Thought For The Week: A Blow to Funding?

Litigation Funding Agreements currently in place likely to be unenforceable due to Supreme Court ruling in Trucks follow-on claim

On Wednesday this week (26 July 2023), the Supreme Court handed down its judgment in R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents). The Court found that litigation funding agreements ('LFAs') which have an award-based return are classified as damages-based agreements ('DBAs'). This will have significant implications for the third-party funding of litigation in England and Wales.

Background

The Road Haulage Association ('RHA') and UK Trucks Claim Ltd ('UKTC') brought separate applications in the Competition Appeal Tribunal ('CAT') to act as class representative in collective proceedings for compensation for an alleged overcharge for trucks caused by anti-competitive conduct set out in the European Commission's decision in the Trucks Cartel¹.

For the types of collective actions brought by the proposed class representatives (RHA or UKTC) in these cases to be permitted to proceed, the CAT must, among other matters, certify a class representative as being suitable and make a Collective Proceedings Order ('CPO'). The prospective class representative must demonstrate that it has adequate funding in place that is sufficient to meet not only its own costs but also any adverse costs order made against it, as part of the CPO approval process. Both RHA and UKTC had LFAs in place, as is common in collective proceedings before the CAT.

In an attempt to challenge RHA and UKTC's applications for a CPO, PACCAR submitted that RHA and UKTC did not have appropriate funding in place, suggesting that the RHA and UKTC's LFAs constituted 'damages-based agreements' ('DBAs') within the meaning of s.58AA of the Courts and Legal Services Act 1990 ('CLSA 1990'). This, PACCAR argued, was due to the funders behind the LFAs providing 'claims management services', as defined in the Compensation Act 2006.

PACCAR's attempted categorisation of the LFAs as DBAs was a crucial point in its submissions. If the LFAs were found to be DBAs, they would be deemed unenforceable in the circumstances as they did not accord with the formality requirements for DBAs set out in the 1990 Act.

The Appeal

At first instance, the CAT held that the LFAs did not involve the provision of 'claims management services'. Consequently, the LFAs were not DBAs, were enforceable and were not required to comply with the regulations governing DBAs. On appeal, the Divisional Court agreed.

PACCAR then appealed directly to the Supreme Court, where a 4:1 majority found that the RHA and UKTC's third-party funders were in fact, on a natural reading of the wording, providing 'claims management services', since funding constituted the 'provision of financial…assistance' – one of the criteria under section 4(3) of the Compensation Act 2006. This finding brought RHA and UKTC's LFAs within the remit of section 58AA of the CLSA 1990. The LFAs were therefore DBAs and, since they did not comply with the relevant formality requirements, were unenforceable in these cases.

Implications of the Decision

The implications of this decision by the UK's highest court are significant and cause potential issues for those looking to bring claims funded by a third-party or those funding claims themselves. The Supreme Court acknowledged that the decision will mean that the majority of LFAs currently in place for English litigation will now be deemed unenforceable.

For collective proceedings in the CAT, section 47C(8) of the Competition Act 1998 prohibits the use of DBAs to fund opt-out claims. The majority of collective actions in the CAT are brought on an opt-out basis. The judgment therefore precludes opt-out collective actions from being funded by LFAs which provide for a reward-based return. Before the judgment, these were commonplace in the funding market.

In regards to opt-in claims, and other third-party-funded claims across the English courts, LFAs between claimants and third parties who play no part in the conduct of litigation but are to be paid a sum calculated by reference to the damages ultimately awarded must now comply with the formal requirements of the Damages-Based Agreements Regulations 2013.

A review of LFAs currently in place, and careful consideration of agreements offered by funders in the future will be required by anyone who has or who is contemplating a funded claim. It is likely that we will see a shift to third-party funding arrangements with an investment-based return (e.g. a multiple of the costs covered by the funder) which in turn may affect the risk profile of claims and funders' appetite for financing new claims.

A Tool for Defendants?

While dealing a blow to the litigation funding industry, this decision was not unexpected given how the hearing had gone in February. So funders are likely to have been already planning for this outcome and done preparatory work in analysing and getting ready to amend their agreements. Subject to this, the judgment potentially provides both current and potential defendants with potential further avenues of challenge against claims.

For instance, any defendant currently subject to a collective action in the CAT may be in a position to challenge the status of a claimant's third-party funding. Any LFA in place that has a reward-based return and is not compliant with the relevant DBA regulations (which is likely to be the substantial majority) will be unenforceable.

A way through for funders and claimants?

It is likely that LFAs which contain a mechanism to determine a funder's return as a multiple of their costs outlay (i.e. provide for an investment-based return) will not be affected, provided they contain a valid and robust severance clause. In theory, depending on how it is worded, the severance clause would keep the remainder of the LFA alive while removing the now unenforceable reward-based return, although litigation funders may consider renegotiating the funding agreement to be the safer course. The agreement itself would not then constitute a DBA due to the new lack of an award-based return mechanism.

Authors: Lynn Dunne, Partner; Tim West, Partner; Anna Morfey, Partner; Angus Rance, Senior Associate; Max De Tommaso, Junior Associate

_{1. Case AT.39824 – Trucks.}