs”) which enable funders to take a payment based on the amount of damages recovered are to be regarded as Damages-Based Agreements (“DBAs”) and are therefore caught by section 58AA(3) of the Courts and Legal Services Act 1990 (“the CLSA”).

The consequence for that agreement, as will subsequently be the case for many other agreements, is that it would be unenforceable. This article will not rehearse the facts of the PACCAR case any further as there are already a large cache of blogs and comments covering the facts and what constitutes “claims management services”. This article will instead look at how we got here, how this should have been avoided and what might be around the corner. The only other point worth mentioning at the outset is that the dissenting judgment of Lady Rose contributed 58 of the total 98 page judgment.

When we suggest that Professor Rachel Mulheron and Nick Bacon K.C. might have seen this coming, we do not mean that they think or thought that LFAs are/were DBAs but they certainly warned us all about this potential problem in the excellently constructed draft DBA Regulations 2019 (“the draft regulations”). Those draft regulations have been gathering dust in one or more government departments for over four years now. When those draft regulations first saw the light of day we had never heard of the coronavirus, rapid lateral flow testing or experienced a lockdown. Yes, it was that long ago.

The draft regulations contained the following very illuminating and prophetic provisions;

Regulation 1(4) Paragraph (c): “It is not intended that litigation funding agreements entered into between a client and a third party funder should be caught by the 2019 DBA Regulations, and nor is it intended that these should be inadvertently treated as DBAs. For that reason, a litigation funding agreement, as defined in Reg

1(4)(c) and in accordance with s 58B of the CLSA 1990 (unenacted), is expressly excluded from the ambit of the 2019 DBA Regulations.”

Also, in recommending the use of hybrid agreements at Regulation 4(1) paragraph b(ii); “circumvent the need for solicitors to enter into ‘side agreements’ with third party funders who pay the law firm the WIP as the case progresses under ‘hybrid DBAs’, but who then may take percentage cuts from both the solicitor and from the client too. The permission for hybrid DBAs under the 2019 DBA Regulations is intended to remove the need for any such practices.”

Dealing briefly with hybrid agreements we of course now have Zuberi v Lexlaw Ltd [2021] EWCA Civ 16. This perhaps has abated the appetite for regulatory or statutory reform allowing the existence of hybrid agreements because this was not only authority for the proposition that there was nothing objectionable in a part of a contract which was unenforceable as capable of being severed as a matter of public policy but, perhaps most importantly, because any damages-based provision in an agreement was the only part of the agreement that could be regarded as a DBA. This allowed the parties to contract for different payment terms within the same agreement (i.e. termination meant quantum meruit kicked in where damages had yet to be achieved). So hybrid agreements became permissible by the side door and nobody worried any longer about the termination beartrap that had lingered since 2013.

The draft regulations sought to clean up the existing 2013 regulations in many other aspects and also promote the use of DBAs in mainstream litigation as Jackson LJ intended, but why did the government not see this coming when the draft regulations did?  Failing to put these draft regulations into practice was a mistake by the government probably of gargantuan proportions, particularly for UK based litigation funders. On 31 August 2023 the Department for Business and Trade made the following statement “The Department is aware of the Supreme Court decision in Paccar and is looking at all available options to bring clarity to all interested parties”.

We cannot escape the cynical view doing the rounds that the four of the five Justices of the Supreme Court might view third party funders using damages geared funding agreements as engaging in new age Champerty and Maintenance which makes the clean up process much harder to achieve. But can it really be the case that such agreements will be impermissible in the Competition Appeal Tribunal (“CAT”) for the foreseeable future? This is potentially very damaging for access to justice and the Consumer Rights Act 2015 and perhaps this is why the Department for Business and Trade felt it necessary to comment. Will Parliament now step in for example?

In the meantime what can funders, clients and lawyers do outside of the CAT where they find themselves stuck with an unenforceable LFA? In cases where the contract is not complete and the litigation is still extant, presumably the client still needs funding, the lawyer still wants to get paid and the funders still want to make money so a classic agreement using a multiple of the investment seems a perfectly agreeable solution.

We know from Birmingham City Council v Forde [2009] EWHC 12 (QB) that it was not against public policy to have contingency fee agreements with retrospective payment provisions so one would hope this could also be applied to post-2013 DBAs allowing all parties to the agreement to have another go at making the agreement an enforceable one as well as having it cover all work from the start of the claim. The only possible resulting argument one can now foresee is that if the multiple is capped by reference to damages, is this also going to caught by s58 of the CLSA?

No doubt a costs lawyer or costs counsel could conjure up a coherent argument on that basis which, if successful, could really stick the knife into the already dazed UK funding market. Worrying times for funders and for access to justice.

Outside of the CAT and in matters where the lawyers are or were acting pursuant to their own DBA, funders could in theory attempt to comply with s58 of the CLSA but given the 50% cap (in non-employment and personal injury cases) includes the payment to the lawyers and in some cases counsel, how exactly will the funder manage to squeeze into the cap is a rather difficult proposition. You would need some very large damages recoveries or some very modest lawyers and counsel’s fees to make the numbers work for the cap and indeed the client. The explanatory note to the 2013 regulations provides that;

“Regulation 4, which applies to all DBAs other than those which relate to employment matters, provides that the payment from a client’s damages shall be the sum agreed to be paid (which, where relevant, will include any disbursements incurred by the representative in respect of counsel’s fees) net of any costs (including fixed costs), or sum in respect of counsel’s fees, payable to the representative by another party to the proceedings.”

Clearly this does not mention funders but the ship has sailed on whether they fit into the definition of “legal representative” or “claims management services” so the important point to note is that any lawyer and counsel who had a perfectly good DBA might now be in a position where a funder’s accidental DBA has caused them all a problem.

What would it mean, for example, for a lawyer who advised the client to enter into the accidental DBA and where the client has now made the payment to the funder under an unenforceable DBA? Does the client then have a claim for professional negligence against the lawyer and/or does the client have a claim against the funder under the law of mistake or restitution? There must be clients out there taking advice on these points as this article goes to publication.

Similarly, Ben Williams KC, told the 2023 Costs Law Reports conference that those clients/consumers would need to be ‘angelic’ not to capitalise on the ruling – as reported by Rachel Rothwell in the Law Society Gazette on 29 September 2023.

One possible route around the problem rests within the law of severance.

It is important to note that the law on severance was initially built on restrictive covenants in employment contracts and while this has recently been developing (for the common law) in the world of Conditional Fee Agreements (“CFAs”), it is not clear whether one could severe the DBA clause and the agreement survive the three stage test of severance set out in Beckett Investment Group Ltd v Hall [2007] EWCA Civ 613. The lawyers tried and failed in the case of Diag Human v Volterra Fietta [2023] EWCA CIV 1107, which involved a Discounted CFA and an attempt to use the severance point that was successful in Zuberi (supra). They failed to gain any assistance from Zuberi because the Court of Appeal upheld the judgment of Foster J below which is perfectly summarised in the lead judgment by Lord Justice Stuart-Smith at [53] “In my judgment, Foster J was right to reject the solicitors' submissions based on Zuberi, essentially for the reasons that she gave. The starting point is the terms of section 58(2)(a), which I have set out above at [19] above. As I have already indicated, that definition of a CFA precludes splitting off the provisions for payment of the solicitor's discounted fees and treating them as not forming part of the (unenforceable) CFA. I accept the client's submission that the discounted fee provisions which the solicitors seek to enforce are part of the core agreement that make the September 2017 Agreement a CFA. Second, the provision for discounted fees is not analogous to the "termination" provision in Zuberi. Third, the considerations of public policy which supported Lewison LJ's narrow construction of the meaning of a DBA are absent in a case involving CFAs such as the present.”

We know from applying the test of severance in Beckett (supra) that changing an agreement from a contingent agreement to a standard fee paying agreement would change entire character of the agreement thus making severance impossible. If one was to try and carve out the damages provision they would have to try and maintain the character of the agreement at least in terms of it being contingent if not geared towards damages. This would take some seriously skilled drafting in anticipation of a future dispute.

The last point to consider is the governance of the contract. What if the parties agree to have the contract governed by another legal system? Can this problem created by PACCAR be subverted? This is possible for parties in the UK under Rome Regulation 1 2008 which the UK still subscribes to by virtue of The Law Applicable to Contractual Obligations and Non-Contractual Obligations (Amendment etc.) (EU Exit) Regulations 2019. Article 3 of Rome 1 allows the contracting parties a freedom of jurisdiction; “A contract shall be governed by the law chosen by the parties. The choice shall be made expressly or clearly demonstrated by the terms of the contract or the circumstances of the case. By their choice the parties can select the law applicable to the whole or to part only of the contract.”

This then appears to be viable if, for example, one party is based in Paris or Dublin and the other based in the UK but, surely, if both parties were based in the UK then Article 9 carrying the mandatory provisions would prevent an attempt to derogate from the requirements of s58 of the CLSA and therefore stop that contract in its tracks. Perhaps funding from the US or Switzerland is the answer. All we know for now is that the funding landscape in the UK has shifted and, unless Parliament steps in pretty soon, access to justice could be impacted. If only the government listened to Professor Mulheron and Nick Bacon K.C. when they had the chance.

Leonardo DiCaprio does not know he is providing the hook for an article on the law of costs, but then again, UK funders did not think they were providing claims management services. It is a funny old world.

Further Information

If you have any questions or concerns about the topics raised in this blog, please contact Michael Tyler.

About the Author

Michael Tyler is a Partner and the Head of the Costs Team with over 18 years’ experience in the field of costs law. He is the ‘go to individual’ when it comes to Part 36 offers and negotiation strategy of high value costs matters and insurance coverage.