Caveat Litigation Funder: R (on the application of PACCAR Inc & Ors) v Competition Appeal Tribunal & Ors [2023] UKSC 28
Jonathon Read
1st August 2023
The Supreme Court Decision in PACCAR and Lack of Enforceability of Certain Litigation Funding Agreements
The Supreme Court has handed down its judgment in R (on the application of PACCAR Inc & Ors) v Competition Appeal Tribunal & Ors [2023] UKSC 28.
As a result, many Litigation Funding Agreements (LFAs) are unenforceable, prompting a likely reshaping of the litigation funding sector in England & Wales: such economic effects may be magnified given the accounting policy choices of various litigation funders and their portfolio concentration risk.
Given the importance of litigation funding to UK-based litigation and arbitration, with UK-based funders managing several billions of pounds, it may be that Parliament is required to legislate in response.
Susan Dunn of the Association of Litigation Funders submitted in intervention (quoted at [243]):
“These consequences will extend to all or most litigation funding agreements that have been agreed since litigation funding began in England and Wales. This would be massively damaging both for the administration of justice in relation to the existing cases which involve funding by litigation funders, and the future access to justice of parties who would otherwise have employed litigation funding agreements to fund their cases. It would bring to an abrupt end to hundreds of funded claims with potentially catastrophic financial consequences for all involved in the case…”
Background
The origin of these proceedings follows from a finding by the European Commission (“EC”) in 2016 that five European truck manufacturers, including DAF, infringed competition law.
Following from the EC finding, the Road Haulage Association Ltd (“RHA”) and UK Trucks Claim Ltd (“UKTC”) sought an order from the Competition Appeal Tribunal (“CAT”) that would authorise them to bring collective claims for damages on behalf of purchasers of trucks from DAF and other manufacturers.
RHA and UKTC obtained litigation funding, confirmed by way of LFAs in which the funders’ payout is calculated by reference to a share of the damages recovered in the litigation.
DAF argued that these agreements were Damages-Based Agreements (DBAs) and were hence unlawful and unenforceable because they did not comply with the statutory requirements of any DBA. DAF contended that third-party litigation funding constitutes “claims management services” as defined in s 4(2) Compensation Act 2006 (the “2006 Act”) since it provides “other services in relation to the making of the claim” in the form of “provision of financial services or assistance”.
DAF’s argument was rejected by the CAT and the Divisional Court (the Court of Appeal decided it had no jurisdiction to hear such an appeal, and the matter proceeded by way of judicial review).
The Supreme Court judgment
The Supreme Court has now found in DAF’s favour, overturning the lower decisions.
By a 4:1 majority (Lords Reed, Sales, Leggatt and Stephens), the Supreme Court has held that LFAs in which the funder is entitled to recover a percentage of any damages recovered are DBAs within the meaning of s 58AA Courts and Legal Services Act 1990 (the “1990 Act”) and the Damages Based Regulations 2013 (the “DBA Regulations 2013”).
The majority held that the words “claims management services” within the 2006 Act did encompass LFAs, noting at [72] that Parliament had used “wide language” in the 2006 Act given the nebulous conception of “claims management services” at that time.
Lady Rose dissented, observing at [227] that funders “cannot realistically” comply with the conditions in the DBA Regulations 2013 since they were “not drafted in a way which applies to [the funders’] business.”
Implications for Litigation Funding
The Supreme Court judgment has profound implications for the UK litigation funding industry:
- DBAs are prohibited entirely in ‘opt-out’ proceedings by way of s 47C(8) Competition Act 1998. Consequently, within any ‘opt-out’ proceedings it will not be sufficient to comply with the DBA Regulations 2013: any LFA will need to be drafted to avoid falling within the definition of a DBA. Given the preponderance of such cases within the CAT, this will lead to significant changes in the type of case, and forum, that is attractive to litigation funders.
- ‘Opt-in’ proceedings and other litigation do not offer a bar to use of DBAs, but LFAs will need to ensure that they comply with the 1990 Act and DBA Regulations 2013 if those LFAs include a percentage-based approach.
- It may be that funders revert to a multiple-based return approach, but it may be that any cap or threshold is still referable to the damages and hence a DBA. There may be changes in the types of case that funders are willing to engage with, reducing access to justice to one view.
- For existing proceedings, it may be that funders attempt to replace existing LFAs to be compliant with this judgment. However, it may be difficult to recover, and obtain return on, historical legal spend. This may lead funders to crystallise significant losses, particularly if they account for litigation assets as financial assets and use fair-value accounting. This judgment has significant implications for the litigation funding industry, its governance and accounting conventions.
- There may be regulatory issues that emerge for funders providing “claims management services”: financial products and personal injuries are subject to specific regulations, for example.
- The Ministry of Justice may seek to amend the DBA Regulations 2013: the Court of Appeal already observed that “nobody can pretend these Regulations represent the draftsman’s finest hour” (Zuberi v Lexlaw [2021] EWCA Civ 16 at [76]). Changes to primary legislation will be more challenging, particularly given Parliamentary distractions.
Jonathon Read is available to advise on general commercial matters, including aspects of litigation funding agreements and the surrounding alternative assets business.