Wholesale Change for Litigation Funding following the Supreme Court decision in R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents) [2023] UKSC 28 (“PACCAR”).
Introduction
In this widely reported and discussed case, the Supreme Court considered the question of whether litigation funding agreements (“LFAs”) pursuant to which the funder is entitled to recover a percentage of any damages recovered constitute damage-based agreements (“DBAs”) within the meaning of the relevant statutory scheme of regulation (the “DBA Issue”).
The DBA Issue arose in the context of collective proceedings in the Competition Appeal Tribunal which came about as a result of European truck manufacturers being found to have breached competition law by the European Commission in 2016.
In order to bring collective proceedings, the Claimants needed to show that they had adequate funding arrangements in place to meet their own costs and any adverse costs order made against them should they lose. The Claimants relied upon the LFAs in an effort to meet these requirements. The truck manufacturers argued before the Competition Appeal Tribunal that those LFAs were in fact DBAs which were unlawful and unenforceable because they did not comply with statutory requirements that govern DBAs. The Competition Appeal Tribunal found that the LFAs were not DBAs. The truck manufacturers appealed but the Divisional Court agreed with the Competition Appeal Tribunal and dismissed the appeal. The truck manufacturers appealed under the leap-frog procedure directly to the Supreme Court.
Supreme Court Judgment
Put briefly:
- The Court ruled that any LFA which provided for a return based on a proportion of the damages was in fact a DBA.
- This meant that such agreements were required to comply with s58AA of the Courts and Legal Services Act 1990 (the “CLSA”) and the Damages Based Agreements Regulations 2013 (the “Regulations”). Most LFAs of this type do not.
- In coming to its conclusion, the Court held that litigation funding was a “claims management service” which included “the provision of financial services or assistance”.
Lady Rose gave a thought-provoking dissenting judgment in which she looked at length at the history and evolution of litigation funding and commented that it was making “an important contribution to providing access to justice”. Her experience in her former role as Chair at the UK’s Competition Appeal Tribunal is highlighted and her understanding of how the relationship between litigation funding and access to justice underpins much of her disagreement with the majority. Not that you would know as neither judgment really mentions the other.
Impact of the Supreme Court Judgment
It is interesting to note that the majority Judgment does not dwell for too long on the impact of their decision on existing LFAs. However, at paragraphs 243 – 245 of Lady Rose’s dissenting Judgment, the learned Judge sets out her views on the potential impact which includes the following statement from the current Chair of the Association of Litigation Funders:
“These consequences will extend to all or most litigation funding agreements that have been agreed since litigation funding began in England and Wales. This would be massively damaging both for the administration of justice in relation to the existing cases which involve funding by litigation funders, and the future access to justice of parties who would otherwise have employed litigation funding agreements to fund their cases. It would bring to an abrupt end hundreds of funded claims with potentially catastrophic financial consequences for all involved in the case. It would have a major impact on the development of group litigations before the English Courts (including but not limited to Collective Proceedings before the Competition Appeals Tribunal), given the inter-relationship between that group litigation and the litigation funding industry. This would have enormous financial consequences: there is to be over £500 million of costs incurred annually by litigation funders in the UK alone. It would also have huge policy implications for the litigation funding industry, which ALF is best-placed to address.”
It follows that it is likely that LFAs of the type defined above are now going to be unenforceable because of this decision. Unless funders enter into variation agreements that make the LFAs in question comply with the statutory requirements then it is possible that:
- Funds advanced under such agreements will not have to be repaid under the LFA as the LFA will be rendered unenforceable; and
- Funders may then have to fall back on claims in restitution and bring claims for repayment of money advanced because those who have received its benefits have been unjustly enriched and no consideration has been received in return on the monies being advanced.
As such, unless funders have already taken steps to protect their investments in the intervening period between PACCAR being heard in the Supreme Court in February of this year and the handing down of the Supreme Court’s judgment, then it might be that funders at worst get nothing or at best get the value of the funds that have been advanced without any uplift.
However, if a case is in progress, then a funder may be in a position to propose a revised agreement and to refuse to provide any further funding until the agreement is varied. The threat of delay in litigation might be significant enough for funded parties to enter into sensible negotiations with funders.
Anyone on either side of a case who has been involved in litigation funding will be wondering whether they are likely to be now faced with satellite litigation.
Will those litigation funders who received windfall gains from prior cases now be targeted by their former clients for a clawback of the monies the funders received?
And will lawyers and other professionals who advised on the terms of litigation funding agreements now face a wave of negligence claims?
Whilst such claims might appear at first blush to smack of opportunism, certain categories of persons may in fact be obliged to – at very least – take advice on the viability of such claims. Examples include directors who owe duties to their companies, where a shareholder waiver might prudently be needed if such claims are not to at least be considered. Likewise, the position of insolvency practitioners who owe duties to the body of creditors as a whole. Third party funders will doubtless be taking proactive advice and bracing for the prospect of such claims.
There is also the potential – somewhat ironic – scenario of a third-party funder now being willing to fund such claims against other funders or professionals caught up in advising on the LFAs, on a DBA compliant basis.
This Judgment does not end litigation funding as some have suggested but it does change the dynamics and the future of funding in our justice system which now seems destined for even more litigation, absent there being political will to swiftly amend the current legislation. Until a suitable amendment is agreed, it could also make the jurisdiction of England & Wales less attractive to foreign litigants who now choose jurisdictions which have a more mature statutory framework for litigation funding.
It will probably have an impact on the economics of litigation funding generally in that it is likely to become more expensive or harder to obtain funding for big cases because funders are now precluded from obtaining the “big wins” of a percentage of damages on large cases.
There are also cases where private citizens and funders help fund litigation in a range of non-commercial litigation cases such as family law proceedings. This was highlighted by Lady Justice Rose in her dissenting judgment (see paragraphs 153 -156). This may mean that some family law cases are also going to be adversely impacted by this judgment with further satellite litigation arising.
Draft Regulations that could have amended some of the problems examined in this case had been submitted to the Ministry of Justice back in 2019 by a working group headed by Professor Rachael Mulheron, but the recommendations were never implemented. It will be interesting to see whether the concerns raised by this Judgment are taken up by Parliament in due course and addressed by way of primary legislation.
Authored by Dipti Hunter, Partner and Ben Rutledge, Associate at Keidan Harrison LLP
