United States: UK Supreme Court Rules On The Enforceability Of Litigation Funding Agreements: Uncertainty For Existing Funding Arrangements And Obstacles Ahead

On 26 July 2023, the UK Supreme Court handed down its much-anticipated judgment in R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents), [2023] UKSC 28 (the "Judgment"). The Supreme Court ruled by a majority that litigation funding agreements ("LFAs") in which funders are entitled to a payment by reference to a percentage of the damages recovered are Damages-Based Agreements ("DBAs"). As a result, these types of LFAs are likely to be unenforceable, unless they are compliant with the relevant regulatory regime for DBAs. This decision therefore will have wide-ranging implications across the litigation funding market, and in particular in the context of opt-out collective proceedings before the Competition Appeal Tribunal ("CAT"), where DBAs are unenforceable in any event.¹

In this article we discuss the background to the Judgment, the reasoning in the Judgment, and its likely implications for the growing number of parties involved in funded litigation.

Background

The Judgment arises out of two applications in the CAT² to certify collective proceedings against a group of truck manufacturers (collectively, "DAF"). The collective proceedings are 'follow-on' damages actions³ brought in reliance on an EU Commission decision finding that five European truck manufacturers operated a cartel to fix the price of trucks between 1997 and 2011 in breach of Article 101 TFEU.⁴

Before the CAT can certify collective proceedings and make a collective proceedings order ("CPO"), it is required to ensure that various criteria⁵ have been met. One of those criteria is that the applicants must show that they have adequate funding arrangements in place. At a preliminary issue hearing on 4-6 June 2019, DAF argued that the funding arrangements in place for both of the proposed class representatives ("PCRs") were DBAs and were consequently unenforceable because they failed to meet the relevant statutory requirements for DBAs and, in the case of the opt-out proceedings which one of the PCRs (UK Trucks Claims Ltd ("UKTC")), sought to bring, were, in any event, an unenforceable form of funding.

The Courts and Legal Services Act 1990 (the "CLSA") defines a DBA, at Section 58AA(3⁶) as:

Therefore, in order for an agreement to be classified as a DBA, it must provide for a payment to be made to a person providing 'advocacy services', 'litigation services' or 'claims management services', the amount of which is determined by reference to the financial benefit obtained from the litigation by the recipient of those services (e.g., the claimant). Additionally, the CLSA states that a DBA will be unenforceable if it does not comply with the requirements set out in Section 58AA(4). This includes the requirement that any DBA complies with the provisions of the DBA Regulations 2013.⁷

In the present case, whether the LFAs were DBAs turned on whether the LFAs involved the provision of "claims management services". Section 58AA(7) states that "claims management services" has the same meaning as Part 2 of the Compensation Act 2006 at Section 4(2). Section 419A of the Financial Services and Markets Act 2000 ("FSMA") replaced the relevant sections of the Compensation Act.⁸ Section 419A of FSMA states that "claims management services" means "advice or other services in relation to the making of a claim" (emphasis added), and "Other services" includes providing "financial services or assistance".⁹

The CAT ruled against DAF in 2019 and found that the LFAs were not DBAs. This meant that the LFAs were both enforceable and lawful, because they fell outside the regulations governing DBAs. DAF then sought to appeal to the Court of Appeal. DAF also challenged the CAT's ruling by way of judicial review, in case the Court of Appeal did not have jurisdiction. The Court of Appeal decided that it had no jurisdiction to entertain an appeal. However, the same constitution of the Court of Appeal proceeded as a Divisional Court to grant permission for the judicial review claim in relation to the DBA issue and to hear the issue. In its March 2021 judgment, the Divisional Court unanimously dismissed DAF's judicial review claim, upholding the CAT's ruling that the LFAs were not DBAs.

DAF appealed directly to the Supreme Court, under the 'leap-frog' procedure.¹⁰ The Supreme Court also granted permission for the Association of Litigation Funders of England & Wales to intervene and make written submissions in the appeal.

The primary question for the Supreme Court was whether "claims management services" included the provision of litigation funding. This was significant because, if the funding arrangements were held to be DBAs, they would be unenforceable because (as was common ground) they did not satisfy the requirements of the DBA Regulations 2013.¹¹ In any event (even if they had complied with those requirements), the DBAs would have been unenforceable in the opt-out collective proceedings before the CAT pursuant to section 47C(8) of the Competition Act 1998 (the "CA98"), which provides that "A damages based agreement is unenforceable if it relates to opt-out collective proceedings".

The Judgment

The Supreme Court handed down its Judgment on 26 July 2023. Lord Sales provided the majority decision which overturned the CAT and Divisional Court decisions, determining that the LFAs were DBAs and were unenforceable. Lady Rose provided the dissenting judgment.

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Footnotes

1. In "opt-out" proceedings, claimants falling within the class definition are included automatically in the claim whereas, in "opt-in" proceedings, claimants need actively to opt into the claim. Section 47C(8) of the Competition Act 1998 renders unenforceable the use of DBAs in opt-out collective proceedings.

2. 1282/7/7/18 UK Trucks Claim Limited v Stellantis N.V. (formerly Fiat Chrysler Automobiles N.V.) and Others and 1289/7/7/18 Road Haulage Association Limited v Man SE and Others.

3. Claims that rely on a prior infringement finding of a regulator as evidence that anticompetitive behaviour has occurred, meaning that the claimant need only prove that the infringement caused it to suffer loss.

4. Treaty on the Functioning of the European Union; Case AT.39824 – Trucks.

5. See our client alerts dated 10 November 2021 and 17 June 2022 for details of these criteria.

6. Section 58AA was first introduced in 2009, but subsequently modified by the Legal Aid, Sentencing and Punishment of Offenders Act 2012, the Consumer Rights Act 2015 and The Financial Services and Markets Act 2000 (Claims Management Activity) Order 2018 (S.I. 2018/1253).

7. Damages-Based Agreements Regulations 2013 (SI 2013/609).

8. Section 419A was inserted by the 2018 S.I. 2018/1253 referred to in footnote 6.

9. The relevant sections of the Compensation Act 2006, now repealed, contained similar wording.

10. Administration of Justice Act 1969, Section 13.

11. Judgment, paragraph 29.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.