Agreements with third-party litigation funders are damages-based agreements (DBAs), the Supreme Court said today in a ruling likely to invalidate almost all existing arrangements.
The 4:1 majority decision in PACCAR will lead to a rush by funders, clients and law firms to restructure their litigation funding agreements (LFAs), but funders said it would not deter them from backing claims.
However, as DBAs are not allowed in opt-out collective actions brought in the Competition Appeal Tribunal (CAT), they said the government needed to make legislative changes to accommodate the ruling.
In 2021, three Court of Appeal judges – albeit sitting in the Divisional Court – upheld the decision of the CAT on a preliminary issue in the opt-out trucks cartel litigation that LFAs were not DBAs but gave permission to leapfrog an appeal to the Supreme Court.
The case is being brought by UK Trucks Claim Ltd and the Road Haulage Association, funded by Yarcombe (part of Calunius Capital) and Therium respectively.
A DBA is defined by section 58AA of the Courts and Legal Services Act 1990 as an agreement between a person providing “advocacy services, litigation services or claims management services”.
The definition of claims management services was imported from section 4 of the Compensation Act 2006 and includes “the provision of financial services or assistance”.
The question was whether an LFA which provides for the funder to be paid by a share of damages, but not to play any part in the active management or prosecution of the claim, was a DBA by this definition.
If it was, then it would be unenforceable because it failed to comply with the conditions of the DBA Regulations.
Giving the majority ruling, Lord Sales – with whom Lord Reed, Lord Leggatt and Lord Stephens agreed – said “the assumption has been made that third-party funding arrangements such as those in issue in these proceedings, which assign a passive role to the funders in relation to the conduct of the litigation, are not DBAs within the meaning of section 58AA, are not contrary to public policy, and so are enforceable as ordinary binding contractual arrangements”.
But he held: “The textual and contextual indicators from the 2006 Act itself clearly lead to the conclusion that the definition of ‘claims management services’ is meant to be wide and is not intended to be coloured by the notion of ‘claims management’.”
Lord Justice Henderson, who gave the Divisional Court ruling, was wrong to infer that the intention of the 2006 Act was to regulate “claims intermediaries” and no one else. “That was not a concept used in the Act itself, nor is it a clear concept.”
The judge continued that there were “understandable reasons” why Parliament would want to include the possibility of regulating litigation funding within the scope of the 2006 Act.
Lord Sales added that neither Sir Rupert Jackson’s reports on civil costs nor the Association of Litigation Funders’ (ALF) code of conduct assisted in answering the question of statutory interpretation. The latter intervened in the case.
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.”
Lady Rose quoted ALF chair Susan Dunn, who said the consequences of overturning the Divisonal Court ruling 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…
“It would bring to an abrupt end hundreds of funded claims with potentially catastrophic financial consequences for all involved in the case.”
Calunius chairman Leslie Perrin told the court that such a decision could make it impossible to fund collective proceedings. “At the least, it would require a radical review not only of these LFAs but of the entire litigation funding sector as it has developed in the United Kingdom.”
In a joint statement, Ms Dunn and International Legal Finance Association executive director Gary Barnett said: “We are disappointed by this decision as it runs contrary to the accepted understanding that financing agreements are not DBAs.
“The decision is not generally expected to impact the economics of legal finance and will not deter our members’ willingness to finance meritorious claims.
“It will only affect how legal finance agreements are structured so that they comply with the regulations and individual financiers will have been considering what if any changes are needed to their own legal finance agreements as a consequence of this decision.”
They said they believed the government never intended this outcome and so “technical amendments are needed to reclarify the government’s intent when it introduced DBAs and ensure the proper funding of opt-out cases in the CAT”.
As DBAs were not permitted in opt-out cases in the CAT, “this decision has the potential to prevent the intended purpose of the CAT to be fully realised”.
Mohsin Patel, director and co-founder at litigation finance broker Factor Risk Management, said the consequences of the decision “may well not be as widespread as expected”.
He explained: “Given that funder returns in many LFAs are structured as multiples of funds invested as opposed to a fixed share of damages, these should therefore fall outside of the DBA regulations.
“Needless to say, the fallout from the issues raised and uncertainty caused by this judgment will have a far-reaching impact on the industry as a whole, and serve to be a retrogressive step for an industry still in its infancy. Overall, a bad day for consumers, funders and lawyers as a whole.”
Garbhan Shanks, a commercial litigation partner at London firm Fladgate, added that the problems caused by the ruling “will be quickly cured” with restructured compliant agreements.
“The increase in collective and group action proceedings in the UK supported by ever increasing third-party funding capacity will continue at pace.”
Steven Friel, chief executive at funder Woodsfood, insisted that “defendant attempts to disrupt funding for meritorious claims will ultimately not succeed”.
He said: “Our business, and UK litigation finding generally, are now sufficiently mature that this decision, while frustrating, will not stop the access to justice momentum that we have created.
“We have prepared for this decision, and we will now work with our lawyers, class representatives and other claimants to move beyond this bump in the road.”
Elena Rey, head of the litigation funding working group and litigation funding group leader at City firm Brown Rudnick, said: “In anticipation of this decision, we have been working with funders and claimants to draft amendments to existing litigation funding agreements.
“We expect that provided that the funding documentation is updated to reflect relevant points referred to in the decision, this decision should not impact funders’ returns in any meaningful way.”