Supreme Court’s decision in PACCAR and ors. v Competition Appeal Tribunal and ors. spells significant uncertainty for UK litigation funders

On 26 July 2023, the UK Supreme Court ruled by a majority in R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents) [2023] UKSC 28 that litigation funding agreements (“LFAs”) which entitle funders to payment based on the amount of damages recovered are Damages-Based Agreements (“DBAs”). Consequently, such LFAs are unenforceable unless they comply with the relevant regulatory regime for DBAs – and cannot be used at all to fund opt-out collective proceedings before the Competition Appeal Tribunal (the “CAT”). While the LFAs at issue in PACCAR were entered into to support collective proceedings before the CAT, the decision stands to affect all LFAs entitling funders to payment based on the level of damages recovered.

The ruling has significant ramifications for UK litigation funders, while claimant law firms that rely on third-party funding also stand to be heavily impacted.

In the case of actions that are currently underway, funders and claimant law firms are likely to be hastily reviewing existing LFAs with a view to replacing arrangements that have been rendered invalid. In cases where proceedings have been ongoing for an extended period of time, moreover, difficulties with recovering historical legal spend (let alone any return on their investment) could leave certain funders sitting on significant losses.

The decision is likely to give rise to a period of reflection by funders regarding the types of claims that they are willing to fund, with more speculative claims struggling to gain backing. This is likely to be particularly true in the context of collective proceedings before the CAT, where the Supreme Court’s ruling opens up additional avenues for proposed defendants looking to resist certification.

Factual background

The question of how the relevant LFAs ought to be characterised arose in the context of applications for collective proceedings orders by UK Trucks Claim Ltd and the Road Haulage Association under Section 47B of the Competition Act 1998 (the “CA 1998”).

To obtain a collective proceedings order (“CPO”) from the CAT, applicants must show that they have adequate funding arrangements in place. Here, the applicants relied on the LFAs. Under these LFAs, litigation funders committed to fund the proceedings in return for a percentage of any damages recovered in the litigation.

The appellant truck manufacturers contended in response to the CPO applications that the LFAs constituted DBAs within the meaning of Section 58AA(3) of the Courts and Legal Services Act 1990 (the “CLSA”) and were, accordingly, unenforceable because they did not satisfy the regulatory requirements for DBAs. UK Trucks Claim Ltd and the Road Haulage Association accepted that the LFAs they had entered into did not satisfy the regulatory requirements for DBAs.[1] Accordingly, the enforceability of the LFAs turned on whether they were, in fact, DBAs.

Overview of the legal framework

Section 58AA of the CLSA provides that a DBA will be unenforceable unless it complies with the requirements set out in Section 58AA(4), including the requirement that it complies with the provisions of the Damages-Based Agreements Regulations 2013 (the “DBA Regulations 2013”).

The definition of DBA under Section 58AA(3) includes an agreement to provide “claims management services” where:

1. the service provider is paid if the recipient obtains a specified financial benefit in the matter related to the services; and
2. the payment amount is to be determined by reference to the amount of the financial benefit obtained.

For the definition of “claims management services”, Section 58AA(7) refers to Section 419A of the Financial Services and Markets Act 2000 (“FSMA”) which replaced Sections 4(2) and (3) of the Compensation Act 2006 (“CA 2006”). Section 419A of FSMA states that “claims management services” include “advice or other services in relation to the making of a claim”. The provision further states that “other services” include the provision of “financial services or assistance”. Sections 4(2) and (3) of the CA 2006 contained similar wording prior to their repeal.

In the course of its judgment, the Supreme Court also considered the implications of:

• Section 58B of the CLSA, which was inserted in 1999 with a view to permitting litigation funding by exempting it from the common law rules against champerty but, unlike the subsequently inserted Section 58AA, never entered into force.
• Section 47C(8) of the CA 1998, which states that damages-based agreements are “unenforceable” to the extent they relate to “opt-out collective proceedings” before the CAT.

Analysis of the judgment

Owing to the framing of the test under Section 58AA(3) of the CLSA 1990, the questions on appeal principally turned on whether “claims management services” should be interpreted as including the provision of litigation funding. The Supreme Court held that they should.

In reaching this conclusion, the majority made the following observations:

• First, the language used in Sections 4(2) and (3) of the CA 2006 was wide and “not tied to any concept of active management”.[2]
• Second, contrary to the findings of the Divisional Court, there was no reason to infer that Sections 4(2) and (3) of the CA 2006 were only intended to regulate “claims intermediaries”. The scheme of the relevant Part of the CA 2006 was to regulate activities, not persons of a particular description.[3]
• Third, the presence of Section 58B of the CLSA on the statute book was not a reason to depart from interpreting Sections 4(2) and (3) of the CA 2006 in accordance with their natural meaning. There is no particular reason why statutory powers contained in different enactments should be regarded as mutually exclusive. In any event, by the time of the enactment of the CA 2006, it was clear that Section 58B did not provide a “comprehensive scheme of regulation” for litigation funders.[4]
• Fourth, the Explanatory Memorandum to the CA 2006 supported the notion that “claims management services” should be interpreted broadly and include the provision of loans and other financial assistance, and that the intention was to facilitate the regulation of particular activities rather than specific types of actor.[5]
• Fifth, the term “claims management services” had no established and generally accepted meaning which might “colour” the meaning of the term as defined in the legislation.[6]
• Sixth, while the Jackson Review endorsed the use of third-party funding, the fact that the preliminary and final reports in that review post-dated the introduction of Sections 4(2) and (3) of the CA 2006 by several years meant that they did not assist in the interpretation of those provisions. The majority concluded that the Association of Litigation Funders’ 2011 Code of Conduct, which was issued in line with the recommendations of the latter report, was similarly irrelevant, as was the fact that litigation funders may have made the assumption that LFAs could not constitute DBAs.[7]
• Seventh, neither Section 58AA of the CLSA nor the DBA Regulations 2013 provided an aid to the interpretation of Sections 4(2) and (3) of the CA 2006. As to the former, the majority held that the principle that a later act could be used as a guide to the interpretation of an earlier act only came into play where there was genuine ambiguity in the earlier act – which there wasn’t in the case at hand.[8] As to the latter, the majority held that the principle did not apply where the later legislation was “subordinate legislation made by the executive rather than an Act of Parliament”.[9]

The Second Respondent, UK Trucks Claim Ltd, additionally argued that an LFA entered into in opt-out collective proceedings under which the funder’s recovery was subject to (a) the discretion of the CAT pursuant to section 47C(6) of the CA 1998 and (b) prior payment to members of the class of their full share of damages did not constitute a DBA for the purposes of Section 58AA(3) of the CLSA or Section 47C(8) of the CA 1998. The majority rejected this, holding that as a matter of substance, such an LFA retained the character of a DBA (as defined in the legislation).[10]

Key takeaways and practical implications

The Supreme Court noted that the majority of LFAs currently in force provide for funders to receive payment based on the amount of damages recovered.[11] Most of these are now likely to be unenforceable (or at least partially unenforceable so far as their payment provisions are concerned). That is so even in cases where the LFA stipulates that the funder’s entitlement to payment is conditional on other requirements being met – as long as the funder’s remuneration is determined by reference to damages recovered, it will constitute a DBA.

How litigation funders will react to the ruling remains to be seen. With that said:

• Going forward, it is likely that funders will look to structure their LFAs in a manner that avoids linking their entitlement to payment to the amount of any damages recovered. Alternatively – albeit potentially trickier – they may seek to restructure their agreements so that they comply with the requirements for DBAs set out in Section 58AA(4) of the CLSA. This may have consequences for the types of claims that litigation funders are willing to fund, with greater competition to fund claims that are assessed as having good prospects of success, and more speculative claims struggling to gain funding.
• In cases where funding arrangements are already in place but proceedings are at an early stage, funders will likely move to replace existing agreements with alternative arrangements of the kind described above.
• In cases where proceedings have been ongoing for an extended period of time, even if it is possible to replace existing arrangements on a forward-looking basis, historical legal spend may prove difficult to recover, and returns on that spend even harder. This could leave some funders sitting on significant losses.
• The ruling firmly shuts the door on damages-linked LFAs in opt-out collective proceedings before the CAT. These arrangements are common in such actions, and it is unclear at this stage how the CAT will deal with cases which were certified on the strength of LFAs that have now been rendered unenforceable. The ruling more generally opens up additional avenues for proposed defendants resisting the certification of such proceedings.

In the short term, the Supreme Court’s ruling is likely to prompt a period of reflection among funders and claimant law firms alike. While it is unlikely to spell the end of funded litigation before the English courts, it has certainly sent shockwaves through a sector which – at least prior to the ruling – offered investors who were willing to take a risk opportunities to generate very significant returns.