Legislation to ensure the enforceability of litigation funding agreements (LFAs) will be scrutinised by the House of Lords on Monday amid concerns it may contravene the European Convention on Human Rights (ECHR) and be vulnerable to a judicial review.

The outcome of the “line by line examination” of the Litigation Funding Agreements (Enforceability) Bill will be closely watched by litigation funders and disputes lawyers alike.

For while it has received cross-party support, battle lines have been drawn up within the legal profession over the plan to make its provisions retrospective.

The bill aims to reverse the effect of last July’s Supreme Court PACCAR decision, which took the profession by surprise when it ruled that litigation funding agreements that allow funders to receive a share of damages were Damages-Based Agreements (DBAs) and therefore subject to the statutory and regulatory regime for DBAs.

The decision rendered many funding agreements unenforceable. Pressure on the government to reverse its effect has been given added impetus by the role litigation funding played in exposing the Post Office Horizon IT scandal – currently the subject of an ongoing public enquiry – by underpinning the successful Bates v Post Office group claim by 555 sub-postmasters and sub-postmistresses (SPMs).

Introducing the bill at its second reading, government minister Lord Stewart KC said retrospective legislation was necessary to ensure “contractual rights and obligations agreed upon under LFA entered into before the Supreme Court’s judgment continue to have effect as intended”.

This, he said, would remove “any uncertainty about the enforceability of LFAs in settled cases and enable litigation funders to continue to fund cases, including existing cases”.

But although Stewart said the bill did comply with the ECHR, barrister and crossbench peer Lord Carlile KC sought further reassurance in the light of a legal opinion by former director of public prosecutions Lord Ken Macdonald KC of Matrix Chambers.

“I note that, at the end of his opinion, the noble Lord, Lord Macdonald, described the case against the ECHR as ‘arguable’,” he said. “That was the word that he used, I suspect with great care…. I am sure that the House would like to be sure that we are not, by accident, falling foul of the European convention.”

It remains unclear who instructed Lord Macdonald, however, the Daily Telegraph reported on 13 April that the barrister had warned that the bill would deprive the SPMs in the Post Office group claim of the ability to revisit their LFA agreement and receive a larger proportion of the damages.

In a similar vein, London litigation boutique Candey sent the Ministry of Justice a pre-action letter on 11 April warning of a potential judicial review by its client Bugsby Property, which is challenging LFAs with Therium and Omni Bridgeway, and a second business, which is in dispute with Harbour Litigation Funding and is being represented by Marriott Harrison.

The letter claims the bill “has the purpose of retrospectively depriving the claimants of their current legal claim/defence as against litigation funders who wish to enforce contracts which the Supreme Court has determined have always been unenforceable”.

Jeremy Marshall, chief investment officer of litigation funders Winward, described the government’s plan to reinstate contractual rights and obligations that had already been voluntarily agreed upon so that they continued to have effect as initially intended as a “compelling proposition”.

The alternative, he suggested, held the prospect of a “carefully negotiated contractual agreement [being] unpicked on the basis of an unknown unenforceability issue”. 

Law Society of England and Wales president Nick Emmerson recognised the existence of “important arguments on both sides” arguing that “as a general principle of the rule of law, laws should not be applied retrospectively unless there is a strong justification”. 

He called on the government to outline its reasoning as to why retrospective legislation was needed.

During the second reading debate, Stewart also flagged the imminent launch of the Civil Justice Council’s review of third-party litigation funding, which he said was the “best vehicle” for addressing concerns “about the sums ultimately received by litigants and the potential sums realised by litigation funders”.

He also said he would consider reforms to the secondary legislation regarding DBAs, which is now more than 10 years old. 4 New Square’s Nick Bacon KC and Professor Rachael Mulheron of Queen Mary University proposed a new set of regulations in 2019, but they were not taken up by the government.