The following is a contributed article from Ana Carolina Salomão, Micaela Ossio Maguiña and Sarah Voulaz of Pogust Goodhead.
On 26 September 2023, a new case was filed in the High Court of England and Wales on behalf of a claimant who, despite having received damages from a successful lawsuit, refused to pay litigation funders for funding previously sought. Legal representatives of the Claimants in this case are seeking a declaration from the Court that the clients’ LFAs “fall under the PACCAR regime as non-compliant DBAs” and have added that in reaching its decision in R (on the application of PACCAR Inc & Ors) v Competition Appeal Tribunal & Ors [2023] UKSC 28 (“PACCAR”), the Supreme Court has recognised “the importance of statutory protections for clients.” Is this the case?
On 26 July 2023, the English Supreme Court (the “SC”) ruled in the widely awaited decision of PACCAR that litigation funding agreements (“LFAs”) where the litigation funder’s remuneration is calculated by reference to a share of the damages recovered by claimants classify as damages-based agreements (“DBAs”).
DBAs are defined within s.58AA of the Courts and Legal Services Act 1990 (the “1990 Act”) as agreements “between a person providing either advocacy services, litigation services or claims management services” and are subject to statutory conditions, including the requirement to comply with the Damages-Based Agreements Regulations 2013 (the “2013 Regulations”). DBAs that do not observe those conditions are held to be unenforceable.
By ruling that the Respondents’ LFAs would fall within the express definition of “claims management services,” the SC in PACCAR extended the statutory condition relevant to the DBAs to the LFAs that provide a percentage of damages to the funder. As the funding agreements used in PACCAR were generally not drafted to meet those conditions, the Court essentially rendered unenforceable all LFAs linking the return to a percentage of the compensation recovered by the client.
This article seeks to provide a critical analysis of the PACCAR decision by considering, firstly, the stance taken by the SC in its statutory interpretation of the definition of what amounts to a DBA and an LFA. Secondly, this article focuses on how the market will likely react to the PACCAR decision, including whether it will adjust and adapt to the changes that this decision brings to the table.
Background to PACCAR
Issues in PACCAR have arisen in the context of collective proceedings being brought against truck manufacturers for breaches of competition law. By way of a decision dated 19 July 2016, the European Commission had found that five major European truck manufacturing groups, including DAF Trucks N.V. (“DAF”), infringed competition law. Based on this decision the Road Haulage Association Limited (“RHA”) and UK Trucks Claim Limited (“UKTC”) (together, the “Respondents”) each sought an order from the Competition Appeal Tribunal (“CAT”) authorising them to bring separate collective claims for damages on behalf of persons who acquired trucks from DAF and other manufacturers.
As both RHA and UKTC had LFAs in place by which the funder’s remuneration would be calculated by reference to a share of the damages ultimately recovered in the litigation, DAF contended that such LFAs p amounted to being “claims management services” constituting DBAs. As RHA’s and UKTC’s LFAs constituted DBAs, these would consequently become unenforceable, as such LFAs did not meet the DBAs’ statutory requirements set out in s.58AA of the 1990 Act.
DAF’s argument was rejected by the CAT and the Divisional Court (Henderson, Singh and Carr LJJ)[1] and the truck manufacturing groups (the “Appellants”) sought to file an appeal. The appeal was leapfrogged to the SC to assess whether LFAs in which a funder is entitled to recover a percentage of any damages would fall within the meaning of the legislation regulating DBAs.
The Supreme Court decision in PACCAR
The relevant issue regarding the definition of DBAs related to whether the Respondents’ LFAs would involve the provision of “claims management services” as defined in s.4 of the Compensation Act 2006 (the “2006 Act”).[2] s.4 of the 2006 Act defines “claims management services” as services which are “advice or other services in relation to the making of a claim” (emphasis added). Within this definition, “other services” would also include a reference to “the provision of financial services or assistance.”
The appeal was allowed by a 4-1 majority (Lord Sales, Reed, Leggatt and Stephens). Lord Sales gave leading judgment, ruling that the terms “claims management services” as read according to their natural meaning were capable to cover LFAs. Lord Sales argued that this was based on the definition of “claims management services” being wide and “not tied to any concept of active management of a claim.”[3] In her dissenting judgment, Lady Rose agreed with the approach taken by the CAT and the Divisional Court, who had instead interpreted the terms “claims management services” as only applicable to someone providing such services within the ordinary meaning of the term.[4] Lady Rose did not however explicitly state what she interpreted to amount as “ordinary meaning”.
Although the SC’s decision in PACCAR affects litigation funded by damage based LFAs, it more pronouncedly impacts opt-out competition claims in the CAT. In CAT’s opt-out collective proceedings DBAs are unenforceable pursuant to s.47C(8) of the Competition Act 1998, which states that “[a] damages-based agreement is unenforceable if it relates to opt-out collective proceedings.” This may be more problematic for ongoing litigation which was allowed to proceed in the CAT and Collective Proceedings Orders granted in such cases will have to be revised for funding to be permitted.
Notwithstanding the particular consequences of this decision for competition claims, this article delves on its role in shaping a crescent market.
- The SC’s interpretation of LFAs as “claims management services”: a way for the law to shape a new market
By ruling on a widely accepted definition of what constitutes an LFA, the SC is presenting a new statutory interpretation of what amounts to an LFA that provides a percentage of damages to the funder. Historically, common law has been hostile to arrangements where third parties would finance litigation between others. Such arrangements were generally considered as being contrary to public policy according to the doctrines of champerty and maintenance.[5]
However, the last 30 years have seen a major increase in the development of instruments whereby a third party agrees to finance litigation between different parties. With an initial increase in popularity of Conditional Fee Agreements (CFAs) when these were firstly introduced in the 1990s, a major growth of the litigation funding industry followed, together with the more recent introduction of DBAs. Could it then be argued that the PACCAR decision represents a response by the courts to deliberately bring certainty to an area and a market that is growing and continuously changing?
In PACCAR Lord Sales held that, as Henderson LJ also observed, “funding of litigation by third parties is now a substantial industry which, although driven by commercial motives, is widely acknowledged to play a valuable role in furthering access to justice.”[6] To this he further added that the “old common law restrictions on the enforceability of third party funding arrangements have been relaxed in various ways, with the result that this industry has developed.”[7] There is thus a clear understanding from the Supreme Court of the lack of restrictions surrounding third party funding, and an awareness of the role which litigation funding plays in furthering access to justice. If this was the background leading to the decision, how could one assess the impacts of a new statutory interpretation of what constitutes an LFA?
In the PACCAR judgment, Lord Sales also referred to Parliament’s intention when legislating on Part 2 of the 2006 Act, which relates to claims management services. He held that what Parliament intended to do was “to create a broadly framed power for the Secretary of State to regulate in this area.”[8] This would entail the Secretary of State being able to “decide what targeted regulatory response might be required from time to time as information emerged about what was then a new and developing field of service provision to encourage or facilitate litigation, where the business structures were opaque and poorly understood at the time of enactment.”[9]
In accordance with Parliament’s intention when legislating on Part 2 of the 2006 Act, the SC’s interpretation of LFAs as “claims management services” also broadens the powers of Parliament to “regulate” in this area. Lord Sales stated that although participants in the third-party funding market may have assumed that the LFA arrangements in the case were not equivalent to DBAs, “this would not justify the court in changing or distorting the meaning of ‘claims management services’ as it is defined in the 2006 Act and in section 419A of FSMA.”[10]
- Will the litigation finance market adjust and adapt?
As Shepherd & Stone have put it “litigation financiers provide capital that allows law firms to litigate plaintiff-side cases that they otherwise would be reluctant to pursue on a purely contingent fee basis.”[11] This is because, as also specified by Bed and C Marra in The Shadows of Litigation Finance, litigation finance starts from the premise that a legal claim can also be framed as an asset, as litigation finance “allows claimholders, or law firms with contingent fee interests in claims, to secure financing against those assets.”[12]
The value of a legal claim as an asset is a function of the amount in dispute, the likelihood that this amount will be awarded and the ability to recover the award, all discounted by certain risk metrics.
It can be argued that the rise of litigation finance as an asset class has provided funding specifically dedicated to addressing claimholders’ liquidity and risk constraints. Claimholders who had previously been unable to obtain various other forms of third-party funding may now obtain other forms of litigation funding.[13] This logic of sharing risk between claimholders and funder, while passing liquidity from funders to claimholders, has improved access to justice, as the scarcity of liquid funds are not an unsurmountable obstacle to litigate a meritorious claim.
The PACCAR decision will certainly influence litigation funders’ choices when designing their funding arrangements, but it is unlikely that it that it will “throw litigation funders under a truck”[14] or prevent the funding of meritorious claims or the pursuit for liquidating those financial assets. To the contrary, the PACCAR decision could be interpreted as a trigger for this market to adjust, adapt and thrive.
Litigation funders may explore new ways to structure funding agreements to ensure compliance with this decision and a more secure return on investment. The new interpretation of LFAs falling within the definition of “claims management services” will likely force all players in litigation finance to take into consideration the drafting of agreements not only for recovery and execution of judgments, but also when contracting and/or thinking of potentially defaulting an agreement.
Litigation funders may and should interpret the PACCAR decision as a natural development for the industry. This decision, which has been widely awaited, can now also bring more clarity to the negotiation tables. Interested stakeholders who have been preparing for how PACCAR would impact the industry will now be provided with more confidence and guidance on entering LFAs.
This leads to conclude that the PACCAR decision, whether it will be overruled or not, is a milestone to the growing relevance of litigation finance in England and Wales rather than a “blow”[15] to this industry. The mere existence of a Supreme Court decision in this niche area of law and finance marks per se the relevance of litigation finance as an asset class.
Additionally, the PACCAR decision also shows that regulating on this alternative asset class can drive the behaviour of the contracting parties. Imposing further regulation may close the gap on information asymmetries and reduce entry barriers for funders and their investors, fostering competition and promoting a more balanced financial ecosystem.
Conclusion
The PACCAR decision does not entail that access to third party funding will necessarily be hampered in England and Wales. As set out in this article, litigation funding is maturing in the country, and a rapidly growing market. Although this decision will mean further compliance with DBA regulations, it should not undermine access to justice and the pace of litigation funding growth.
Nonetheless, as the decision does impose a new statutory interpretation of the law, law firms, claimants and litigation funders will all inevitably face additional scrutiny when entering into funding agreements and they will be compelled to revise their current LFAs to make sure they do not fall within the definition of a DBA and, therefore, become unenforceable. These revisions are expected to be easily cured in most cases, with restructured compliant agreements when needed.
Citations:
[1] [2021] EWCA Civ 299, 1 WLR 3648.
[2] s.58AA of the 1990 Act incorporates the definition of “claims management services”2 set out in the 2006 Act (and subsequently the Financial Services and Markets Act 2000 (“FSMA 2000”)).
[3] PACCAR [63].
[4] PACCAR [254].
[5] PACCAR [11]. See also PACCAR [55] which provides that in “the Arkin decision in 2005 the Court of Appeal confirmed that an arrangement whereby a third party funder who financed a claim in the expectation of receiving a share of any recovery, under an arrangement which left the claimant in control of the litigation, was non-champertous and hence was enforceable.” Note that whilst the doctrines of maintenance and champerty are now obsolete in England and Wales, in countries such as Ireland there is a continuing prohibition on maintenance and champerty, which has meant an effective prohibition on third party funding of litigation in those jurisdictions, save in limited circumstances.
[6] PACCAR [11].
[7] PACCAR [11].
[8] PACCAR [61].
[9] PACCAR [723]
[10] PACCAR [91]
[11] Joanna M. Shepherd & Judd E. Stone II, Economic Conundrums in Search of a Solution: The Functions of Third Party Litigation Finance, 47 ARIZ. ST. L.J. 919 (2015) at 929-30.
[12] Suneal Bedi and William C. Marra, The Shadows of Litigation Finance, Vanderbilt Law Review, Vo. 74 Number 3 (April 2021) at 571.
[13] Suneal Bedi and William C. Marra, The Shadows of Litigation Finance, Vanderbilt Law Review, Vo. 74 Number 3 (April 2021) at 586.
[14] PACCAR – Supreme Court throws Litigation Funders under a truck, Simmons+Simmons, 26 July 2023.
[15] UK’s Supreme Court Strikes Blow to Litigation Funding, Law International, 26 July 2023.
