On 26 July 2023, the UK Supreme Court handed down a judgment that will cause serious disruption (at least in the short term) to the litigation funding market. In R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal and others[1], the Supreme Court held by a majority that litigation funding agreements which entitled the funders to recover a percentage of the damages recovered were damages-based agreements and, as such, were unenforceable, as they did not meet the strict statutory conditions for such agreements.

Background

The Road Haulage Association and UK Trucks Claim Ltd. made applications to the UK Competition Appeal Tribunal to bring collective proceedings for breaches of competition law by various truck manufacturers. To obtain a collective proceedings order, they were required to have adequate funding arrangements in place, leading them to rely on litigation funding agreements. Under the terms of these agreements, the funders’ remuneration was to be calculated by reference to a percentage of the damages ultimately recovered in the litigation.  

The appellant truck manufacturers contended that these funding agreements constituted damages-based agreements, known as ‘DBAs’, within the meaning given in Section 58AA of the Courts and Legal Services Act 1990. Further, as the funding agreements did not comply with the strict requirements of that section, they were unlawful and unenforceable.  

A DBA is defined in Section 58AA as an agreement with a person providing advocacy services, litigation services or ‘claims management services’ which provides for a payment to be made to the service provider only where the party to the litigation receives a specified financial benefit from the litigation – and the amount of payment is to be determined by reference to the amount of the financial benefit obtained.  

Whether the funding agreements qualified as DBAs under Section 58AA therefore turned on whether they involved ‘claims management services’, which are defined in the Compensation Act 2006 and the Financial Services and Markets Act 2000 as ‘advice or other services in relation to the making of a claim’. The Competition Appeals Tribunal ruled that the funding agreements were not DBAs within the meaning of Section 58AA, and that they were lawful and enforceable funding arrangements which could justify the making of collective proceedings orders. The appellants’ judicial review challenge was dismissed by the Divisional Court, so the appellants appealed directly to the Supreme Court.

Appellants’ issues

The appellants argued that, under the funding agreements, the funders provided ‘claims management services’ by virtue of providing ‘other services in relation to the making of a claim’ in the form of ‘the provision of financial services or assistance’. The funding agreements were therefore DBAs, which were noncompliant with the relevant statutory requirements – and were thus unenforceable.  

In response, the Road Haulage Association and UK Trucks Claim Ltd. contended that ‘financial services or assistance’ that was ‘in relation to the making of a claim’ was to be interpreted as applying in the context of the management of a claim. Under the terms of the funding agreements, the funders had no role in the management of the claims against the appellants, thus the agreements were not DBAs within the statutory meaning, and Section 58AA did not render them unenforceable.

Supreme Court’s ruling

By a majority (four-to-one) decision, the Supreme Court allowed the appeal, and it considered the principles relevant to interpreting a statutory provision, including:

• Its purpose and general scheme by which it was put into effect.
• Identifying relevant aids to interpretation, such as explanatory notes and the context of the section as a whole in the wider context of the statute.
• The principle that the courts will not interpret a statute so as to produce an absurd result.
• That the definition of a term may give words a different meaning from their ordinary meaning, but where Parliament has provided a definition, this must be the primary guide to the meaning of the defined term.

The Supreme Court held that the words ‘claims management services’, read according to their natural meaning, were capable of covering the funding agreements. The statutory purpose of the relevant part of the Compensation Act 2006 was to provide a broad power to allow the Secretary of State to decide what targeted regulatory response might be required to new developments in the provision of services to encourage or facilitate litigation. 

The wide language used to define ‘claims management services’ was not tied to any concept of active management of a claim. This wide interpretation was supported by the Compensation (Regulated Claims Management Services) Order 2006 and the Explanatory Memorandum, which formed part of the same legislative scheme as the Compensation Act 2006.  

Furthermore, while the established legal or ordinary meaning of a term may provide guidance as to the meaning of a term set out in a statutory definition, ‘claims management services’ had no such established and generally accepted meaning which would qualify or colour the express language of the definition set out in the statute. To read the definition in this way would be counter to the scheme and purpose of the Compensation Act 2006.  

The appellants’ interpretation of the term also did not produce any absurdity. It was not for the Supreme Court to limit the scope of the power or qualify the wide language used in the definition under the Compensation Act 2006 by thinking of situations in which use of the power might be unreasonable.  

Lastly, the Supreme Court held that events after 2006 were not relevant to the interpretation of Section 58AA, as they did not provide guidance regarding the policy context in which the Compensation Act 2006 was enacted or its purpose. Importantly, the ruling noted that ‘even if it might be said that it is desirable in public policy terms that third party funding arrangements … should be available to support claimants to have access to justice … this is not a reason why there should be any departure from the conventional approach to statutory interpretation’.  

The Supreme Court accordingly held that the funding agreements were DBAs and, as it was common ground that they did not comply with the strict regime governing DBAs, the effect of the ruling was that the agreements were unenforceable.

Takeaways

The Supreme Court itself recognised that the likely consequence of the decision in practice is that most third-party litigation funding agreements currently in place will be unenforceable as the law stands, given that funding agreements do not usually meet the conditions required for DBAs. This had been the position of the Association of Litigation Funders of England and Wales, which intervened in the case.  

In particular, the decision appears to outlaw funding agreements calculating compensation as a percentage of damages in opt-out collective proceedings in the Competition Appeal Tribunal.  

Existing third-party funding agreements will need careful review to assess whether, and to what extent, they are enforceable. Funding agreements structured to provide returns as a multiple of costs paid may fall outside of the DBA regime.  

Parties to noncompliant funding agreements will need to take immediate steps to restructure their agreements, where possible to do so, or face challenges to their enforceability. Where amendments cannot be achieved, termination may need to be considered.  

While this will inevitably be an enormous headache in the short term, it remains to be seen whether it will in fact dampen the long-term growth of the industry, or whether legislation will be introduced to permit wider forms of third-party litigation funding agreements.

[1] [2023] UKSC 28

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