Many litigation funding agreements found to be unenforceable by UK Supreme Court

In a decision handed down on 26 July 2023 (PACCAR Inc & Ors, R (on the application of) v Competition Appeal Tribunal & Ors [2023] UKSC 28), the Supreme Court has ruled by a majority that litigation funding agreements (LFAs) that remunerate the litigation funder by reference to a proportion of the damages ultimately recovered constitute damages-based agreements (DBAs) and are therefore unenforceable in certain circumstances.

The effect of this decision will be that many LFAs currently in existence are likely to be unenforceable, unless they satisfy additional stringent conditions in subsidiary legislation. This includes the LFAs entered into by the Road Haulage Association Ltd (RHA) and UK Trucks Claim Ltd (UKTC) in relation to the Trucks collective proceedings, which were before the Supreme Court for consideration.

The decision has been the subject of significant press attention and legal commentary. Whilst its implications will be particularly acute for collective competition law proceedings, the decision will be of importance to all litigators, given the explosion in litigation funding in recent years to facilitate, in particular, multi-claimant actions in relation to ESG, data protection, and consumer-based claims.

The issue considered by the Supreme Court

This issue arose in the context of two applications by class representatives to bring collective proceedings for breaches of competition law under section 49B of the Competition Act 1998. Damages are sought in respect of losses allegedly caused by an unlawful arrangement between various truck manufacturers. This is a “follow on” claim, meaning that it relies upon a finding of the European Commission that the truck manufacturers had participated in a breach of competition law (Case AT.39824 – Trucks). It is alleged that prices paid for trucks were inflated as a result of the infringement.

The first application was brought by UKTC, a special purpose vehicle set up to pursue these claims. The second application was brought by RHA, a trade association for the haulage industry. Both applications were considered by the Competition Appeal Tribunal (Tribunal).

The Tribunal must “certify” a claim of this nature before it can proceed. As part of that decision, the Tribunal must decide whether to authorise the class representative to bring the claim on behalf of the class and will also consider whether the class representative has sufficient funding arrangements in place to meet their own costs and any costs order made in favour of the defendants. Therefore, in order to obtain certification from the Tribunal, both RHA and UKTC had to demonstrate that they had adequate funding arrangements in place. For this purpose, both RHA and UKTC relied on LFAs. The truck manufacturers applied for determination of a preliminary issue as to whether the LFAs were lawful and enforceable funding arrangements.

The key question the Supreme Court had to consider was whether the funders of the claims were providing “claims management services”:

• The truck manufacturers said they did because they concerned the provision of financial services or assistance.
• The RHA and UKTC said they did not on the basis that the funders did not have a role in the management of the claim.

If the funders were providing “claims management services”, then the LFAs in question were DBAs under the statutory definition and could only be enforceable if certain additional requirements set out in the Damages-Based Agreements Regulations 2013 (SI 2013/609) were satisfied. It was common ground that the LFAs entered into by RHA and UKTC did not satisfy these requirements.

If the funders were not providing ‘claims management services’, then the LFAs were not DBAs within the meaning of section 58AA of the Courts and Legal Services Act 1990, and were hence valid and enforceable funding agreements.

The Supreme Court’s decision to uphold the appeal

The majority of the Supreme Court agreed with the truck manufacturers and found that the funders were providing “claims management services” and that the funding agreements were DBAs. Lord Sales applied the ordinary and natural meaning of the statute to find that the definition of “claims management service” is intended to be wide, and not meant to be further restricted by the notion of “claims management”.

The Association of Litigation Funders of England and Wales had intervened in the appeal, and Lord Sales noted (at [13]) “[t]he court was told that if LFAs of this kind, whereby the third party funders play no active part in the conduct of the litigation but are remunerated by receiving a share of any compensation recovered by their client, are DBAs within the meaning of section 58AA, the likely consequence in practice would be that most third party litigation funding agreements would by virtue of that provision be unenforceable as the law currently stands”. In her dissenting judgment, Lady Rose referred to evidence heard by the Supreme Court that the majority’s conclusion would mean that: (i) most, if not all, LFAs that have been agreed since litigation funding began would be invalidated; (ii) this would likely mean that no collective proceedings order would ever be pursued in the Tribunal again; and (iii) a radical review would be required not only of the LFAs at issue, but of the entire litigation funding sector in the UK.

Legal and practical implications for litigation funding in the UK

The legal effect of the decision will be most acute for the collective proceedings regime provided for by section 47B of the Competition Act 1998. This is primarily due to the need for the class representative to show that it has secured adequate funding arrangements for its claim before the Tribunal will grant it authorisation to proceed. As Lady Rose noted in her dissenting judgment ([101]), “this kind of [LFA] underpins many if not all of the proceedings brought under that statutory procedure”.

Section 47C(8) of the Competition Act 1998 creates an additional hurdle for representatives seeking to bring collective proceedings on behalf of an “opt-out” class, in that it simply provides that a “[DBA] is unenforceable if it relates to opt-out collective proceedings”. As Lord Sales considered ([95] to [99]), this means that there is no scope for a DBA in relation to opt-out proceedings to be made enforceable by compliance with the further conditions stipulated in section 58AA.

It is presently unclear whether the Supreme Court’s ruling will cause the Tribunal to revisit the authorisation of any collective proceedings that have already been certified by the Tribunal on the basis of funding arrangements that involve a DBA. It is anticipated that authorised class representatives are likely working with funders to restructure their arrangements regardless. In the interim, it is understandable that defendants will have legitimate concerns about their continued ability to seek recoverable costs if and when they are ordered.

Away from the competition litigation sphere, the impact of the judgment will be felt by all UK litigators. Recent years have seen an explosion in litigation funding which has facilitated many multi-claimant ESG, data protection, and consumer-based claims, including an increasing volume of group and collective actions. We anticipate the following practical implications as a result of the Supreme Court’s decision:

• Where LFAs provide for the remuneration of the funder based on a percentage of damages awarded, they will now be unenforceable. That is likely to be the case even where the link with damages is indirect, such as a cap determined by the amount of damages obtained.
• LFAs which provide for remuneration based on a multiple of the amount funded should still be valid. However, such arrangements traditionally provide for a lower return to funders rather than LFAs based on a percentage of damages.
• Litigation funders will be reviewing their LFAs and will need to decide how to restructure these agreements, and on what terms. Such decisions may need to be taken in the round, having regard to all investments. High-value, but speculative, claims may not now be so attractive, if the funder can only hope to recover a multiple of the amount it has invested (rather than a proportion of any damages, which would potentially have been a much higher amount). This could result in funders seeking to jettison more ‘risky’ claims from their portfolios – particularly those that have not yet been issued or which are at an early stage.