In a significant decision which has already received extensive commentary, a majority of the Supreme Court has held that litigation funding agreements which provide for the funder to recover a percentage of damages constitute damages-based agreements (DBAs) and, if they fail to comply with the formal requirements for such agreements, are unenforceable and unlawful. In overturning the decisions of both the Competition Appeal Tribunal (CAT), and the Divisional Court, in R (on the application of PACCAR Inc & Ors) v Competition Appeal Tribunal & Ors  UKSC 28, the Supreme Court has dealt an unexpected blow to the litigation funding industry, and heightened the need for further legislation in this area. However, the decision is not quite the catastrophe some have suggested.
The development of litigation funding
Historically, agreements whereby a third party agreed to finance litigation between others were generally regarded as unenforceable under English law as being contrary to public policy. However, recognising the valuable role that such arrangements have in furthering access to justice, the last 30 years have marked a sea change in approach, starting with the development of conditional fee agreements, followed by the growth of the litigation funding industry, and most recently, the introduction of DBAs.
Section 58AA(3)(a) of the Courts and Legal Services Act 1990 provides that a DBA 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.
Provided that such an agreement complies with the applicable statutory conditions, in particular the requirements of the Damages-Based Agreements Regulations 2013 (2013 Regulations), then it will be enforceable.
Section 58AA incorporates the definition of "claims management services" set out in the Compensation Act 2006 (and subsequently the Financial Services and Markets Act 2000), which means "advice or other services in relation to a claim", including "the provision of financial services or assistance".
In 2016, the European Commission decided that five truck manufacturing groups had engaged in anti-competitive behaviour in breach of competition law. In PACCAR, two proposed class representatives applied to the CAT to bring collective proceedings on a follow-on basis for damages arising out of breaches of European competition law. In order to obtain a collective proceedings order, the applicants needed to show they had adequate litigation funding arrangements in place to meet their own costs, and any adverse costs order made against them. They each relied on litigation funding agreements which provided for the relevant funder's remuneration to be calculated by reference to a percentage of the damages that would ultimately be recovered in the collective proceedings before the CAT.
However, the defendants contended that the funders were providing financial services, with the effect that they fell within the definition of claims management services, and so the funding agreements constituted DBAs in accordance with section 58AA. Since it was common ground that the funding agreements did not satisfy the requirements for DBAs in the 2013 Regulations, the defendants contended that they were therefore unenforceable. The result was that there was no proper basis on which a collective proceedings order could be made.
The CAT rejected that argument, as did the Divisional Court (which heard the issue by way of judicial review). The defendants appealed to the Supreme Court under the leapfrog procedure.
The Supreme Court's decision
In a leading judgment given by Lord Sales, the Supreme Court allowed the appeal. Lord Sales concluded that the words used to define "claims management services" in the Compensation Act 2006, read according to their natural meaning, were apt to cover the litigation funding agreements in this case and that neither section 58AA, nor the 2013 Regulations could be referred to as an aid to interpretation in circumstances where he did not accept that there was any ambiguity in the definition.
Lady Rose dissented, commenting, that everything in the scheme of the 1990 Act, together with the 2013 Regulations and applicable case law, showed that in enacting section 58AA, Parliament did not intend to render damages-based litigation funding agreements unenforceable.
While the Supreme Court's judgment has significant ramifications for the funding industry, it is important to bear in mind that the decision is not a criticism of litigation funding, but instead an example of the law of unintended consequences and what can go wrong where definitions from one statute are incorporated into another. It seems likely that correcting legislation will follow to remedy the situation.
In the meantime, it is now clear that funding agreements which provide for a return based solely on a percentage of the compensation recovered by the client, will be unenforceable unless they comply with the notoriously unclear requirements of the 2013 Regulations. However, the great majority of funding agreements now in operation provide instead for a return based on the higher of either a multiple of the amount invested (which would not fall within the definition of a DBA in section 58AA), or a percentage of compensation recovered. Provided the percentage recovery element can be severed in such agreements, those agreements should therefore still be enforceable.
Claimants, funders and their lawyers all recognise and value the benefits of litigation funding, which enable legitimate claims to be brought where it might otherwise be impossible or uncommercial to do so. The Supreme Court's decision will not bring a halt to that, although it may well provide an opportunity for agreements to be renegotiated.