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The UK’s highest court dealt a blow to the litigation funding industry on Wednesday after it ruled an agreement to finance a lawsuit brought in a truckmakers’ case was unenforceable.
The Supreme Court’s decision will send shockwaves through the industry and affect other civil lawsuits that have similar litigation funding agreements in place, lawyers say.
Litigation funding, where a finance company bankrolls a lawsuit for a percentage of any damages recovered, is increasingly used to back civil lawsuits in England and Wales.
The Supreme Court’s decision was on a case brought in the Competition Appeal Tribunal by the Road Haulage Association and other hauliers alleging competition breaches against DAF and other truckmakers.
The case was originally considered a legal finance agreement but the court decided it should be defined as a damages based agreement (DBA). As a DBA, it failed to satisfy certain conditions.
Lord Philip Sales, Supreme Court justice, handing down the ruling, said: “The funding agreements fall within the definition of a ‘damages based agreement’ and are therefore made unenforceable.”
Lawyers predicted the decision will lead to a flurry of litigation funders trying to redraft their existing agreements to ensure compliance.
Alice Darling, senior associate at Clifford Chance, said: “Litigation funding has become increasingly prevalent in recent years across all industries and types of claims, and this decision has rendered many funding agreements currently in place unenforceable.”
One litigation funder estimated that hundreds of civil lawsuits in the English courts could be affected by the ruling but said funders would be able to redraft existing agreements by instead agreeing to receive a certain multiple of the amount invested rather than taking a percentage of any award.
“It’s a bit of a self-imposed injury by the English courts,” the funder said. “There will be problems and delays but it’s not Armageddon by any means. But defendants are going to prick up their ears and have a poke at these cases and say they are not valid because of a technicality.”
Elena Rey, litigation funding group leader at law firm Brown Rudnick, said: “In anticipation of this decision, we have been working with funders and claimants to draft amendments to existing litigation funding agreements.”
The biggest impact is expected to be on the lawsuits lodged with the Competition Appeal Tribunal where more than 20 class action-style cases have been brought by consumer groups backed by litigation funding.
The cases alleging breaches of competition law have been lodged against large companies including Mastercard, Apple and BT.
Tim West, commercial litigation partner at Ashurst, said litigation funders with cases before the Competition Appeal Tribunal will need to “move quickly to review and potentially replace their funding arrangements and ensure they are in an acceptable form”.
“Otherwise, there is a risk their action could be dismissed as existing claims will not be immune from today’s decision,” he added.
Gary Barnett, executive director of the International Legal Finance Association, and Susan Dunn, chair of Association of Litigation Funders, representing the industry, said they were both “disappointed”.
“The decision is not generally expected to impact the economics of legal finance and will not deter our members’ willingness to finance meritorious claims. It will only affect how legal finance agreements are structured,” they said.
Travers Smith, which acted for Dutch group DAF, did not comment immediately.
Steven Meyerhoff, director at law firm Backhouse Jones representing the Road Haulauge Association, said his client was “disappointed” but was “confident” that the funding agreement between the group and its litigation funder could be amended so its claim can proceed.
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