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UK litigation funding upended – implications for funders and practitioners

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By Laura Berry, Jamie Tomlinson & Matthew Manso de Zuniga

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Publised 29 August 2023

Overview

In a major upheaval of the litigation funding market, the UK Supreme Court decided on 26 July 2023 that litigation funding agreements ("LFAs") which allow funders to be paid by reference to the amount of damages recovered by the claimant are unenforceable damages based agreements ("DBAs"). The decision in R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal and others [2023] UKSC 28 will have immediate and significant effects on funded claims, and on the approach funders themselves take to investment in litigation.

The lower judgments

The factual background will be familiar to those who have been following the Trucks Litigation (for a reminder, please see our previous articles here and here).

The issue in dispute in this limb of the case was first considered by the Competition Appeal Tribunal ("CAT"). It related to whether the funding arrangements of the Claimants' proposed class representatives supported their applications. The Defendant truck manufacturers argued before the CAT that the funding arrangements fell under the statutory definition of DBAs. It was common ground that if those agreements were DBAs, they would be unenforceable under the relevant regulations.

The CAT – and, on appeal, the Divisional Court – sided with the proposed class representatives in finding that the LFAs were not DBAs. The Divisional Court noted that, in the interests of facilitating access to justice, Parliament had not intended for LFAs to be dealt with under the DBA regulations.

The Supreme Court's judgment

The truck manufacturers appealed to the Supreme Court, contending that the LFAs were 'claims management services' within the meaning of section 4(2)(b) of the Compensation Act 2006. By a four to one decision, the Supreme Court reversed the decisions of the lower courts, granting the truck manufacturers' appeal. In a decision that will have far-reaching effects, not only in competition litigation but in relation to funding of all types of litigation, the Supreme Court held that the funders were carrying out 'claims management services'. The Class Representatives' LFAs are therefore DBAs, and unenforceable.

Lord Sales considered that Parliament's intention in passing the relevant legislation was to "regulate types of activity rather than particular actors" so as to protect consumers, a side effect of which would be that some "legitimate actors" might also be covered by the regulations.

In a dissenting opinion, Lady Rose made the point that reading the legislation broadly so as to classify LFAs as DBAs meant that the role of barristers' clerks and the provision of ordinary bank loans, for example, would also be captured by the definition of 'claims management services'. Her view was that Parliament had intended the term to be interpreted more narrowly than that. Lord Sales, in the majority, agreed that clerks and lenders would be caught by the definition – but that the Secretary of State had been granted a wide power to stipulate the types of applicable activity. It was not for the Court, it held, to "limit the ambit" of that power, or to "qualify the wide language" used in the statute.

Both opinions considered the history and context of the legislation in depth to understand its purpose. However, the judges were split as to how the key phrase 'claims management services' should be construed. Lord Sales decided that because the phrase has no generally understood meaning outside of the legislation, its construction must depend on the statutory definition itself, which includes 'other services in relation to the making of a claim' (i.e., capturing LFAs). Lady Rose considered that although the phrase 'claims management services' does not have a recognised independent meaning, those words have an ordinary meaning which, she argued, is not inclusive of LFAs. That is "an important pointer in favour of a construction which treats the listed services as included in the term when they are provided as part of an overall claims management service but not when they are provided by themselves, not as part and parcel of managing a claim".

Aside from being hugely significant to the funding market in general, this case is a reminder of the difficulties of statutory interpretation. Lady Rose put it neatly: "Almost all English words have imprecise boundaries. If one were to limit the principle of the "potency of the term defined" to ordinary words that have a single accepted core meaning and no fuzzy penumbra, almost no English word would have any potency at all."

Comment

Comments by the intervener, the Association of Litigation Funders ("ALF"), are not mentioned in Lord Sales' judgment and were not an important factor in the Court's decision. They appear however as a stark warning in the dissenting opinion of Lady Rose (Ms Dunn from ALF here speaking about a potential grant of the appeal):

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 Orders before the Competition Appeals Tribunal), given the inter-relationship between that group litigation and the litigation funding industry.

The impact of this decision on the funding world could well be enormous. Litigation funders are estimated to provide around £500 million of legal costs each year in the UK. The clear difficulties the decision will cause in enforcing LFAs will be of great concern to those who have capital invested, as well as to claimants, who had thought until now that their funding structures were settled and straightforward.

Funders have naturally been following the progress of this case, and many took steps where possible to protect themselves prior to the Supreme Court handing down its decision. The choice is now between complying with the DBA regulations or amending standard agreements to fall clearly outside of those regulations. While potentially problematic, both options are eminently achievable. We do not expect this decision to be as calamitous for the funded litigation market as Ms Dunn suggested. It seems more likely that funders will draft LFAs to ensure the payment the funder receives on a successful claim is not determined by reference to the level of damages awarded.

DBAs are entirely prohibited in 'opt-out' proceedings under section 47C(8) of the Competition Act 1998. Given the nature of opt-out proceedings, claims are highly likely to be backed by litigation funders, so this decision has particular significance where the option of complying with DBA regulations does not exist, and where creative funding structures are often needed to ensure that claims are financially viable. Novel funding arrangements will have to be explored in an environment of heightened risk-awareness around the recoverability of costs.

Ultimately, there is a clear need for funding for many types of claim. As long as financing structures can be found which ensure the commercial viability of funded claims, the routes to them will remain open. Consumer protection is accepted by all parties as an important principle, so despite the short term uncertainty, achieving a new workable solution is possible.

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