The Supreme Court finds that litigation funding agreements (“LFAs”) are damages-based agreements (“DBAs”) within the meaning of the legislation regulating DBAs

In R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents) [2023] UKSC 28 [1], the Supreme Court has held by a 4:1 majority that LFAs, pursuant to which the funder is entitled to recover a percentage of any damages recovered, are DBAs within the meaning of s.58AA Courts and Legal Services Act 1990 (the “1990 Act”) and the Damages Based Regulations 2013 (the "DBA Regulations 2013"). The result is that many LFAs are likely to now be unenforceable as the law currently stands and a review of the litigation funding sector in the UK will be required.

Background

In 2016, the European Commission (“EC”) found that five major European truck manufacturing groups, including DAF TRUCKS N.V. and DAF TRUCKS DEUTSCHLAND GMBH (collectively “DAF”), infringed competition law. Following that EC decision, the Road Haulage Association Ltd and UK Trucks Claim Ltd, applied to the Competition Appeal Tribunal (the “Tribunal”) for collective proceedings orders (pursuant to s.47B of the Competition Act 1998) in order to bring collective claims on behalf of persons who had acquired trucks from DAF and other manufacturers. Both applicants were funded by LFAs. The LFAs provided that the third-party litigation funders’ only involvement in the collective proceedings would be to provide funding and that they were to be remunerated, in the usual way, by a share of any damages recovered. DAF opposed the orders. It contended that third-party litigation funding constituted "claims management services" as defined in the s. 4(2) Compensation Act 2006 (the “2006 Act”) 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”, and therefore the LFAs were actually DBAs within within s.58AA of 1990 Act and were consequently, unenforceable for non-compliance with the DBA Regulations 2013. The Tribunal found that the LFAs were not DBAs and were therefore enforceable. 

In Paccar Inc. v RHA and UKTC [2021] EWCA Civ 299, the Court of Appeal dismissed DAF’s application for permission to appeal, stating that it had no jurisdiction to hear the case and, sitting as the Divisional Court on judicial review, upheld the Tribunal’s decision confirming that LFAs were not regulated DBAs. DAF appealed directly to the Supreme Court under the leap-frog procedure.

Appeal to the Supreme Court

Now, in its judgment of 26 July 2023, the Supreme Court has overturned the lower decisions and agreed with DAF that the LFAs fall within the express definition of "claims management services" and therefore are DBAs and unenforceable. The Court held that the words "claims management services" in the s.4(2) of the 2006 Act, when read according to their natural meaning, were capable of covering LFAs and that Parliament had deliberately used those broad words in the 2006 Act because of the vagueness of the notion of “claims management services” at the time. Lord Sales stated “Where Parliament has taken the trouble to provide a definition, it is the words of the definition which are the primary guide to the meaning of the term defined.” 

Lady Rose, in her dissenting judgment, agreed with the Divisional Court and the Tribunal that the provision of financial assistance is only included in the term "claims management services" if it is given by someone who is providing claims management services within the ordinary meaning of that term however she did not explicitly state what she thought should be the ordinary meaning.

The decision has rendered the LFAs in the case unenforceable and the Court acknowledged that it had been informed that most third-party litigation funding agreements currently in place are likely to be unenforceable as the law currently stands.

If you would like to discuss this update, please contact Ben Knowles, Niya Phiri or your usual Clyde & Co contact.

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