Earlier this week, the UK Supreme Court handed down a long-awaited judgement that many believe will have a significant impact on the short-term future of the UK litigation funding market. The ruling in the case of R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents) held that litigation funding agreements (LFAs), where the funder’s remuneration is based on a percentage of the recovered damages, should be classified as damages-based agreements (DBAs).
Whilst we cannot yet predict how the industry will respond, nor whether we will see legislative action from Westminster to address this issue, it is important to look back at how we arrived at this moment. We should also consider the variety of reactions to this judgement and assess whether industry leaders, analysts and commentators view this as an inflection point for litigation finance in the UK, or simply another challenge that funders will have to adapt to moving forward.
Background to the Judgement
The journey that led to the Supreme Court’s judgement on 26 July 2023 can be traced back to its beginnings in July 2016, when the European Commission (EC) found that five truck manufacturers – MAN, Volvo/Renault, Daimler, Iveco, and DAF – had breached the European Union’s antitrust rules. The Commission stated that these companies had “colluded for 14 years on truck pricing and on passing on the costs of compliance with stricter emission rules”, and imposed a fine of nearly €3 billion. Only MAN avoided a fine due to its role in disclosing this cartel’s existence to the EC.
Unsurprisingly, the Commission’s fine was not the end of the story, as customers across Europe, who had bought trucks from companies involved in the cartel, began to take legal action in an effort to seek financial compensation from the manufacturers. Legal proceedings were brought in various jurisdictions across Europe, including claims in the Netherlands, Germany and the UK.
In the UK, the Road Haulage Association Ltd (RHA) and UK Trucks Claim Ltd (UKTC) sought collective proceedings orders (CPOs) from the Competition Appeal Tribunal (CAT), to bring collective proceedings on behalf of these customers against DAF and other truck manufacturers. As is the case with many such claims brought, the RHA and UKTC each secured third-party litigation financing from Therium and Yarcombe respectively. The LFAs for both claimants were structured so that in the event of a successful outcome, the litigation funders would receive a financial return based on a percentage of the damages recovered.
In response, the DAF opposed the CPOs and argued that such litigation finance arrangements fell under the classification of ‘claims management services’, as defined by the Compensation Act 2006. Therefore, DAF asserted, the LFAs actually constituted DBAs as defined in section 58AA of the Courts and Legal Services Act 1990, which would mean that the LFAs were unenforceable, as they failed to comply with the requirements of the DBA Regulations 2013.
In 2019, the CAT ruled against DAF and found that the LFAs were not DBAs according to the meaning of section 58AA, thereby asserting that the agreements were both lawful and enforceable in the case of the CPOs sought by RHA and UKTC.
Subsequently, DAF’s appeal to the Court of Appeal was denied due to a lack of jurisdiction, but proceeded as a Divisional Court to hear DAF’s requested judicial review of the DBA issue. In 2021, the Divisional Court’s judges unanimously dismissed DAF’s claim and upheld the CAT’s ruling, concurring with the tribunal’s decision that the LFAs should not be considered DBAs.
Under the leap-frog procedure, DAF appealed directly to the Supreme Court, with hearings taking place on 16 February 2023. The Court also gave the Association of Litigation Funders of England & Wales permission to intervene and make written submissions for the appeal.
The Judgement
After five months of waiting, the Supreme Court released its judgement on 26 July and sent shockwaves through the UK litigation funding industry, as it overturned the CAT and Court of Appeal decisions. Lord Sales’ ruling was in clear agreement with DAF that LFAs should be considered “claims management services” as described in the Compensation Act 2006, meaning that they are in fact DBAs and therefore unenforceable.
Lord Sales’ judgement explored the wording of the 2006 Act in detail and found that: ‘Parliament deliberately used wide words of definition in the 2006 Act precisely because of the nebulousness of the notion of “claims management services” at the time and in order to ensure that the general policy objective of Part 2 of the 2006 Act would not be undermined.’
Furthermore, he clarified that: ‘The language of the main part of the definition of “claims management services” in section 4(2)(b) is wide and is not tied to any concept of active management of a claim.’
As a result, Lord Sales concluded that LFAs cannot be excluded from the definition of “claims management services” simply because litigation funders do not actively manage the claim itself. The judgement acknowledged the impact that the ruling would have on the funding industry, stating that ‘the likely consequence in practice would be that most third party litigation funding agreements would by virtue of that provision be unenforceable as the law currently stands.’
Lord Reed, Lord Leggatt and Lord Stephens all joined Lord Sales’ judgement in agreement, but Lady Rose offered a sole dissenting judgement and agreed with the previous rulings of the Divisional Court and the CAT. In the conclusion to Lady Rose’s dissent, she clearly rejected Lord Sales’ interpretation, arguing that all of the legislation and case law shows that: ‘Parliament did not intend by enacting section 58AA suddenly to render unenforceable damages-based litigation funding agreements’.
Despite this dissent, the result of the Supreme Court’s judgement is that not only are the LFAs in the DFA case unenforceable, but it is also true that the majority of similar LFAs are likely to be held as unenforceable.
Industry Reaction
In the two days since the judgement was released by the Supreme Court, we have seen a wide variety of responses to the ruling, ranging from strong opposition, to those who have argued for a more cautious and patient approach to see what the consequences of this decision will be.
In a poll on LFJ’s LinkedIn page, we asked the question: What impact will the recent UK Supreme Court ruling have in regard to dissuading funders from pursuing meritorious claims in the UK?
As of the time of publication, 41% of respondents agreed that it would have a ‘significant impact’, 41% stated that it would have a ‘minor or moderate impact’, whilst 19% believed it would have ‘no meaningful impact’. Clearly, most respondents believe that although there will be a noticeable impact on funders, there isn’t yet a consensus as to whether the impact will be significant in regard to funders pursuing claims in the UK.
As mentioned above, responses to the ruling from inside the industry have varied over the last 48 hours.
The International Legal Finance Association and the Association of Litigation Funders of England and Wales came out with a joint statement on the day of the judgement, restating their opposition to the decision, but suggesting that its impact may not be severe: “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.”
Woodsford’s chief investment officer, Charlie Morris called on the UK’s lawmakers to take proactive steps to address this ruling: “This decision is bad news for consumers and other victims of corporate wrongdoing. Parliament urgently needs to reclarify what its intentions were when it introduced DBAs, and take any necessary remedial action to ensure the proper functioning of the CAT to the benefit of those who have been wronged.”
Mohsin Patel, director at Factor Risk Management, acknowledged that whilst the “full extent of fallout” is not yet known, the judgement must also be considered in a wider context: “The outcome of this judgement arises in the main due to the failure of legislators to set out a clear and consistent legal framework, despite attempts made to clarify the law, and instead leaving it to the Supreme Court to deal with the legislative and regulatory patchwork that exists. The ultimate beneficiaries of this decision will be the large corporates who utilise every trick in the book to frustrate and delay meritorious claims. This decision is therefore a bad day not just for funders and lawyers but for consumers in the UK as a whole.”
Glenn Newberry, head of costs and litigation funding at Eversheds Sutherland, also emphasised the impact the judgement would have on consumers: “The decision is potentially a blow for the government as the collective funding of consumer claims has helped bridge the gap caused by the erosion of state funded legal assistance for civil claims. Funders themselves may well start to actively lobby to seek legislation which effectively reverses this decision.”
Tets Ishikawa, managing director of LionFish, suggested that the judgement itself is hardly the end of the story, rather the beginning of a new chapter for litigation funding: “It’s fair to say that few expected this judgement. It certainly raises more questions than it answers, with the potential for a multitude of unintended consequences extending beyond litigation funding agreements. At the same time, the judgement leaves significant scope for litigation funding agreements to continue their evolution and long term growth in a compliant way, so that it continues supporting the drive to improve access to justice”.
Neil Johnstone, barrister and founder of FundingMyClaim.com, argued that the initial shock from the decision will naturally be followed by a measured and effective response from funders: “The fact that the Supreme Court’s decision has been widely reported as a ‘Shockwave’ for the industry perhaps shows how unexpected this result was. However, prudent funders who have taken steps to redraft existing agreements where possible may now be counting the benefits of having ‘hoped for the best but prepared for the worst.’ Of course, a key feature of shockwaves is that they pass; and far from being a disaster, this decision is rather a hallmark of the kind of growing pains inherent to a maturing industry. Where funders have positive and constructive relations with their clients, renegotiation of existing agreements should be perfectly possible.”
Garbhan Shanks, commercial litigation partner at Fladgate, also suggested that the judgement would be a temporary obstacle that the industry would overcome: “The Supreme Court’s ruling that the litigation funding agreements in place for collective proceedings in the Competition Appeal Tribunal are not enforceable because they fall foul of the Damages Based Agreement statutory conditions is clearly an unwanted outcome for claimant side lawyers and funders in this space. It will be quickly cured, however, with restructured compliant agreements, and the increase in collective and group action proceedings in the UK supported by ever increasing third party funding capacity will continue at pace.”
Nick Rowles-Davis, CEO of Lexolent, stated that it would be unwise to downplay the impact of the judgement at such an early stage: “The impact of it, the disruption and the distraction it will cause to funders should not be underestimated, nor should the potential damage to law firms relying upon monthly drawdowns in funded cases – particularly in matters in the CAT. It’s wishful thinking to suggest that all funded parties will play ball and allow edits. It is also wishful thinking that there will not be several years of satellite litigation to clarify the old LFA position and a possible cohort of funded parties seeking restitution. This is a statement of the law as it has always been, not new law.”
Closing Thoughts
With limited consensus as to what the true scale of the impact from the Supreme Court’s decision will be, LFJ will continue to monitor developments in the industry over the coming weeks and months. It will be of particular interest if any public disputes between funders and clients where LFAs must be rewritten or completely replaced.
Beyond the individual changes to funding agreements, eyes will now turn to Westminster to see whether there are any efforts by the Government to address the issue with specific legislation, or if there will be renewed calls for holistic legislation that deals with the UK litigation finance industry.
LFJ will continue to report on reactions to the decision, and welcomes input from industry leaders and analysts.
