Litigation Funding: The Supreme Court’s Earthshock

Posted by Michelle Barron on 2nd October, 2023 in Opinion and categorised in .

Richard Allen, Costs Lawyer & Senior Pricing ConsultantR (on the application of PACCAR Inc and others)  v Competition Appeal Tribunal and others [2023] UKSC 28

At the end of July, the Supreme Court handed down its decision in the “PACCAR Trucks appeal”, with a majority decision that a litigation funding agreement (“LFA”) under which the funder is to receive a percentage of any damages recovered by the funded party is a damages based agreement (“DBA”) within the meaning of s58AA Courts and Legal Services Act 1990 (“CLSA”).

It was found that litigation funding falls within an express definition of “claims management services”, which includes “the provision of financial services or assistance” and that those services are provided “in relation to the making of a claim”.

So what does this decision mean?

It is widely considered this will have a huge impact on the litigation funding industry, commercial litigation and especially claims in the Competition Appeal Tribunal (“CAT”), as well as in other large group actions, many of which are supported by funders.

The background

This centred on the principles of statutory construction. The definition of claims management services is found in s4 Compensation Act 2006 in relation to DBAs before 1 April 2019 and s419A the Financial Services and Markets Act 2000 (“FSMA”) in respect of DBAs entered into after that date. The parties accepted that there was no material difference between the definitions. The CAT and the Divisional Court had found that for a service to come within the definition of claims management services that service had to be provided within the context of the management of the claim and that funders did not normally manage a claim.

The opinion of the Supreme Court was that Parliament had provided a deliberately wide definition of claims management services so that the Secretary of State could decide which claims management services should be regulated and provide for the regulation of the same through a Scope Order. Although litigation funding is not a form of regulated claims management service under the current scope orders, the section 58AA CLSA definition of a DBA extends to all those providing claims management services and is not limited to those providing regulated claims management services.

Consequences of the decision

Any funding agreement that provides for a return based on a proportion of the damages recovered will be a DBA and therefore unenforceable unless it complies with s58AA CLSA and the Damages Based Agreements Regulations 2013. It was accepted by the Respondents in the appeal that their LFAs did not comply with the Regulations and the evidence was that few if any LFAs would have complied with the Regulations since litigation funding had begun.

Hope going forward?

It may be possible to draft an LFA that does comply, despite the Regulations clearly not drafted with litigation funders in mind. However, if an LFA is a DBA, there should be a way of applying the Regulations to an LFA. It must be said that Lady Rose in her long dissenting decision, queried whether it would be possible to draft an LFA to comply,

Of course, an LFA which seeks a return simply as a multiple of the amount invested, will not be a DBA. Many LFAs have a return based on the higher of a multiple or a percentage of the recovery. Such agreements will have to be carefully examined to see if they contain an express severance clause, in order to remove the percentage elementary. Going forward, if funders focus on returns based on a multiple of their investment, this is likely to push the multiples up and take away any certainty that litigants will have about the proportion of damages they will be relinquishing.

The biggest consequences will fall upon both opt in and opt out proceedings in the CAT. Since one cannot have a DBA in opt out proceedings in the CAT (s47C(8) Competition Act 1998), opt out proceedings will not be able to be funded by an LFA that includes a return based on a percentage of the damages awarded.  It is understood that all of the current opt out proceedings in the CAT involve claims for many billions of pounds and are funded by LFAs providing for a percentage return. These LFAs will be DBAs and therefore not permitted. The Collective Proceedings Orders granted in those cases will undoubtedly have to be revisited, with the funders, if they choose to continue funding,l having to limit their return to a multiple of their investment. The impact of this decision will be colossal on claims in the CAT.

Funders will need to review their portfolios to consider what steps need to be taken in relation to existing but unresolved cases and what steps can be taken to amend the existing LFAs or replace them with new compliant LFAs. Future LFAs, including those currently in the final stages of negotiation, will have to comply with the Regulations or be based solely on a multiple so that the same will not be a DBA.

Funders could put the brakes on for any further funding in existing LFAs, until an amended or new LFA is agreed. It is therefore in the funded party’s best interests to agree to this approach as quickly as possible in order to preserve their litigation prospects.

This decision flies in the face of the draft Damages Based Agreements Regulations 2019 drafted by Professor Rachael Mulheron and Nicholas Bacon QC, which was provided at the Ministry of Justice’s request and expressly provided that an LFA is not a DBA. The government has thus far chosen not to implement these draft regulations. Further, the Supreme Court’s decision is at odds with the longstanding approach in litigation funding and the view of its modern day architect, Sir Rupert Jackson, who fully supported third party funding in his reports, did not consider an LFA to be a DBA and recommended self-regulation.

It remains to be  seen if primary legislation will now follow this judgement to regulate the situation and avoid the damaging consequences which surely will result in litigation, both nationally and internationally.

Written by Richard Allen, costs lawyer and senior pricing consultant at Burcher Jennings, Validatum and Virtual Pricing Director.