Supreme Court Ruling on PACCAR Deals a Blow to Litigation Funding

The UK's Supreme Court has handed down a much awaited judgment in a case that threatens the foundations of the country's litigation funding industry.

By a majority of four to one, the Court held that a Litigation Funding Agreement (LFA) which entitles the funder to recover a percentage of any damages recovered is a Damages Based Agreement. This is likely to render most such agreements unenforceable.

The Trucks case

R (on the application of PACCAR Inc) v The Competition Appeal Tribunal is a case that arose out of one of the proliferating competition class actions before the Competition Appeal Tribunal (CAT). It is brought on behalf of buyers of heavy goods vehicles who allege they have suffered loss due to a cartel found by the EU Commission to have operated between major truck manufacturers.

The defendants struck upon a novel argument with which to defeat the claim. All collective proceedings brought before the CAT use third party litigation funders to provide the capital to pay the lawyers and to purchase insurance against an adverse costs award should the claim fail. The defendants argued that, because the funders' agreements provide "financial services or assistance" in the litigation, they are claims management services under section 58AA of the Courts and Legal Services Act 1990. As the return on their investment in this agreement was contingent on the level of damages procured by the action, the funding agreement thereby constituted a Damages Based Agreement (DBAs). A DBA is unenforceable if it does not comply with the 2013 DBA Regulations and so, as funding agreements do not generally follow the restrictions imposed by those regulations, few would be likely to comply.

The Supreme Court Ruling

By a majority of 4 to 1 the Court held that damages based funding agreements are DBAs. The majority held that LFAs which are structured such that "the funder's maximum remuneration is calculated with reference to a percentage of the damages ultimately recovered in the litigation" and where the amount payable "is to be determined by reference to the amount of the financial benefit obtained" fall within the definition of a DBA. Any such agreement that does not comply with the 2013 DBA Regulations is unenforceable.

Potential impact

What is at stake is a great deal more than just the Trucks cartel case. All cases before the CAT will be in immediate difficulty if the litigation funding agreements underpinning the claimants' cases are unenforceable. A great deal of other general commercial litigation is pursued using third party funding. Many of these cases will now be thrown into chaos as well, if the funding agreements specify payment as a percentage of damages recovered and are now unenforceable for failure to comply with the DBA Regulations. On top of all this, funding agreements used in cases now finished might become the basis of claims against funders to recoup amounts paid under contracts now rendered unenforceable.

Such a dramatic outcome might have made a finding against the claimants in PACCAR seem unlikely. But, perhaps noting that during the February hearing at the Supreme Court arguments as to the potential effects of such a finding seemed to make little impact with the judges, behind the scenes some litigation funders had started to make contingency plans for replacement agreements.

It is worth noting what the decision will and will not effect. Many litigation funding agreements are not based on a contingency arrangement, but instead require a payment in the event of success which is a multiple of capital advanced by the funder. That is not a DBA. Outside of opt-out collective proceedings in the CAT, a funding agreement that required a payment based on damages could also be enforceable if it complied with the DBA Regulations. In PACCAR it was common ground that the agreement did not comply with the Regulations, though the judgment does not specify why. However, in the context of opt-out collective actions, even if a funding agreement did comply with the Regulations, it would fall foul of section 47C(8) of the Competition Act 1998 that states 'A damages-based agreement is unenforceable if it relates to opt-out collective proceedings'. It is in the area of opt-out competition claims that we expect the consequences of PACCAR to be most pronounced.

Litigation funder Erso Capital’s Matthew Amey’s reaction was that "The judgment is a disappointment for the industry as users and providers alike have benefitted from flexibility over funder return structures which this judgment diminishes on technical grounds rather than for reasons that substantively protect litigants. However, the need for litigation funding and the appetite to supply funding is unlikely to be affected by this decision."

What next?

It is inevitable that applications will be made to the CAT for declarations that the class representatives are not suitable as they no longer have financial resources with which to meet any adverse costs award. The CAT may order some form of moratorium on cases while the issue is resolved, but that won't help with High Court cases, where the use of this type funding may not even be known by the other side.

Beyond opt-out competition claims, could changes to the DBA Regulations 2013 resolve the issues? The Court of Appeal said of the regulations in the 2021 case of Zuberi v Lexlaw that "nobody can pretend that these Regulations represent the draftsman's finest hour". Attempts were made to engage the government in redrafting them by a Working Group established with judicial support in 2015, but despite a well-thought through set of draft regulations being published, the idea withered with the onset of COVID. The latitude with which the Court of Appeal interpreted them in the Zuberi  case may have unwittingly reduced the impetus for change, though it addressed only one of many issues with them.

The Ministry of Justice will be under pressure to revisit the Competition Act 1998 and amend the DBA Regulations without delay, but that may not be enough. If funding agreements are DBAs, the regulations would struggle to accommodate them while offering consumers protection in entering into DBAs with lawyers. The two are too different. If the Courts and Legal Services Act 1990 or Competition Act 1998 need to be amended to address this problem, that may take some time. All that is clear is that the ripples from this decision will be fanning out across the litigation market for a long time yet.