News

Director Tom Davey explores the Post Office scandal and litigation funding in Thomson Reuters Regulatory Intelligence, PLC Magazine and Litigation Finance Insider

Director Tom Davey discusses the role of litigation funding in the recent group action against the Post Office, and argues that it is vital that the UK government learns from the story of Alan Bates and reverses last year’s controversial PACCAR judgment.

Tom’s article was published in Thomson Reuters Regulatory Intelligence, 29 January 2024, and can be found here. He also authored an article for PLC Magazine, 01 February 2024, which can be found here, and Litigation Finance Insider, 06 February 2024, which can be found here.

The Post Office’s Horizon scandal has been described as the biggest miscarriage of justice in British legal history, having been recently dramatized in the television series Mr Bates v The Post Office which brought this remarkable story palpably home to the British public.

The series told the true story of the group litigation action, led by Alan Bates of the Justice for Sub-postmasters Alliance (JFSA), where over 500 sub-postmasters successfully brought a High Court action against the Post Office to clear their names, having been wrongly prosecuted for theft, false accounting, and fraud as a result of bugs, errors and defects in the Horizon IT system. With more than 3,500 sub-postmasters accused of such discrepancies between 1999 and 2015, the Criminal Cases Review Commission called it the “most widespread miscarriage of justice” ever seen in the UK.

Whilst the case was ultimately settled out of court for £58m, leaving each claimant with some £20,000 after costs, the UK government agreed to supplement this compensation and to establish a statutory inquiry into the scandal. The criminal courts, meanwhile, began quashing the convictions of over 900 sub-postmasters who had been wrongly convicted over a 16-year period thanks to the defects in the Horizon IT system.

This landmark case helped to prompt UK government support for the litigation funding sector.

The vindication of those wrongly accused was made possible by litigation funding, which played a key role securing access to justice. Remarkably, however, the UK’s litigation funding sector was put in jeopardy in July last year, by a landmark UK Supreme Court judgment in PACCAR and ors. v Competition Appeal Tribunal and ors which dealt a serious blow to litigation funders. By a majority of four to one, the judges held that many litigation funding agreements (LFAs), which allow funders to recover a percentage of damages are, in fact, damages-based agreements (DBAs), enforceable only if they comply with the relevant regulatory regime.

This was a judgment with serious consequences for public access to justice. The potential ramifications for the viability of class actions were enormous and, in practice, meant that many future group actions would simply become unviable for litigation funders to even consider.

The PACCAR judgment is widely considered a retrograde step, out of tune with the global trend towards allowing the greater use of litigation funding. The UK Supreme Court itself has even acknowledged the vital role litigation funding can play in helping consumers secure access to justice.

Litigation funding has now become a global industry with its own recognised asset class, and an estimated US$17bn global market, which looks set to more than double in the next 10 years. With increasing numbers of US states permitting litigation funding, as well as Indian firms also finding a greater role for such funding in a jurisdiction where it faces no statutory or regulatory bars, it is clear that this is becoming a global trend.

Australian courts, by contrast, take a pragmatic approach to regulating litigation funding, through the judicial oversight of funding agreements. With judges able to intervene on behalf of claimants if a contract is viewed as contravening public interest or if it is onerous and unfair, Australia had considered regulating litigation funding but, after a change of government, that policy was not brought forward.  The Australian litigation funding model shows that courts themselves can adequately supervise funding within a legal framework, rather than requiring a statutory regulatory regime, which could have a stifling effect on a nascent industry.

Increasingly, litigation funding is also employed by corporations as well as consumers, where corporates avail themselves of the benefits of procuring non-recourse and unsecured financing to take their legal spend off-balance sheet in pursuing or defending claims.

However, litigation funding is a high-risk area of business, and it is not always easy to make returns. Funders therefore need adequate freedom to price the risks involved. In the longer term, with the growing importance of funding, it will be interesting to see if the regulators step in or allow this industry to be governed by the courts under an evolving legal framework.

Fortunately for funders, law firms and consumers alike, the UK government’s reaction to the PACCAR judgment following the Post Office scandal shows its willingness to legislate pragmatically to protect litigation funding.

The UK Justice Secretary, Alex Chalk, duly announced the government’s intention to legislate to counteract what he called the “damaging effects” of the controversial judgment, to protect the UK’s litigation funding sector. This is of vital importance of litigation funding as an industry, and its role in helping consumers secure access to justice, as was seen with the Post Office scandal.

The shockwaves of the Post Office scandal will no doubt continue to resonate through the UK justice system for the foreseeable future, along with many other major group cases of recent years. In doing so, we can hope it will also help to underline the growing importance of the litigation financing sector to the UK justice system as a whole.