A summary of the recent Court of Appeal decision in Sony Interactive Entertainment Europe Ltd v Alex Neill Class Representative Ltd, which confirmed that the litigation funding agreements under consideration were not unenforceable damages-based agreements.
The recent Court of Appeal (CoA) decision in Sony Interactive Entertainment Europe Ltd v Alex Neill Class Representative found that litigation funding agreements (LFAs) entered into by parties to collective proceedings in the Competition Appeal Tribunal (CAT), which provided that the funder's fee was to be calculated as a multiple of the funder's outlay and was capped at the level of the proceeds recovered, whether expressly or by implication, were not unenforceable damages-based agreements (DBAs).
The LFAs under consideration in the appeals had been amended from being rendered unenforceable as a consequence of the decision of the Supreme Court in R. (on the application of PACCAR Inc) v Competition Appeal Tribunal.
While the CAT did not consider that there was any real prospect that the appeals would succeed, it nonetheless allowed the appeals on the basis that, in light of PACCAR, the ongoing uncertainty regarding the enforceability of LFAs merited consideration and resolution on appeal.
The appeals raised two key issues in respect of the returns obtained by a funder:
- If the amount payable to a funder or insurer under the LFA is payable from and/or capped by the proceeds of a successful outcome, is the amount of the payment "to be determined by reference to the amount of the financial benefit obtained" for the purposes of s.58AA(3)(a)(ii) of the Courts and Legal Services Act 1990 Pt 2 (CLSA)?
- If the LFAs provide that the funder or insurer is paid a percentage of the proceedings "only to the extent enforceable and permitted by applicable law" (or similar) is it a DBA, otherwise impermissible, or inappropriate for the purposes of certification?
The CoA held that consideration of the financial benefit obtained should focus on the funder's primary contractual entitlement, which was to a multiple of outlay, not to a percentage of damages. The fact that the multiple outlay recoverable by the funder might be subject to adjustment depending on the amount of damages recovered, or at the CAT's discretion, did not alter the character of that primary contractual entitlement.
It also determined that while the funder's return was limited by reference to the proceeds, and therefore subject to an express or implied cap, that did not mean that it was calculated by reference to those proceeds.
The CoA referred to parliamentary materials, which suggested that DBAs are agreements where funders recover a percentage of the damages. The fact that the source of a funder's fees are damages does not in itself mean that a funding agreement is a DBA, nor does the inevitably of an upper limit on the amount recoverable. The key point is that the funder's fee is ultimately calculated by reference to the amount of funding provided.
The decision of the CoA aligns with the recommendations of the CJC in its recent report on litigation funding, which included the reversal of PACCAR through legislation with both prospective and retrospective effect. The appeals in this case were stayed in March 2024 in anticipation of the passage through Parliament of the Litigation Funding Agreements (Enforceability) Bill, which would have reversed the decision in PACCAR.
This Bill, however, did not pass before the 2024 General Election and the current government decided not to reintroduce the Bill until after the publication of the CJC report. As a result, the uncertainty around the enforceability of LFAs remained.
The CoA's decision is a welcome one, as it provides much-needed clarity on the status of LFAs. It is a sensible outcome that overturns the existing untenable position that makes funding under LFAs practically impossible, jeopardising the future of collective proceedings such as those in this case.
This article was co-authored by Trainee Hamish Montgomery.
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