Arbuthnot: Funder took immense risk
The former MP who championed the cause of sub-postmasters has defended the litigation funder which took a large chunk of the damages in the pivotal civil action.
Lord Arbuthnot’s comments came in the second reading in the House of Lords of the Litigation Funding Agreements (Enforceability) Bill, which reverses last year’s Supreme Court ruling in PACCAR.
The bill, which has retrospective effect, restores the position that LFAs are not damages-based agreements (DBAs) and thus do not have to comply with the 2013 DBA regulations.
None of the speakers during the two-hour debate – most of whom were lawyers – opposed the bill.
There was widespread support for some form of regulation of third-party litigation funders, which will be a key issue addressed by the Civil Justice Council review of the market commissioned by Lord Chancellor Alex Chalk.
Its terms of reference will be published shortly, with an interim report due this summer and a final report by summer 2025.
Introducing the bill, Lord Stewart, the Advocate-General for Scotland, said the review would consider issues such as greater safeguards for claimants, regulation of the sector and caps on the returns to funders.
He confirmed that the “legality and propriety” of the bill being retrospective, including its compatibility with the European Convention on Human Rights, has been “considered carefully” – although some peers said they would want to explore this in more detail during the bill’s committee stage.
Lord Stewart said: “If the bill were prospective only, there would be uncertainty as to the enforceability of agreements entered into before the PACCAR judgment but where the claim is concluded after the Act comes into force. This could lead to undesirable satellite litigation, which would benefit no one.”
Lord Arbuthnot described “the fantastic judgment” of Mr Justice Fraser in the Bates group litigation in 2019 as the “turning point” in the sub-postmasters’ story and as evidence of why litigation funding was essential.
The case was backed by Therium and there have been criticisms of how much of the damages it took.
He said: “It is regrettable that the 555 sub-postmasters failed to recover their full costs from the Post Office. It was certainly regrettable that, out of a settlement of £57m, after legal and litigation funding costs only £12m found its way into the pockets of the sub-postmasters.
“However, I do not say that the litigation funders were unfairly recompensed. They took the immense risk of taking on the country’s most trusted brand, the Post Office, which was backed by the bottomless purse of the taxpayer.
“That was a risk that needed a high pay-off if it succeeded, because it would have been ruinously expensive for the litigation funders if it had failed.”
But Lord Arbuthnot argued that, alongside a “properly regulated system of litigation funding”, there should be other methods of obtaining redress, “including the model of regulators-plus-ombudsmen recommended in various books by the chairman of the Horizon compensation advisory board, Professor Christopher Hodges”.
The former Lord Chief Justice Lord Thomas spoke strongly in favour of the role of litigation funding in providing access to justice.
He reiterated his previously expressed scepticism about regulation – “[It] has not served us well in many areas” – and suggested that “self-regulation may be the better thing; or, simply agreeing some principles and leaving the courts to police what is effectively in front of them may be a way forward”.
He also issued a “plea to the litigation funding industry, and maybe to others who do very well out of litigation” that they consider providing assistance for “small but very important cases that have wide implications, and that are not suitable for litigation funding, and whether some of the money that is made can be put into this kind of enterprise, which is so important not merely for the rule of law but for our society as a whole”.
Lord Carlile, the one-time LibDem peer who now sits as a cross-bencher, said “we should be prepared, if absolutely necessary, to provide statutory legislation for litigation funders—though I suspect from what I have seen that they will be willing to move voluntarily to a proper level of regulation, which is in some ways much better than statutory legislation because it is much more flexible”.
LibDem Lord Marks was one of the voices for stronger regulation, saying unregulated litigation funding “leaves us caught in a bit of a jungle out there”.
“The traditional rules against champerty were founded on a distrust of investors, in effect, gambling on other people’s litigation. Despite the growth of litigation funding, the grounds for that distrust have not been entirely extinguished.
“On the other hand, they have to be balanced against the need to enable access to justice—a point that has been made.
“That is a need that, I suggest, can be met by a well-regulated and fully functioning system of private sector legal funding alongside a fully functioning legal aid system.”
Labour peer Lord Mendelsohn questioned whether the CJC was the right body to review the funding market, “because it is about the development of an economic market with economic activity, actors and consequences”.
The most sceptical note was sounded by Baroness Jones of the Green Party, who said the bill appeared “quite sensible” by restoring the pre-PACCAR position, “but the more one looks at it, the more it appears to be designed to protect the profits of hedge funds, sovereign wealth funds, banks and other backers of these litigation funding agreements, without any consideration of the impact that it will have on the claimants being funded”.
Three barristers – Lords Meston, Sandhurst (Guy Mansfield KC) and Trevethin and Oaksey (Patrick Lawrence KC) – also raised changes to the DBA regulations that were recommended in 2019 by Nick Bacon KC and Professor Rachael Mulheron to remove the uncertainty about the legality of hybrid agreements that combine a DBA element with some other form of payment, such as reduced hourly rates.
Lord Trevethin and Oaksey sought an assurance “as to the speed with which the ministry and the government will move in the direction of reforming the DBA regulations”.
Lord Stewart said only that the government would “consider the timetable to make improvements to the DBA regulations without encouraging unnecessary litigation”. Any revisions would be subject to a statutory consultation.
Lord Trevethin and Oaksey went on to suggest that the regulations around DBAs and conditional fee agreements should be restructured so as not to operate “in a completely binary way” of the agreement being either enforceable “if all the boxes and regulations have been ticked” or otherwise unenforceable.
“There is no middle ground whatever. There is nothing resembling the jurisdiction in the consumer credit legislation, which gives the court a power to hold that a consumer credit agreement is enforceable notwithstanding that there has been some technical non-compliance with the relevant regulations.
“Something of that sort would work well here because where there is the completely binary structure of enforceable or wholly unenforceable, there is trouble ahead: the stakes are raised much too high.
“With this sort of structure, a party who shows that the relevant agreement is unenforceable stands to gain massively. A finding of that nature will close down the litigation and lead to a saving of millions, many of millions or hundreds of millions of pounds.
“You get very expensive, time-consuming, recondite satellite litigation which goes all the way to the Supreme Court and filters back down through the court system, causing judges to wrestle with difficult points.”
Two matters were clear from the debate:
1. Serious issues arise in respect of convention rights and retrospectivity. This will be a major theme for investigation. Even the Bill’s major advocates stated as much. The Government’s supporting documents are flawed as a matter of law. This is only stating to come to light. Any first year associate will understand Paccar did not create new law. As such the Bill does not ‘restore’ anything. Nor does it ‘return to the position’. Major A1P1 and A6 issues ahead.
2. Regulation is clearly a theme. When do the large group of sub-postmasters start coming out of the woodwork asking for something more than a fraction of what they are due? Why is Mr Bates not out publicly advocating for them now? Curious.
Whilst support for the Bill amongst a large group of esteemed lawyers at the second reading was clear, and the prospective aspect is likely to succeed, there is much much more to this story to unfold as the broader Parliament is briefed on its effect and implications.
Grab your popcorn and tune in. Should be fun politics.