Supreme Court: Litigation Funding Agreements Unenforceable

On 26 July 2023, the Supreme Court of the United Kingdom handed down a judgment that is set to cause significant disruption to many collective proceedings, particularly opt-out collective actions before the Competition Appeal Tribunal (CAT). The Court held that litigation funding agreements (LFAs) which entitle funders to a percentage of the recovered damages ultimately fall under the statutory definition of damages-based agreements (DBAs). As such, opt-in claims which currently rely on these LFAs will be held to be unenforceable if they do not comply with the relevant statutory conditions for DBAs. Whilst all current opt-out collective actions utilising these funding arrangements will be invalidated as the Competition Act 1998 explicitly precludes their use.

Background

In a follow-on damages claim against DAF Trucks relating to the company’s involvement in the European truck cartel, the UK Trucks Claim Ltd (UKTC) and the Road Haulage Association (RHA) sought a Collective Proceedings Order (CPO) from the Competition Appeal Tribunal (CAT).

For a claim to proceed under a CPO, the CAT must conduct an assessment of the adequacy of the class representative's funding arrangements. In this particular case, a preliminary issue arose around the litigation funding agreements (LFAs) entered into by UKTC and the RHA with Calunius Capital and Therium respectively. Under the aforementioned LFAs, the litigation funders had committed to financing the proceedings and, if the claims were ultimately successful in the recovery of monetary damages, the funders would be entitled to a percentage of said recovery.

The truck manufacturer subsequently argued that the aforementioned LFAs constituted DBAs within the meaning of Section 58AA(3) of the Courts and Legal Services Act 1990 (“CLSA”) and as such, were unenforceable as the DBAs would not comply with the regulatory provisions of the Damages-Based Agreements Regulations 2013 (“DBA Regulations”). Consequently, DAF Trucks would argue that given the unenforceability of the claimants funding arrangement, the claimants were not adequately funded under the governing rules and as such, a CPO should not be issued.

Both the UKTC and RHA contended that the LFAs they had entered into with Calunius and Therium could not be statutorily defined as being a DBA, although they conceded that, if the funding arrangements were indeed classifiable as DBAs, they would ultimately be in breach of the DBA Regulations. As such, the enforceability of the corresponding LFAs turned on whether they could or could not be classified as DBAs according to statutory definitions.

Photograph: DAF Trucks N.V. Eindhoven

Statutory Definition of Damages Based Agreement

Under Section 58AA of the CLSA, a DBA is defined as an agreement whereby a party provides advocacy services, litigation services or claims management services in exchange for a specified financial benefit that is determined based upon the amount of the final damages award, or in other words, a share of the proceeds from the litigation. It was previously held that litigation funders did not fall under the scope of either advocacy services, litigation services or claims management services, however, DAF Trucks argued that both Calunius and Therium were involved in the provision of claims management services and as such, their funding arrangements constitute a DBA .

Section 58AA(7) refers to Section 419A of the Financial Services and Markets Act 2000 (“FSMA”) for its definition of “claims management services”. Section 419A of FSMA states that “claims management services” include “advice or other services in relation to the making of a claim” and that, “other services” also includes the provision of “financial services or assistance”.

Competition Appeal Tribunal Decision

The CAT ruled that the LFAs were not DBAs within the meaning of Section 58AA and that the CPOs could be issued as the LFAs were lawful and enforceable. The truck manufacturer subsequently sought a judicial review but the decision was upheld by the Divisional Court. Both the CAT and the Divisional Court found that the statutory definition could not have been intended to bear its broad literal meaning and should be interpreted as applying within the context of the management of a claim only. DAF Trucks therefore appealed directly to the Supreme Court.

Supreme Court Decision

In its judgment on the case of R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents) [2023] UKSC 28, the Supreme Court overturned the decisions of the CAT and Divisional Court, therefore agreeing with DAF that the LFAs fall under the statutory definition of "claims management services" and are thus classifiable as DBAs, thereby rendering them unenforceable.

The Supreme Court held that “claims management services” includes the “advice or other services in relation to the making of a claim” and that “services” also includes “the provision of financial services or assistance”.

The Supreme Court was of the view that these words, “according to their natural meaning, are apt to cover the LFAs in this case” and that “Parliament used wide language in section 4 deliberately and with the intention that the words of the definition of “claims management services” should be given their natural meaning.”

Photograph: The Supreme Court of the United Kingdom

Impact on Collective Actions

The Supreme Court's decision has significant implications for collective proceedings and in particular, opt-out collective actions. Section 47C(8) of the Competition Act 1998 explicitly precludes the use of DBAs for opt-out claims, irrespectively of whether they comply with the DBA Regulations or not. This means that all funding arrangements for current opt-out collective actions that are structured in such a way that funder payment is based upon claimant recovery, will now be invalidated. The consequence is that there might be no effective funding arrangements for these opt-out collective actions, potentially stalling or hindering the progress of such claims.

For opt-in collective actions, both the claimants and funders will need to scrutinize and subsequently renegotiate their existing LFAs to ensure that they comply with the DBA Regulations. To ensure compliance, DBA contracts will need to ensure that they explicitly outline the basis of calculation of the payment rate as well as when such payments are to be made. The claimant is only to pay the agreed upon payment minus costs and disbursements covered by another party's agreement or order, along with the representative’s incurred expenses.

Current Uncertainties

The decision raises several important questions for the future of opt-out collective actions:

• How will existing, potentially non-compliant, funding arrangements be amended or restructured in order to comply with the regulatory requirements for opt-out collective proceedings?

• Can alternative funding arrangements be employed to finance opt-out collective claims without falling under the DBA regime, such as agreements that provide for a return based on a multiple of the funding rather than a percentage share of the damages?

• Will there be amendments to the statutory regime in order to permit the use of certain DBAs within the context of opt-out collective proceedings?

Conclusion

The Supreme Court's ruling has created immediate uncertainty and challenges for opt-out collective actions and other collective proceedings that rely on LFAs. The claimants, legal representatives and litigation funders involved in these collective claims will need to re-assess their financing arrangements and renegotiate their funding models to navigate the impact of this landmark ruling. Moreover, it remains to be seen whether the industry will find ways to comply with the regulatory requirements or whether legislative changes will be introduced to permit wider forms of third-party litigation funding agreements.