The Supreme Court's decision in PACCAR: litigation funding stopped in its trucks?

The Supreme Court’s recent ruling in R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal and others on litigation funding agreements (LFAs) has generated a storm of headlines, suggesting that the funding industry in the UK is set for turbulent times ([2023] UKSC 28) (see below “Background to the decision in PACCAR"). The extent to which this is true may be debated but it is clear that the ruling necessitates careful consideration by funders, legal practitioners and their funded clients as to existing and future funding arrangements.

At the heart of the debate in PACCAR was the definition of a damages-based agreement (DBA) under section 58AA(3) of the Courts and Legal Services Act 1990 (1990 Act); in particular, whether the LFAs concerned the provision of “claims management services”. Since 1 April 2019, this phrase has been defined by reference to the Financial Services and Markets Act 2000 and before that, by reference to the Compensation Act 2006. Claims management services are stated to be “advice or other services in relation to the making of a claim”, and “other services” includes a reference to “the provision of financial services or assistance”.

 

The Competition Appeal Tribunal (CAT) and the Court of Appeal sitting as a Divisional Court found that, for a service to come within this definition, the service had to be provided within the context of the management of the claim and that funders did not normally manage a claim ([2019] CAT 26; [2021] EWCA Civ 299).

 

The Supreme Court overturned this conclusion. It ruled that “claims management services”, when read according to its natural meaning, could cover the relevant LFAs. Funders provide these services because they include financial services or assistance in isolation, as opposed to being in conjunction with the actual management of a claim. Parliament had deliberately used wide language and there could be good policy reasons to support its application; for example, evidence might emerge of third-party funders extracting more than a reasonable share of the recovery, in which case regulation would plainly be fairly and squarely within the purpose of the power in the legislation, in order to protect the consumers of these services.

 

As a result, the LFAs in question were held to be DBAs and, because all parties had accepted that the agreements did not comply with the Damages-Based Agreements Regulations 2013 (SI 2013/609) (2013 Regulations), they were unenforceable.

The impact of PACCAR on claims in the CAT will almost certainly be significant, given that DBAs are not permitted in opt-out cases, and it is understood that all current opt-out proceedings are funded by LFAs providing for a percentage return. Existing collective proceedings orders and the funding arrangements supporting the claims will need to be revisited. Since costs in these cases can run into the millions and take years to resolve, the importance, or even necessity, of litigation funding cannot be understated.

 

But the impact is not confined to proceedings in the CAT. The court observed that the consequences could be far-ranging, having been informed that most third-party LFAs would be unenforceable as the law currently stands. Lady Rose in her dissenting judgment noted that the conclusion reached by the majority of the court was likely to mean that most, if not all, LFAs that had been agreed since litigation funding began would be unenforceable and a radical review of the entire litigation funding sector in the UK would be necessary.

 

In her dissenting judgment, Lady Rose quoted Ms Dunn, chair of the Association of Litigation Funders, in saying that: “These consequences will extend to all or most litigation funding agreements that have been agreed since litigation funding began in England and Wales. This 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 who would otherwise have employed litigation funding agreements to fund their cases. 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…”

 

Given the growth in group actions in the UK, their prominence in areas such as climate change litigation, and the need generally for litigation funding to support these actions, it is unsurprising to see headlines describing the shockwaves caused by the court’s decision. No doubt many funders had, until now, proceeded on the understanding that their arrangements sat outside of the regulatory framework. Even Sir Rupert Jackson, when undertaking his review of civil litigation costs in 2008 to 2009, does not appear to have considered LFAs to be DBAs (see Exclusively online article “Jackson report: reformist but not too radical”).

 

Certainly, to the extent that any LFAs have been prepared on the basis of a share of damages recovered, they are likely to be classed as DBAs. They will be unenforceable if they do not meet the strict conditions set out in the 1990 Act and the 2013 Regulations, in particular, the need to include reasons for the pricing and the fee cap of 50% of the damages recovered by the client, inclusive of VAT and disbursements (regulations 3(c) and 4(3), 2013 Regulations).

 

Funders, legal practitioners and funded clients would, therefore, be well advised to review any existing third-party funding arrangements that are subject to English law in light of the court’s ruling to consider whether these arrangements should be amended in order to be rendered enforceable. In turn, this could mean that funding is paused on current proceedings, which will have consequences for progressing cases and cash flow management for law firms.

 

It also remains to be seen whether there could be unintended regulatory consequences given the very wide definition accorded to “claims management services” and where, for example, financial products and personal injuries are subject to specific regulations.

 

However, just how far-ranging the court’s decision is may be open to debate. In the first instance, funders may have been taking pre-emptive steps in anticipation of this outcome, despite reports suggesting that the decision was a surprise to the industry. Secondly, it would seem that LFAs will only be within scope of the legislation to the extent that they are based on a share of any damages recovered. However, this is not the only way in which an LFA may be structured. Often, LFAs provide for a return based on a multiple of the funding or investment and, arguably, these will not be affected by the ruling, although there could be a counter argument that the fees still come from the damages recovered and the fact that the return is multiple-based is simply a method of calculation. Meanwhile, whether or not this will prove attractive to a consumer in a large group action is debatable: it is reasonable to expect that the multiple would be set quite high and the consumer will not know what proportion of their damages recovered will end up being paid to the funder.

 

The position could be further complicated if the funding arrangement is a hybrid of the two models, for example, the LFA provides for a return based on the higher of either a multiple of the amount invested or a percentage of damages recovered, or the multiple-based return is in some other way referable to the damages recovered, such as by way of a cap or threshold. In this scenario, it would be necessary to see whether the percentage recovery element could be severed in order to make the agreement enforceable. In Zuberi v Lexlaw Ltd, the Court of Appeal recognised that severance is a permissible route at common law provided that the necessary criteria for severance are fulfilled, and also held that the DBA constituted only the percentage-based payment part of the retainer rather than the retainer as a whole ([2021] EWCA Civ 16; see News brief “Damages-based agreements: an island of clarity in changing seas”).

Funders, legal practitioners and funded clients will need to take steps to review existing arrangements and carefully consider new ones, whether they are in compliance with the 2013 Regulations or based solely on a multiple return. There could be vigorous challenges from defendants and, possibly, funded parties who may be, for example, officeholders with duties to creditors and seeking restitution of any amounts paid under an LFA affected by the ruling in PACCAR. No doubt insurers, such as those providing after-the-event insurance, will also have a vested interest in the enforceability of the arrangements and the extent to which their policies will be affected.

 

It will also be interesting to see whether PACCAR results in any legislative change. As the Supreme Court observed in PACCAR, the common law was historically hostile to arrangements for third parties to finance litigation between others. While there has been a substantial shift over the last 30 years in England and Wales, not least because the effectiveness of group litigation may depend on the use of third-party funding, DBAs at least on one view remain “islands of legality on a sea of illegality” (to borrow a phrase used before the court in Zuberi).

 

Expanding that landmass of legality has not been forthcoming. This is despite the Court of Appeal’s observations in Zuberi that “nobody can pretend these [2013] Regulations represent the draftsman’s finest hour” and the considerable efforts made in drawing up the draft Damages-Based Agreements Regulations 2019 and presenting these to the Ministry of Justice. Notably, these draft regulations had provided expressly that an LFA is not a DBA. Given the satellite litigation and challenges that the Supreme Court’s ruling could spawn, greater regulation, and therefore certainty, around funding arrangements would be welcomed.

 

Background to the decision in PACCAR