Litigation funding is an exceptionally risky business, which current delays and uncertainty over new rules is worsening, writes Leslie Perrin
The UK’s reputation as a leading destination for investment and a trusted jurisdiction for justice depends on legal frameworks that are both effective and predictable.
That is why the government’s recent light-touch proposals on the opt-out collective action regime are welcome.
The recommendations – stemming from a Department for Business consultation on the opt-out regime – include those geared toward faster distributions in successful class actions, better management of legal costs and procedural reforms.
It is now 10 years since the UK’s very first opt-out collective action was filed in the Competition Appeal Tribunal (CAT), the specialist court which handles cases concerning opt-out claims, market mergers and economic disputes.
Collective actions are important. They help ensure competition law is enforceable in practice. They deter anti-competitive behaviour, promote fair competition and prevent businesses that break the rules from gaining an unfair advantage over those that comply with them. In that sense, the regime underpins both access to justice and confidence in fair and competitive markets across the UK.
None of this would be possible without investment in such cases, which comes from the third-party litigation funding industry. Despite its accepted importance in providing access to justice, it is an industry that has faced uncertainty in recent years.
Funders still await the implementation of key recommendations made a year ago by the Civil Justice Council around returns on investments, as well as government legislation which was promised to reverse the 2023 Supreme Court judgment known as PACCAR, which is a significant issue for the industry.
However, a more immediate question confronts the future of the opt-out regime itself: the Competition Appeal Tribunal’s developing approach to litigation funding agreements and a failure to appreciate the scale of the commercial risk undertaken by those who finance cases.
Funders commit substantial capital to investigate, certify and pursue claims that can take many years to resolve. In return, they receive an agreed share of any recovery if the claim succeeds. If it fails, they lose their investment.
What is often overlooked is that funding collective proceedings is an exceptionally risky business, often beset with delays and complex legal matters. Funders must absorb significant upfront costs – always facing the genuine prospect that their entire investment could be lost.
That is why recent signals from the CAT are causing concern. The Tribunal appears increasingly willing to revisit funding arrangements and priority agreements when determining distributions, effectively reassessing returns after a case has concluded. The concept of “success” being applied remains uncertain and may depend on factors that were impossible to predict when funding was first committed.
Capital is mobile. Investors will only deploy funds into litigation if the potential return reflects the risks undertaken. If returns become uncertain or unattractive, investment will flow elsewhere. No investment market can function effectively if agreements are liable to be substantially redrawn after the event. Funding arrangements are negotiated and priced according to risks assessed at the outset. If returns can be recalculated years later, uncertainty inevitably increases, and funding becomes more expensive. Some claims may never be brought at all.
Just as the scrutiny of the behaviour of big business is entirely appropriate, so too is the scrutiny of funder returns. But there needs to be a level playing field.
If the CAT wishes the regime to remain effective over the next decade and beyond, it must ensure that the risks taken to deliver access to justice are properly understood and respected.
This is ultimately not just a debate about litigation funding. It is a test of whether Britain remains committed to the predictable, stable and investment-friendly legal framework on which access to justice and market confidence depends.
Leslie Perrin is the chairman of Calunius Capital
