Has The Gravy Train (or Truck) Been Derailed For Litigation Funders? UK Supreme Court Deals Blow To Litigation Funders - Trials & Appeals & Compensation

Introduction

In the recent case of R (PACCAR Inc & ors.) v Competition Appeal Tribunal & ors [2023] UKSC 28, the UK Supreme Court found that litigation funding agreements ("LFAs") involve the provision of "claim management services", which includes "the provision of financial services or assistance". Therefore, where the funder's recovery is linked to a share of the damages awarded to the claimant(s), these arrangements are properly categorised as damages-based agreements ("DBAs") and must therefore comply with the relevant statutory requirements, else be deemed unenforceable.

This is an unexpected ruling that will likely create significant waves, particularly in the funding industry. Prior to the judgment, it was thought that these LFAs fell outside of the DBA regime, as the third-party funders played no active part in the conduct of the litigation. The Chair of the Association of Litigation Funders, who intervened in the proceedings, had warned the Supreme Court that finding such LFAs to be DBAs could lead to consequences which "will extend to all or most litigation funding agreements that have been agreed since litigation funding began". This notwithstanding, the Supreme Court found that such LFAs are DBAs and, therefore, unenforceable.

The judgment will have immediate repercussions for litigation funders or any parties with an existing LFA in place — who will most likely need to revisit and renegotiate their arrangements, but it remains to be seen what long term effects the judgment will have on: (i) the involvement of third-party funding in English litigation going forward; (ii) the development of collective proceedings (particularly in the Competition Appeal Tribunal; the "CAT") (which are very often third-party funded); and (iii) the appetite of the UK government to intervene through new or amended legislation.

Background

The underlying case derives from the 2016 European Commission decision in AT.39824 - Trucks, where it was held that five truck manufacturing groups had infringed European competition law through an unlawful arrangement that inflated the prices paid for trucks over a 14-year period from 1997 to 2011. Two parties, UK Trucks Claim Ltd ("UKTC") and Road Haulage Association Ltd ("RHA"), applied to the CAT for permission to bring follow-on collective (i.e., class action) proceedings on behalf of various persons (on both opt-in and opt-out bases) who had acquired trucks from certain of the truck manufacturers identified in the European Commission's decision. However, for the CAT to grant a collective proceeding order, both UKTC and RHA had to show that they had adequate funding arrangements to meet their own costs and any adverse costs orders that may be made against them if they lost the claim. In this regard, UKTC relied upon an opt-out LFA and an opt-in LFA and RHA relied upon an opt-in LFAs under which the funders' maximum renumeration was calculated by reference to a percentage of the damages ultimately recovered in the litigation.

In response, the truck manufacturers argued that the LFAs constituted DBAs within the meaning of Section 58AA of the Courts and Legal Services Act 1990 ("Section 58AA") and were therefore: (i) prohibited for opt-out competition collective damages proceedings, and (ii) unenforceable unless they complied with relevant statutory conditions, including the Damages-Based Agreements Regulations 2013 ("DBA Regulations 2013"). Section 58AA provides an exception to the general rule that contingent fee arrangements, where the recovery is based on the amount of damages awarded, are not permitted in English litigation. However, in order to be effective, these agreements must comply with requirements prescribed by the Ministry of Justice, including as to form and substance.

Although the precise reasons were not explained, it was common ground between the parties that the LFAs would not satisfy the requirements under the DBA Regulations 2013 and therefore this issue was not before the court – potentially because the agreements may not have contained a cap on recovery by the funders of no more than 50% of the sums ultimately recovered.

The CAT found that the LFAs did not fall within the Section 58AA definition of a DBA, namely an agreement "between a person providing advocacy services, litigation services or claims management services" and were therefore valid and enforceable. In reaching this conclusion, the CAT considered the interpretation of Section 58AA together with other legislative references to "claims management services", including in Section 4 of the Compensation Act 2006 ("Section 4 CA 2006") and Section 419A of the Financial Services and Markets Act 2000. These provisions define "claims management services" as "advice or other services in relation to the making of a claim" and include "financial services or assistance" within the scope of "other services".

The CAT decision was unsuccessfully appealed to the Court of Appeal (sitting as the Divisional Court) before the truck manufacturers appealed directly to the Supreme Court under the leap-frog procedure.

The UK Supreme Court Judgment

The UK Supreme Court allowed the appeal by a 4:1 majority decision (Lords Reed, Sales, Leggatt and Stephens), and held that "claims management services" included the provision of litigation funding. As such, the LFAs entered by UKTC and RHA constituted DBAs and were, accordingly, unenforceable as they also did not adhere to the DBA Regulations 2013. In coming to this conclusion, the majority considered that:

First, there is no generally established legal meaning of "claims management services". Section 4 CA 2006 was not intended to regulate "claims intermediaries" only. Rather, the majority considered that it was the UK Parliament's intention to use the broad term "claims management services" in Section 58AA in order to capture future new commercial models which would facilitate litigation and access to justice. As such, "claims management services" should not be interpreted restrictively.
Second, on a plain meaning interpretation of the phrase, the definition of "claims management services" in Section 4 CA 2006 covered LFAs in this case.
Third, this interpretation would not produce any absurdity.
Fourth, the DBA Regulations 2013 were not considered when defining "claims management services" under Section 4 CA 2006, as the DBA Regulations 2013 is a piece of subordinate legislation. Only later Acts of Parliament can be used to supplement the interpretation of an earlier statute where there is ambiguity.

Additionally, UKTC raised a specific argument that its LFA in respect of opt-out collective proceedings was not a DBA as the funder's recovery was subject to further conditions. The Supreme Court rejected this argument, as the conditions attached to the funder simply reflected the mechanism of payment as opposed to fundamentally altering the character of the LFA. As such, UKTC's opt-out LFA was also deemed to be a DBA.

Lady Rose, in her dissenting opinion, agreed with the lower courts, that the provision of financial assistance is only included in the term "claims management services" if it is given by someone who is providing claims management services within the ordinary meaning of that term, and held that it is an important fact that litigation funding would not naturally fall within the scope of the term "claims management services". Lady Rose also noted that funders "cannot realistically comply with [the DBA Regulations 2013] because those Regulations are not drafted in a way which applies to their business".

Looking Ahead

The Supreme Court's judgment has potential widespread impact on the enforceability of all LFAs under English law and may result in the loss of effective funding arrangements, as well as the withdrawal of funding arrangements for claimants due to there being no proper basis for funders to recover their share following an award of damages. It is now the case that a LFA will constitute a DBA (and so will need to comply with the DBA Regulations 2013) as long as the funder's remuneration is calculated by reference to recovered damages, even where payment may be conditional on other requirements.

From a funding perspective:

Funders will need to undertake a comprehensive review of their current funding arrangements to ensure that the arrangements remain valid and enforceable.
This may require wholesale changes to how a funder calculates its recovery so as to tie its financial rewards to the sums invested rather than the damages awarded. LFAs that calculate the return based on a multiple of the sums invested will not fall within the scope of a DBA.
Funders may seek to renegotiate or replace existing LFAs to ensure compliance with the DBA Regulations 2013 but that may call into question their ability to recover for spend already incurred under any unenforceable pre-existing LFAs.
Funders may also face the risk that counterparties look to challenge recoveries made by funders in previous cases based on agreements that are no longer enforceable.
Funders may be more cautious in their approach to what claims they are willing to fund and under what arrangements.

From a more general perspective:

The Supreme Court's decision, (and following from its decision in Lloyd v Google – see our previous client alert) may have put a further dent into the UK landscape for collective or class action claims, particularly in the competition, consumer protection, data protection, and ESG spheres, as such claims often rely heavily on litigation funding in order to proceed due to their make-up (i.e., claims involving large numbers of claimants, each of whom has suffered a small amount of loss meaning that proceedings run on a collective basis are the only economically viable route for such claims).
Ultimately, there is a crucial question of whether the UK Parliament may intervene through legislature, or whether the UK Ministry of Justice may seek to amend the DBA Regulations 2013, to make them more compatible with typical litigation funding arrangements, given the impact that this decision may also have from an access to justice perspective. As the Court of Appeal noted in 2021, "nobody can pretend these Regulations [the DBA Regulation 2013 and the Damages-Based Agreements Regulation 2010] represent the draftsman's finest hour" (Zuberi v Lexlaw [2021] EWCA Civ 16, para 74).

Jacqueline Lee, London Trainee Solicitor, contributed to the drafting of this alert.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.