Rude health or losing wealth – where is the litigation funding market now?

The litigation funding market had a tumultuous year in 2023. Although there were some notable successes, many funders lost money and all funders were disrupted by PACCAR. We consider why and what the future might hold for litigation funding.

19 January 2024

Hand on calculator and financial paperwork

Where is the litigation funding market now?

The litigation funding market could be labelled as somewhat of a mixed bag.

In September 2023 Burford Capital published details of a $16 billion award – the biggest ever for a Burford-backed case. The claim was brought by Petersen Energia Inversora and Eton Park Capital Management against the Argentine Republic and YPF S.A. in the US District Court of New York. According to Bloomberg, Burford are entitled to approximately $6.2 billion of the damages.

The announcement acts as a belated comeback for Burford after its waters were muddied in 2020. As long as it can enforce even a fraction of the judgment, it will have well-exceeded its publicised returns, Muddy Waters be damned. This case perfectly illustrates the significant rewards that litigation funders have been touting to investors and the markets.

However, there are signs that life is not as rosy for other litigation funders as this recent win would suggest. For Augusta Ventures, another leading funder, 2022 was their second, worsening, year of losses. Similarly, despite an increase in revenue and a record number of completed cases, Manolete reported heavy losses in March 2023.

These funders are faring better than the likes of LionFish Litigation Finance (a captive litigation funder sold by RBG Holding plc to an asset manager this summer) and Affiniti Finance Limited. The former suffered losses in excess of £4 million in 2022 and the latter went into administration in November 2021 owing £43 million, with administrators still struggling to grapple with the fallout.

It wasn’t all bad – Manolete recently reported more positive half-year results to September 2023 and Litigation Capital Management also announced strong financial results in September, which flow from a significant return on a funded dispute in the London Court of International Arbitration in June 2023.

However, it’s currently fair to say that there are more negative results than positive ones. It’s not immediately apparent why this is and the recent significant rises in interest rates are not going to improve the situation for funders.

PACCAR – an industry shake-up

Is part of the problem the judgment of the Supreme Court in PACCAR?

In giving judgment in that case, the Supreme Court surprised the litigation funding industry by holding that the Claimants’ Litigation Funding Agreements (LFAs) were Damages-Based Agreements (DBAs) and were therefore subject to the DBA regulations.

The Supreme Court decided that the Claimants’ LFAs did not comply with these stringent regulations and were therefore unenforceable. This was not the outcome that the industry expected and has caused some serious concern.

Why did the majority of the Supreme Court reach the conclusion it did? On its face, the judgment is one pertaining to technical legislative analysis – but to what extent did the opinions of the Supreme Court judges on litigation funding have an influence?

The question was most certainly not lost on defence counsel. In a recent competition case, Sony’s lawyers ran the argument that the Supreme Court’s judgment required courts, when assessing LFAs, to adopt “a broad approach to assessing whether funding agreements were DBAs and effectively imposed a requirement to assess the proportionality of returns to funders which might, in reality, be DBAs in disguise”.

However, the Competition Appeal Tribunal (CAT) concluded that was not the correct reading of the PACCAR judgment and that the intention was not for the courts to take such a proactive role. Instead, given that the parties had agreed to such a clause and it was deemed “an entirely proper position to take”, the CAT found that the amended LFA was not an unenforceable DBA. Further, the CAT held that “any concerns about the proportionality of the funder’s return by reference to the risk and level of funding commitment it has made is best dealt with in the context of any judgment or settlement”.

In attempting to understand the Supreme Court’s decision in the PACCAR case, it’s important to note that they did not reach this conclusion because of legislative construction nor because the majority were worried about cases being pursued solely for the benefit of funders. PACCAR instead concerned a European Commission cartel case against five major truck manufacturers.

The CAT rejected the suggestion that it should consider the proportionality of the returns under an LFA. It cannot be a judge’s role to comment on the fairness of a funding agreement. This should be determined by market economics and to achieve this we need a robust, effective, and engaged litigation funding market and lawyers that hold the same professional objectives as they always have in this area.

Whatever the motivations of the Supreme Court majority in PACCAR, the decision has generated an interesting variety of responses. The courts subsequently considering the judgment have seemingly sought to limit the impact of the decision. In addition to the response of the CAT in Neill v Sony, both the High Court in Therium v Bugsby Property and a separate panel of the CAT in the Mastercard and VISA interchange fees proceedings took restrictive approaches. The Government has stated an intention to correct the legislative fault at the heart of the decision, but limited to claims in the CAT. This seems an opportunistic response as the Government is a regular defendant, and so stands to benefit from a restriction to litigation funding and it is not regularly a defendant in the CAT.

Where next?

Following the CAT’s decision in Neill v Sony, both funders and funded can rest easy in the knowledge that only the LFAs, or parts thereof, that take remuneration as a percentage of the damages awarded will be unenforceable. Sony are, however, seeking to appeal that determination.

The furore created by The Post Office scandal may well have a still greater impact, particularly after the release of ITV’s dramatization of the scandal: Mr Bates v The Post Office. Mr Bates has publicly acknowledged the importance of Therium’s funding in enabling sub-postmasters to bring their claims against The Post Office. The Government is on the wrong side of this scandal, which may well motivate it to correct PACCAR faster and more comprehensively as a result.

PACCAR may turn out to be a flash in the pan for litigation funders. Interest rate rises removing the plentiful supply of cheap money could yet have a much greater impact in the end. However, as Burford has demonstrated so spectacularly, there is still a lot of money to be made. Although many funders may struggle, the stellar returns of a few will likely continue to draw investors for some time to come.