Lucy Keane analyses the recent UK Supreme Court decision that litigation funding agreements are DBAs in Legal Futures

By Lucy Keane
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Lucy Keane
Lucy Keane

Counsel Lucy Keane examines the recent UK Supreme Court decision in the case of R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal and others [2023] UKSC 28 that litigation funding agreements are damages-based agreements.

Lucy’s article was published in Legal Futures, 18 August 2023, and can be found here

Third-party litigation funding in the UK has been thrown into a state of uncertainty following the surprise decision of the UK Supreme Court (“UKSC”) on 26 July 2023 that litigation funding agreements (“LFAs”) that take the form of damages-based agreements (“DBAs”) are unenforceable if they do not comply with the relevant regulatory framework.

The appeal in the case of R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal and others [2023] UKSC 28 concerned an application to bring collective proceedings for breaches of competition law under section 49B of the Competition Act 1998.

Two of the respondents had obtained funding in CAT opt-out proceedings from third-party litigation funders and LFAs had been entered into under which the funder’s maximum remuneration had been calculated with reference to a percentage of the damages ultimately recovered in the litigation.

The appellants maintained that these LFAs constituted DBAs under the relevant legislation and maintained that the DBAs were unenforceable because they did not comply with certain formality requirements.

In the leading judgment„ Lord Sales concluded that. the LFAs were properly to be construed as DBAs under the relevant legislative framework. In the circumstances, they were unlawful and unenforceable.

The significance of the decision was not lost on the Court which observed that participants in the third-party litigation funding market may have assumed that this form of LFA, which assigns a passive role to the funders in relation to the conduct of the litigation, did not constitute a DBA. The Court acknowledged that “the implications of the issue in the appeal are significant”.  

There is no doubt that this is a hugely significant decision for the litigation financing industry, not just in relation to opt-out cases before the CAT. It is feared that most, if not all, LFAs agreed since litigation funding began could be invalidated. The consequences for those already involved in cases could be catastrophic.

Reaction from funders has been mixed. Many in the funding industry have expressed frustration and disappointment at the decision. Having said that, most funders will not be deterred and many will be looking at the form of their funding agreements to see how best to restructure them to comply with the relevant regulations. The economics of funding has not changed and, with careful legal input, it is widely believed that funding agreements can, and will, live to fight another day.

There is obvious anxiety that funds already advanced may well be lost if the funding agreement is unenforceable. There is no doubt that the impact of the Paccar decision will be most significant in United Kingdom litigation funding arrangements where the funders’ interest or return is calculated as a percentage of the award made to the funded party.

While those practising in the international arbitration sphere initially expressed  concern about the impact of the decision, reaction in the English international arbitration funding industry has become more muted with a belief that there is definite scope for restructuring of agreements to, for example, take the funding agreement out of the scope of English law. Funding arrangements in international arbitrations seated out of the UK would seem to be unaffected.

But, like other aspects of the fallout from the decision, much remains to be seen.

Some funders, such as Litigation Capital Management Limited, are optimistic as their funding contracts, which are structured so that the return is calculated as a rising multiple of invested capital over time, will survive. Such arrangements seem to be unaffected by the UKSC judgment. However, it only takes one defendant to argue that these arrangements are also DBAs to cause more uncertainty in the market.

There have already been calls from some funders for clarity from the UK Government now that funding of opt-out cases before the CAT has been torpedoed. The costs of opt-out competition claims can run into many millions of pounds and small businesses and consumers are now on the back foot when it comes to pursuing these claims. The collective proceedings in Paccar involved more than 18,000 claimants and was worth in excess of £2 billion.

The UKSC decision makes public access to justice, already vastly under-funded, open to threat. Simply looked at in the context of the CAT proceedings, running an opt-out competition claim can, in itself, run to many millions of pounds and there is concern that the decision will allow well-funded multinationals to gain an unfair advantage over small businesses and consumers.

Although reaction from funders has been mixed, there is no doubt that, many funders will have to review and re-think their funding agreements and business models if third-party funding is to remain a viable option in the United Kingdom.

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