SUPREME COURT RULING THROWS LITIGATION FUNDING INTO DISARRAY
Third-party litigation funding in the UK has been thrown into a state of uncertainty following the surprise decision of the UK Supreme Court (”UKSC”) on 26 July 2023 that litigation funding agreements (“LFAs”) that take the form of damages-based agreements (“DBAs”) are unenforceable if they do not comply with the relevant regulatory framework.
In a 4:1 majority decision, the UKSC Justices Lord Reed, Lord Leggatt, Lord Stephens and Lord Sales (who delivered the Judgment with Lady Rose dissenting) decided that the LFAs at issue in that case were DBAs and not enforceable. As the Court acknowledged, “the implications of the issue in the appeal are significant”.
The appeal in the case of R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal and others [2023] UKSC 28 concerned an application to bring collective proceedings for breaches of competition law under section 49B of the Competition Act 1998. The second and third respondents (UK Trucks Claim Ltd (“UKTC”) and the Road Haulage Association (“RHA”)) each sought a collective proceedings order from the Competition Appeals Tribunal (“CAT”) to enable them to bring proceedings on behalf of persons who had acquired trucks from the appellants and other truck manufacturers. The arrangement between the truck manufacturers had been found to be a breach of European competition law by the European Commission.
In order to obtain the order sought from the CAT, each of the two respondents had to show that it had adequate funding arrangements in place to meet its own costs and any adverse costs order made against it. In the case of UKTC, the application was for “opt-out” collective proceedings.
Funding had been arranged by UKTC and the RHA from third-party litigation funders and LFAs had been entered into under which the funder’s maximum remuneration had been calculated with reference to a percentage of the damages ultimately recovered in the litigation. UKTC and the RHA contended that these LFAs did not constitute DBAs for the purposes of the relevant legislation (section 58AA of the Courts and Legal Services Act 1990 as amended).
The appellants (the truck manufacturers) maintained that the LFAs did constitute DBAs within the meaning of section 58AA. They therefore maintained that the DBAs were unenforceable by virtue of section 58AA because they did not comply with formality requirements that applied under that provision. If they were right in that, the appellants contended that the practical consequence would be that there was no proper basis on which a collective proceedings order could be made by the CAT in favour of either the UKTC or the RHA.
In determining the matter as a preliminary issue, the CAT held that the LFAs were not DBAs within the meaning of section 58AA and that collective proceedings orders could be made in favour of both UKTC and the RHA.
On appeal to the UKSC by way of leap-frog procedure, the question for determination of the Court was whether LFAs which entitled the funder to a percentage of any damages recovered in the litigation constituted DBAs within the meaning of the relevant statutory scheme of regulation and whether they were lawful and enforceable. Specifically, the issue was whether the funders provided “claims management services” within the meaning of section 4 of the Compensation Act 2006 and section 419A of the Financial Services and Markets Act 2000. If they did, then the LFAs would be unlawful and unenforceable as it was common ground that they did not satisfy the detailed requirements of the Damages-Based Agreements Regulations 2013 (SI 2013/609). Section 419A provides that “claims management services” means “advice or other services” and “other services” includes “(2)(a) financial services or assistance”.
In his analysis, Lord Sales concluded that the funders did provide “financial services or assistance”. The LFAs were therefore properly to be construed as DBAs under the relevant legislative framework. In the circumstances, they were unlawful and unenforceable.
The significance of the decision was not lost on the Court which observed that participants in the third-party litigation funding market may have assumed that this form of LFA, which assigns a passive role to the funders in relation to the conduct of the litigation, did not constitute a DBA. This did not, however, justify the Court in changing the meaning of “claims management services”.
There is no doubt that this is a hugely significant decision for the litigation financing industry, not just in relation to opt-out cases before the CAT. It is feared that most, if not all, LFAs agreed since litigation funding began could be invalidated. The consequences for those already involved in cases could be catastrophic.
The UKSC decision makes public access to justice, already vastly under-funded, open to threat. Simply looked at in the context of the CAT proceedings, running an opt-out competition claim can, in itself, run to many millions of pounds and there is concern that the decision will allow well-funded multinationals to gain an unfair advantage over small businesses and consumers.
Reaction from funders has been mixed, but there is no doubt that, at the very least, those funders will have to review and re-think their business models if third-party funding is to remain a viable option.
LUCY KEANE © 2023
BARRISTER
33 BEDFORD ROW
LK@33BR.CO.UK
NOTICE: This article is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by the author, any member of Chambers or by Chambers as a whole. No attempt has been made to provide an exhaustive review/account of the law in this area.