In a unanimous and significant judgement, the Court of Appeal has dismissed a challenge to the legality of litigation funding agreements (LFAs) structured around a multiple of the funding provided – a ruling that will bring major relief to the litigation funding industry.
The case, Sony Interactive Entertainment Europe Limited & Anr v Alex Neill Class Representative Limited, was heard by Sir Julian Flaux, Chancellor of the High Court, along with Lord Justice Birss and Lord Justice Green. The judges rejected arguments from defendants, including Sony, Visa, Mastercard, and Apple, who sought to invalidate funding arrangements in several class actions currently before the Competition Appeal Tribunal (CAT).

The appellants contended that these LFAs were, in effect, damages-based agreements (DBAs) – which are not permitted in CAT proceedings – because they linked the funder’s return to a portion of the damages or undistributed damages. Such arrangements, they argued, fell within the scope of section 58AA(3)(a)(ii) of the Courts and Legal Services Act and would be unenforceable unless compliant with the DBA Regulations 2013.

Sir Julian Flaux rejected this interpretation, noting:
“The appellants argue that any cap on the funder’s return tied to the damages results in the LFA becoming a DBA. But since most funding arrangements inevitably involve returns from damages, this logic would mean virtually no LFA could avoid being classified as a DBA”

He continued:

“Given that third-party litigation funding is essential to collective proceedings in the CAT, the appellants’ position would lead to the absurd result that such funding becomes practically unworkable. Even more illogical is that, under their argument, an LFA with no cap – potentially allowing excessive funder profits – would be enforceable, while one with a protective cap for the benefit of the class would not.”

Flaux clarified that DBAs apply where a representative’s fees are calculated as a percentage of damages recovered. In contrast, LFAs that base the funder’s fee on a multiple of the capital deployed are fundamentally different. Supporting submissions from Nicholas Bacon KC for the claimants, the court ruled that the fee in such LFAs is determined by reference to the amount of funding provided – not by the damages recovered – even if the damages are the source of payment. The presence of a cap does not convert the agreement into a DBA.

The Sony v Alex Neill ruling provides vital clarity for funders following the uncertainty created by the Supreme Court’s decision in PACCAR, which prompted a shift toward LFAs based on multiples rather than percentages. Had this appeal succeeded, it would have rendered many existing agreements invalid, destabilising ongoing and future class actions.

The Sony v Alex Neill decision is a major win for the funding sector, though it remains to be seen whether it will be taken to the Supreme Court.

Types of Litigation Funding Agreements

The Court of Appeal’s ruling in Sony v Alex Neill has direct and positive implications for third party funders, particularly in how it preserves the enforceability of litigation funding agreements (LFAs) that are structured as a multiple of the capital provided.

At Annecto Legal, we assist with a range of litigation funding solutions tailored to the needs of law firms, claimants, and corporate clients. Some of the main types of litigation funding agreements we assist with include:

Third party funding 

One funding method that is commonly used for disputes is third party funding. Third party funding acts as a form of non-recourse financing for litigation. Third party litigation providers take on the financial risk of litigation so that clients can pursue a claim without having to worry about the legal fees associated with it.

In return for taking the risk, the litigation funder will typically seek a share of the proceeds in the region of a fifth to a third of any damages recovered. This means that you keep up to 80% of the reward, having taken none of the risk. If the claim is unsuccessful, the funder will lose their investment. 

Damages based agreement 

A damages based agreement (DBA), also known as a contingency fee agreement, is a type of arrangement made between a client and a solicitor in which the solicitor agrees to fund their case and share the risk of litigation. In return, the solicitor will be paid a percentage sum of the damages recovered as long as the client’s case is successful.

DBAs provide that, instead of being paid on a conventional hourly rate, the solicitor’s legal fees are only payable in the event that the case is successful. Therefore, these types of agreements allow clients the opportunity to pursue a case without having to worry about the solicitors’ fees associated with it. In some circumstances, however, fees for Counsel and other disbursements may still be payable by the client. 

ATE insurance

After the event (ATE) legal expenses insurance is taken out after the event that has led to a dispute has taken place to protect you in the case of your claim being unsuccessful. ATE insurance can protect you from paying your opponent’s legal costs, should your claim not be successful.

However, ATE insurance is not free, and it is important to remember that if your case is successful, you may have to use some of your reward to pay the cost of the insurance premium, which will be included in the terms and conditions.

The use of third-party litigation funding, CFAs and ATE insurance can sound complicated, but they are simply risk management tools and when used correctly, they can make all the difference to a dispute case.

How can Annecto Legal assist?

Alternative funding for commercial disputes is about finding the best way to manage the financial risks of litigation. Annecto Legal assists with commercial litigation funding and ATE insurance.

Clients can transfer the costs and risks of their case using commercial litigation funding and insurance to put themselves in a position of strength to negotiate the best settlement possible or go to trial if necessary.

We deal with a variety of legal cases, including assistance with insolvency litigation, breach of contract solicitors, professional negligence solicitors, fraud, banking litigation and can even help if you’re suing a solicitor or looking for commercial dispute resolution, including international arbitration.