On 26 July 2023, the Supreme Court handed down its judgment in R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents) [2023] UKSC 28 whose implications have sent shockwaves through the litigation funding industry in England and Wales.

But what does this ground-breaking decision mean, and what are its likely impacts on litigation funding?

Litigation funding agreements

The appeal concerned litigation funding agreements (LFAs) in the context of applications on behalf of persons who acquired trucks to bring collective proceedings against various truck manufacturers for breaches of competition law. The LFAs contained mechanisms commonly adopted by litigation funders whereby the funder’s maximum remuneration was to be calculated by reference to a share of damages recovered in the litigation.

The key issue that the Supreme Court had to grapple with was whether the LFAs under scrutiny constituted “damages-based agreements” (DBAs) for the purpose of relevant statutory regulations. The statutory definition of a DBA includes agreements where the payment received by a person providing services is quantifiable by reference to a share of the proceeds of litigation, but there have been arguments around the extent to which DBAs require the funder to play an active role in the management of the claim.

It was common ground between the parties that the LFAs in question did not comply with the statutory regulations that apply to DBAs and would therefore be unenforceable if the Supreme Court found that the LFAs did, in fact, constitute DBAs. In the context of the underlying proceedings, the question was of significance because the need for effective funding arrangements (in this case, the LFAs) is a prerequisite for this form of collective proceedings. 

At first instance, the Competition Appeal Tribunal found that the LFAs in question were not DBAs and were therefore enforceable and effective funding arrangements. This decision was upheld by the Divisional Court following a judicial review.

Unenforceable LFAs

In the event, the Supreme Court disagreed with the Competition Appeal Tribunal and the Divisional Court. It found that the LFAs at issue did fall within the definition of “claims management services” and therefore within the regulatory regime that applies to DBAs. 

As a result (and much to the consternation of the claimants in the proceedings and their funders), the LFAs in question are unenforceable because they do not comply with the formal requirements for DBAs.

Manifold consequences

The reaction to the decision of many in the litigation funding industry has, so far, been bullish. Steven Friel, chief executive at litigation funder Woodsford, said: 

“Defendant attempts to disrupt funding for meritorious claims will ultimately not succeed. 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.”

Nevertheless, despite the brave face, the consequences of this decision will be manifold. 

If they have not already done so, litigation funders will be carrying out a hasty review of their portfolio of funding agreements to establish which of them are rendered unenforceable by the Supreme Court’s decision. Given the way the industry has developed, we expect this will be a significant number.

Litigation funders will then find themselves having to deal with the unenviable problem of having advanced funding for claims pursuant to unenforceable agreements. Wholesale renegotiation of terms will be necessary to ensure that agreements either comply with the relevant statutory regulations for DBAs or fall outside the boundaries of the definition for DBAs, as clarified by the Supreme Court.

In claims that are currently funded pursuant to unenforceable agreements, questions will no doubt arise about the claimant’s capacity to satisfy adverse cost orders. Similarly, claimants seeking to recover legal costs that were advanced pursuant to unenforceable agreements may find themselves in a tricky position. We expect to see a number of satellite disputes arising around issues of this nature. 

It may well also be the case that a raft of disputes emerge between litigation funders and those they are funding (particularly those in the late stages of litigation and/or those without ongoing funding requirements) around payment terms. This may result in significant losses for litigation funders.

Looking forwards, one can expect to see a change to the standard terms and portfolios of litigation funders to manage the risks to their business created by the Supreme Court’s ruling. Critics of the decision may well point out that increasing the barriers to litigation funding will impact access to justice, and we can expect to see the industry lobbying for legislative changes on that basis. 

In the context of collective proceedings before the Competition Appeal Tribunal, the decision rules out funding linked to damages recovery in opt-out proceedings. It is not clear yet how the court will deal with existing cases that fall within this category or how the funding industry will try to work around the obstacle.

A review of the litigation funding sector is now undeniably under way – current and future claimants will be well advised to take legal advice to ensure that any and all risks are considered before making any decisions on how to proceed.