Supreme Court decision on litigation funding causes concern

A recent Supreme Court case has cast doubt on the validity of certain types of litigation funding agreements or LFAs. We look at the detail of R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents) [2023] UKSC 28. 

The case examined whether a type of litigation funding agreement which allowed the funder to recover a percentage of the damages were considered to be a Damages-Based Agreement (DBA)and, if so, whether they complied with Damages-Based Agreements Regulations.

What is a litigation funding agreement?

A litigation funding agreement (LFA) is made between a party who wishes to fund a court case and an organisation prepared to provide this funding. In some cases, law firms may offer conditional fee agreements or contingent fee agreements. Other alternatives include funding offered by third-party funders – companies that specialise in covering legal costs.

The Supreme Court case in question dealt with an LFA which allowed the funder to recover a percentage of the damages and whether that was in fact to be considered a DBA. 

How do damages-based agreements work?

DBAs were introduced under the Damages-Based Agreements Regulations 2013 (SI 2013/609) (DBA Regulations) with the intention of providing potential litigants another option for funding legal action.

DBAs are a type of contingency fee agreement and are typically offered by solicitors. The fee the funder will receive is contingent upon the result achieved and is based on the damages recovered.

This differs from a conditional fee agreement, which is not based on the amount recovered. Instead, an uplift or success fee is charged. This is a percentage of the amount of the solicitor’s fees. This means that the success fee is based on the amount of work done.

Under a DBA, the amount recovered is a percentage of the damages received if the funded party is successful. The claimant is still entitled to claim payment of their legal costs, on the standard indemnity basis, should they win. This will go some way towards covering the percentage of damages paid out to the funder under the DBA.

DBAs can be used for both litigation and non-contentious matters where work is undertaken to recover money or other assets.

R (PACCAR Inc) v Competition Appeal Tribunal background

The case involved a claim for compensation made by the purchasers of lorries from five truck groups between 1997 and 2011. The European Commission found that the truck groups had colluded in a way that breached competition laws. A group of those who had bought lorries sought damages for losses arising from the lack of competition.

Two applications were then made to the Competition Appeal Tribunal (CAT) to continue follow-on collective proceedings. These applications were made by the Road Haulage Association and a company created for the purposes of making a claim, UK Truck Claims Ltd. For the applications to be successful, the Competition Act 1998 provides that the CAT would need to make a collective proceedings order.

The applicants in the proceedings put LFAs in place to both meet their own costs and any costs orders made against them. The LFAs made over £50 million available to cover potential costs.

The truck groups objected to the making of collective proceedings order, claiming that the LFAs constituted DBAs and were unenforceable as they did not comply with the DBA Regulations. Without establishing that valid funding was in place, it was not possible to request a collective proceedings order.

Governing legislation

Relevant legislation taken into account by the courts includes the following:

The Courts and Legal Services Act 1990, section 58AA(1) and (2)

“A damages-based agreement which satisfies the conditions in subsection (4) is not unenforceable by reason only of its being a damages-based agreement.

… a damages-based agreement which does not satisfy those conditions is unenforceable.”

The legal definition of a damages-based agreement, as set out in section 58AA(3) is:

“an agreement between a person providing advocacy services, litigation services or claims management services and the recipient of those services which provides that-

• the recipient is to make a payment to the person providing the services if the recipient obtains a specified financial benefit in connection with the matter in relation to which the services are provided, and

• the amount of that payment is to be determined by reference to the amount of the financial benefit obtained

‘Claims management services is defined in the Financial Services and Markets Act 2000 and section 4(2) of the Compensation Act 2006 as:

“… advice or other services in relation to the making of a claim.”

‘Other services’ includes “financial services or assistance”.

Key issue

The court was asked to consider whether the LFAs were DBAs. 

The key issue was whether ‘claims management services’ included the provision of litigation funding, which was the funder’s only involvement in the proceedings.

If the provision of litigation funding was a claims management service, then this would mean that the LFAs were DBAs. As such, they would not be enforceable as the agreements did not comply with the DBA Regulations, which set out formal requirements for this type of agreement. It should be noted that the respondents accepted that the LFAs did not comply with the DBA Regulations and this point was not at issue.

Initially, the Competition Tribunal decided that the LFAs were not DBAs and so they would be enforceable. They reached this decision on the basis that funders would not normally manage a claim so they were not providing a claims management service.

Supreme Court decision

The case was leapfrogged to the Supreme Court after the Court of Appeal said that it had no jurisdiction to hear an appeal, although in a judicial review, it upheld the Competition Tribunal’s decision.

The Supreme Court decided differently, by a majority of four to one. Lord Sales gave judgment, with Lords Reed, Leggatt and Stephens concurring. The fifth judge, Lady Rose, dissented and would have dismissed the appeal.

The Supreme Court found that the LFAs in place did constitute DBAs.

This meant that the collective proceedings could not be brought under the agreements as they were unenforceable.

It also raised the larger point that most, if not all, LFAs considered to be damages-based agreements may be unenforceable if they do not comply with the DBA Regulations. 

The main points of the judgment were as follows:

Parliament had intended to ‘create a broadly framed power for the Secretary of State to regulate’ these types of services. The Compensation Act 2006 did not limit or prohibit claims management services but required conditions to be met in the provision of such services.

The relevant legislation at section 58AA(3) of the Courts and Legal Services Act 1990, which defined DBAs, should be given its natural meaning and, as such, covered the type of funding in this case. The phrase ‘claims management services’ should be given a wide interpretation and not simply mean the idea of ‘claims management’. It could also include support such as financial assistance or loans and the legislation was intended to regulate this type of activity. 

The Courts and Legal Services Act 1990 was intended to protect consumers from circumstances such as funders trying to claim an unreasonable share of damages. It might also be the case that a package of services could be provided or the funding used to pay other service providers, in which case the regulations would be needed to cover this type of situation, supporting the idea of a wide interpretation.

Impact

Lord Sales noted that the court had been advised that the majority of third-party LFAs currently in place may be unenforceable following this judgment. This appears to be on the basis that if LFAs are considered to be DBAs and do not comply with the DBA Regulations. 

The Supreme Court stated that a litigation funding agreement where ‘the funder’s maximum remuneration is calculated with reference to a percentage of the damages ultimately recovered in the litigation’ is a DBA and must comply with the DBA regulations if it is to be enforceable.

Lady Rose also said that the majority verdict was likely to mean that:

• most, if not all, LFAs put in place since litigation funding began would now be unenforceable. Again, this appears to be on the basis that such LFAs now considered to be DBAs do not comply with the DBA Regulations.  
• collective proceedings orders could not be requested in the Competition Appeal Tribunal; and
• a radical review of the entire UK litigation funding sector would be needed

What next?

The government has previously been urged to amend the Damages-Based Agreements Regulations, which have been criticised for being poorly drafted and unclear. In an earlier DBA case of Zuberi v Lexlaw (2021), the court noted that the rules did not represent ‘the draftsman’s finest hour’. This case is likely to increase pressure on legislators and make changes more of a priority. However, in the meantime, funders and lawyers will need to work with the legislation as it is.

During the case, it was noted that UK litigation funders pay for costs of over £500 million a year.

Funders are likely to be urgently redrafting their standard agreements to ensure that they comply with the formal requirements for a damages-based agreement under The Courts and Legal Services Act 1990, section 58AA(4), which states:

The agreement—

(a)must be in writing;

[F7(aa)must not relate to proceedings which by virtue of section 58A(1) and (2) cannot be the subject of an enforceable conditional fee agreement or to proceedings of a description prescribed by the Lord Chancellor;]

(b)[F8if regulations so provide,] must not provide for a payment above a prescribed amount or for a payment above an amount calculated in a prescribed manner;

©must comply with such other requirements as to its terms and conditions as are prescribed; and

(d)must be made only after the person providing services under the agreement [F9has complied with such requirements (if any) as may be prescribed as to the provision of information].

In cases where collective proceedings orders are requested, it is a pre-requisite that an enforceable agreement exists for payment of the defendant’s costs, should the claimant lose. The case means that DBAs, now unenforceable, cannot be used to show that adverse costs can be paid, and so a collective proceedings order cannot be sought.

As well as Competition Appeal Tribunal cases, a substantial amount of other litigation relies on third-party funding to cover both a party’s costs and the threat of an adverse costs order. The case may not just leave parties struggling to bring a case in the Competition Appeal Tribunal and other courts but could also give the other side in proceedings a new argument to stop a case from going ahead. If there is no possibility of showing that an applicant is able to meet the other side’s costs should they lose their case, it may be possible to prevent a case from being heard at all.

There is also the issue of cases that have already been finalised under earlier LFAs. Now that the court has found the contracts to be unenforceable, there may be potential for those who have entered into this type of agreement with funders to seek to recoup the money they have paid.

Litigation funding agreements which allow the funder to claim a multiple of the amount paid towards funding the case do not constitute damages-based agreements and so are not likely to be directly affected. In the case of PACCAR, the payment was calculated on the basis of damages awarded, and not on the basis of the legal costs.

Another potential problem exists for funders however. Now that they have been held to have been providing claims management services, they may find that they are subject to regulation on other fronts, such as personal injury claims regulation or financial services regulations.

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