In a decision of major importance for litigation in the UK, the UK Supreme Court has held that litigation funding agreements (“LFAs”) under which a litigation funder receives a percentage of any damages recovered by the claimant are damages-based agreements (“DBAs”) for the purposes of s58AA of the Courts and Legal Services Act 1990 (“CLSA”).^[1] As a result, most current litigation funding arrangements are likely to be unenforceable.

DBAs are agreements between (amongst others) providers of “claims management services” and the recipient of the services by which payment to the service provider is contingent on the recipient obtaining a specified financial benefit, with the amount of the payment determined by reference to the amount of the financial benefit obtained. In other words, DBAs are contingency fee arrangements in which the amount of the fee is referable to the amount the client recovers in the litigation.

The Court’s decision in PACCAR therefore turned on whether litigation funding falls within the definition of “claims management services” in s419A of the Financial Services and Markets Act 2000 (that being the definition that has been adopted for use in the CLSA).

“Claims management services” means advice or other services in relation to the making of a claim and “other services” includes “financial services or assistance”. Applying various rules of statutory interpretation and notwithstanding that the role played by litigation funders (at least those in PACCAR) arguably involves limited if any ‘management’ of a claim, the majority of four Justices found that the litigation funders in this case were providing a “claims management service”.

The PACCAR decision has significant and wide-ranging implications for the UK litigation funding market. DBAs that do not meet certain conditions under the CLSA and the Damages-Based Agreements Regulations 2013 (the “DBA Regulations”) are unenforceable. Those conditions include a requirement that in first instance cases, DBAs do not provide for payment of more than 50% of the amount recovered by the client. It has historically been widely assumed that LFAs do not constitute DBAs, and that therefore LFAs are enforceable regardless of the conditions.

As a result, it was common ground in PACCAR that if the LFA in that case were found to be a DBA, it would not satisfy the conditions under the CLSA 1990 and the LFA would be unenforceable. Indeed, there was evidence that the same was likely to be true of most LFAs that have been entered since litigation funding was introduced to the UK market.

In competition claims brought by way of collective proceedings, of which PACCAR is one, the impact of this decision is likely to be particularly pronounced. Collective competition proceedings in the UK to date are invariably reliant on the support of litigation funding and almost all such claims have been ‘opt-out’ proceedings (for which litigation funding is all but essential). However, in ‘opt-out’ proceedings, DBAs are prohibited entirely under s47C(8) of the Competition Act 1998.

In the context of opt-out proceedings, therefore, it will not be sufficient for LFAs simply to meet the conditions for DBAs and will instead need to be drafted so as to avoid falling within the definition of a DBA. Subject to the emergence of alternative pricing models, this may mean that at least for now, payment under LFAs in ‘opt-out’ claims will need to be limited to a set multiple of the funding provided (rather than as a percentage of the amount recovered).

As a result, litigation funders may insist on higher multiples, potentially leading to worse recoveries for Claimants overall. That may in turn attract greater scrutiny from the CAT as part of its decisions whether to certify ‘opt-out’ claims. If, therefore, it is more difficult for claimants to access funding (or to obtain certification) and absent legislative reform, PACCAR could deal a serious blow to the UK’s burgeoning collective proceedings regime.

Funders may also seek higher multiples in the context of opt-in proceedings, as well as other types of litigation. Alternatively, they may stick with (or include) a percentage-based approach but will then need to ensure that their LFAs comply with the conditions applicable to DBAs under the CLSA 1990 and the DBA Regulations. However, in her dissenting judgment, Lady Rose observed that funders “cannot realistically” comply with the conditions in the DBA Regulations, given that they were “not drafted in a way which applies to their business”.

And there may be further disputes in due course over whether LFAs that have been drafted or amended in light of PACCAR are enforceable. For example, any multiples-based approach which includes a cap or threshold linked to the damages obtained may give rise to an argument that the LFA is still referable to the level of damages obtained, and therefore a DBA.

In any case, parties to existing LFAs rendered unenforceable by the Supreme Court’s decision will now need to grapple with the consequences, which in many cases could include negotiating new terms. Where funded claims have succeeded but damages have not yet been determined (or the litigation funder has not yet been paid), funders may find they are now unable to enforce their right to a share of the damages awarded.

Litigation funding is becoming an increasingly important aspect of the UK litigation and arbitration markets, with the top 15 UK litigation funders now understood to be managing in excess of £2bn, nearly double the level reported as recently as 2017/18 and close to a ten-fold increase compared with 2013/2014. Given the growing significance of such funding for UK litigation and the scope for further disputes around the enforceability of funding arrangements following the Supreme Court’s decision, it may well be necessary for Parliament to legislate to address some of the issues raised by PACCAR.

Footnotes

[1] R (on the application of PACCAR Inc and ors) v Competition Appeal Tribunal and ors [2023] UKSC 28

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