Background to the Appeal
R (PACCAR Inc and others) v Competition Appeal Tribunal and others  UKSC 28 considers the statutory interpretation of a “damages-based agreement” (“DBA”) and whether litigation funding agreements (“LFA”) are DBAs. LFAs are entered between a third-party litigation funder and a litigant with the purpose to finance litigation on a contingency basis whereby the funder takes a percentage of the damages recovered should the claim be successful. The funder plays no active role in the management of the claim. All collective proceedings brought before the Competition Appeal Tribunal (“CAT”) use third party litigation funders.
This case was initiated by the second and third respondents to the appeal – UK Trucks Claim Ltd and the Road Haulage Association Ltd respectively, both of which have LFAs in place. They applied to bring collective proceedings (on a ‘follow-on’ basis) on behalf of persons who acquired trucks from the appellants (collectively, “DAF”) and other truck manufacturers for competition law infringements as found by the European Commission in a 2016 decision.
In an attempt to defeat the claim, DAF contended that, because the funders’ agreements provide “financial services or assistance” in the litigation, they are “claims management services” under section 58AA of the Courts and Legal Services Act 1990 (“CLSA 1990”) (inserted by Section 154 of the Coroners and Justice Act 2009) thereby constituting a DBA.
DBAs are subject to stringent statutory requirements under section 58AA(1) and (2) of CLSA 1990 which provide that unless certain conditions are complied with, a DBA will be unenforceable. Additional requirements were brought in by the Damages Based Regulations 2013.
It was accepted that the LFAs in this appeal did not satisfy the requisite conditions, so to establish whether the LFAs were in fact enforceable rested on the finding of whether they constituted DBAs. If they were found to be DBAs, they would be rendered unlawful and unenforceable.
DAF’s argument that the LFAs were DBAs was rejected by the CAT, a decision later upheld by the Divisional Court. DAF was however granted permission to leapfrog an appeal to the Supreme Court.
The Supreme Court’s Ruling
The Supreme Court has held 4:1 (Lady Rose dissenting) that LFAs which are calculated on a percentage of damages basis are DBAs.
A DBA is defined by section 58AA(3) of the CLSA 1990 as an agreement between a person providing “advocacy services, litigation services or claims management services”. The relevant part of the definition of a DBA in this appeal is whether the LFAs involve the provision of “claims management services”. The definition of claims management services was imported from section 4 of the Compensation Act 2006 (“CA 2006”) and includes “the provision of financial services or assistance”; later defined by the Financial Services and Markets Act 2000 in materially the same terms.
Giving the majority ruling, Lord Sales – with whom Lord Reed, Lord Leggatt and Lord Stephens agreed – held that there were strong indicators that the Parliamentary intention was to use wide language in section 4 of the CA 2006 deliberately and to give natural meaning to the words used to define “claim management services”, which could cover LFAs.
Lady Rose dissented: “it seems to me, as it seemed to the Divisional Court, most improbable that Parliament intended that damages-based litigation funding agreements would all be rendered unenforceable by section 58AA without any mention of this fact…
“I therefore conclude that the Divisional Court was right to agree with the reasoning of the CAT that the giving 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.”
The Potential Impact
While the ruling’s impact may be far-reaching, it is unlikely to affect the entire litigation funding industry equally. In particular, proceedings financed by third-party litigation funders running on an opt-out basis in the CAT may be among the most significantly affected as DBAs are unenforceable if they relate to opt-out collective proceedings pursuant to section 47C(8) of the Competition Act 1998.
This may place cases before the CAT in immediate difficulty, as many are based on a return to the investor’s outlay being replayed to a percentage of the damages recovered, and may cause uncertainty in amending funding agreements for claims past the certification stage. This may force the CAT to stay current proceedings while the issue is resolved. It may also catalyse legislative change in the form of amendments to DBA regulations to reclarify Parliamentary intention. This could be achieved by, for example, including amendments in the Digital Markets, Competition and Consumers Bill which is currently in front of Parliament. It is important to note, however, that not all LFAs are automatically DBAs.
Two possibilities are being considered to address the issues raised. The first is for the litigation funder to comply with DBA regulations. This cannot happen overnight so will not solve the problem in the short term, but a business that is a claims management business might be able to use its compliant regulatory position to acquire claims from others.
The second is to structure the funding agreement as one that relates the funder’s gain directly to the investment incurred. Using a ‘return on investment’ basis for funding would result in existing funding agreements being redrafted so that the funder agrees to receive a certain multiple of capital advanced in the event of a successful claim. That would not be based on accepting a fixed share of damages and hence would not be a DBA, thereby eliminating the difficulties in ensuring compliance with DBA requirements or in running opt-out proceedings in the CAT.
Some commentators have suggested that return on investment might be the simplest way to address the issue raised by PACCAR. Whether such restructuring would work in practice remains to be seen and swifter means such as consolidation via corporate transactions may be needed.
The full judgment can be read here.