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The Supreme Court held that third party Litigation Funding Agreements (LFAs) that entitle funders to a percentage of the damages recovered are Damages Based Agreements (DBAs) within the meaning of the legislation that regulates such agreements. This means that LFAs are subject to the statutory requirements and restrictions that apply to DBAs, such as the cap on the percentage of damages that can be paid to the funder.
The majority based their decision on the following reasons:
The majority rejected the argument that LFAs are not DBAs because they are not contracts for services, but contracts for loans or investments. They also rejected the argument that LFAs are not subject to the same policy concerns as DBAs, as they are regulated by other means, such as contractual terms, ethical standards, judicial discretion and competition.
The court noted that whilst the litigation funding industry had previously been proceeding on the basis that LFAs were not DBAs, most LFAs currently in place are likely now to be unenforceable. This means that it leaves some funders facing difficulties with recovering historical legal spend (let alone any return on their investment) and significant losses.
Funders, solicitors and claimants will immediately be asking whether their LFA is a DBA, and if so, did it comply with the requirements of The Damages-Based Agreements Regulations 2013 (SI 2013/609) as to whether or not it is now unenforceable and unlawful. That will raise serious issues as to where it leaves their litigation.
In the longer term it means that a radical review of the entire litigation funding sector in the UK is required.
If you are facing uncertainty over the enforceability of your LFA, you should seek independent legal advice.
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For more legal advice regarding enforceability of LFAs, or any other dispute related matter, please don’t hesitate to contact us.