Litigation Funding
Supreme Court provides clarity on Litigation Funding Agreements
Litigation Funding – Supreme Court provides clarity on Litigation Funding Agreements
Litigation Funding – Supreme Court provides clarity on Litigation Funding Agreements
The recent Supreme Court decision in PACCAR Inc & Ors v Competition Appeal Tribunal & Ors [2023] UKSC 28 has sent Litigation Funders back to the drawing board, on the basis that litigation funding agreements (LFAs) should be properly classified as agreements falling within the statutory definition of damages-based agreements (DBAs). As such, LFAs need to satisfy the statutory conditions for DBAs failing which they are unenforceable.
It is reported that percentage-based LFAs have been the most popular method for funding Competition Appeals Tribunal (CAT) cases. This decision means that very many existing LFAs are now vulnerable to unenforceability challenges on the basis that they do not comply with the statutory regime for DBAs in the Courts and Legal Services Act 1990 (section 58AA) and the Damages-Based Agreements Regulations 2013. The consequences will be particularly significant in opt-out collective actions in the CAT because in such actions DBAs are prohibited altogether.
We look at the rationale for, and implications of, the decision.
What is the case about?
The Claimants in the CAT sought orders to enable them to bring collective proceedings on behalf of persons who acquired trucks from the Respondents (collectively ‘DAF’) and other truck manufacturers. The proposed proceedings take the form of follow-on proceedings in which compensation is sought for loss caused by an unlawful arrangement between DAF and other manufacturers in breach of European competition law, arising from an infringement decision of the European Commission in 2016. In essence, it is alleged that the prices paid for trucks were inflated as a result of the established infringement. One of the Claimants (Road Haulage Association (RHA)) was asking for ‘opt-in’ collective proceedings, whereby persons wishing to participate in any award would have to opt in to the class represented by the RHA. Whereas one of the other Claimant’s (UK Trucks Claim Limited (UKTC)) application was for ‘opt-out’ proceedings, whereby an order would be made for it to represent a specified class of persons who would have the ability to opt out if they did not wish to be represented. UKTC made an application for opt-in proceedings in the alternative.
In order to obtain a collective proceedings order from the CAT, UKTC and RHA needed to be able to show that they had adequate funding arrangements in place to meet their own costs and any adverse costs order made against them. The proceedings were supported by LFAs under which the funder’s remuneration is calculated by reference to a share of the damages ultimately recovered. DAF applied for a preliminary issue on the LFAs, arguing that the proceedings in the CAT should not be certified because the agreements were invalid for not complying with the rules governing DBAs. This argument was rejected in the CAT and permission to appeal was granted and the appeal was leapfrogged to the Supreme Court.
The question the Supreme Court therefore had to decide was whether a form of LFA for the financing of litigation by third party litigation funders was lawful and effective.
What was decided?
The Supreme Court (majority of four) has ruled that LFAs allowing funders to recover a percentage of damages awarded constitute DBAs.
Prior to this case, the general understanding in the funding industry was that that LFAs were not DBAs because litigation funding did not amount to ‘claims management services’, to which the statutory DBA regime applies. This belief was so widespread that many existing LFAs do not attempt to comply with the statutory DBA regime.
The relevant provision under consideration was section 58AA of the Courts and Legal Services Act 1990 (as amended in 2013) which provides that a DBA is unenforceable if it does not satisfy the relevant statutory conditions, which include a requirement to comply with the 2013 DBA Regulations.
A DBA is defined as an agreement with a person providing advocacy services, litigation services or ‘claims management services’ which provides for a payment to be made only if the party to the litigation obtains a specified financial benefit from the litigation, and for the amount of that payment to be determined by reference to the amount of the financial benefit obtained. This means that a DBA allows the person providing the services to be paid by way of a share/% of the proceeds of the litigation.
The term ‘claims management services’ in s.58AA was defined, at the time of the LFAs in this case, by reference to s.4(2) of the Compensation Act 2006, which defines a claims management service as ‘advice or other services in relation to the making of a claim’. Under s.4(3)(a), a reference to the provision of services includes, in particular, a reference to (at s.4(3)(a)(i)) ‘the provision of financial services or assistance’.
The Supreme Court held that the words used in s.4(2) and (3) of the 2006 Act to define ‘claims management services’ applied to the LFAs in the case. There was no requirement for there to be active management of a claim. Further, the 2006 Act did not prohibit or limit the provision of claims management services generally.
As a result, the Supreme Court has now decided that “claims management services” includes litigation funding. The Supreme Court stated that these words ‘according to their natural meaning, are apt to cover the LFAs in this case”’
It was accepted that if the LFAs at issue in the present case were found to be DBAs within the meaning of the relevant legislation, they were unenforceable and unlawful since they did not comply with the formal requirements for such agreements.
What are the implications for Litigation Funders?
The decision has rendered many funding agreements currently in place unenforceable. It is clear that litigation funders will have to act quickly to put alternative agreements in place which are compliant with the requirements of the DBA legislation.
Commentary from the Funders suggests that there is little real concern arising from the decision as the issue only affects the structure of LFAs so that they comply with the regulations and that it simply requires such agreements to be rejigged.
Other commentators have suggested that the issue is a deeper one and that some smaller funders may even go out of business as a result.
The decision has ramifications not just for the funding arrangements in the present case but also for numerous other cases with similar arrangements in place, particularly in the CAT where costs can run into £ millions and meritorious claims can frequently only proceed when funding is in place.
Finally, there does not appear to have been any consideration in the judgment to past cases - will those who have paid funders under what were thought to be (but now turn out not to have been) enforceable agreements seek to recover what they have paid? The implications from this decision could be live for some time.
What are the implications for parties who have existing litigation funding in place?
This is potentially a worrying time for parties who are affected by the decision. As a result of funders and claimants having to renegotiate existing funding agreements in order for actions to proceed, there may be concerns that clients could refuse to renegotiate, potentially leaving funders without their returns. However, this is unlikely given the continued need for claimants to have funding in place to progress their claims. The most likely scenario is that any agreements that are non-compliant will simply be renegotiated and replaced.
Parties with exposure to group litigation across a range of sectors – higher education, pharmaceutical, retail - may now take the opportunity to review how this case may impact current or threatened claims.
For further information on this topic, please contact Moya Clifford.
