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Counsel Lucy Keane analyses the UK Supreme Court judgment in R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal and others [2023] UKSC 28.

In an unexpected ruling issued on 26 July 2023, the UK Supreme Court has decided that Litigation Funding Agreements (“LFAs”) that take the form of a damages-based agreement (“DBA”) are unenforceable in certain circumstances.

This shock ruling, made in the context of competition proceedings, could have profound and long-lasting implications for the UK litigation funding industry and for public access to justice.

The Judgment in 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. In order to obtain a collective proceedings order from the Competition Appeal Tribunal (“CAT”), the second and third respondents had to show that they had adequate funding arrangements in place to meet their own costs and any adverse costs orders.

These parties had obtained funding from certain third-party litigation funders. Under the relevant LFAs, the funders’ maximum remuneration was calculated by reference to a percentage of the damages ultimately recovered in the litigation.

The respondents contended that the relevant LFAs were not DBAs within the meaning of the relevant legislative provision (section 58AA of the Courts and Legal Services Act 1990 as amended) and were, accordingly, lawful and effective funding arrangements.

The appellants, who are truck manufacturers and defendants in the CAT proceedings, maintained that the LFAs were DBAs within the meaning of section 58AA.

In determining the matter as a preliminary issue, the CAT held that the LFAs were not DBAs within the meaning of section 58AA. The tribunal found that they were lawful and enforceable funding arrangements that could justify the making of the collective proceedings orders sought.

On appeal by way of leap-frog procedure to the Supreme Court, the question for determination was whether this form of arrangement for the funding of litigation by third-party funders is lawful and effective. Specifically, the issue was whether LFAs, pursuant to which the funder is entitled to recover a percentage of any damages recovered, constitute DBAs within the relevant statutory scheme of regulation.

This analysis depended on whether litigation funding fell within an express definition of “claims management services” in the applicable legislation, which includes the “provision of financial service or assistance”. If the LFAs at issue were DBAs within the meaning of the relevant legislation, they would be unenforceable and unlawful since they did not comply with the formal requirements for such agreements.

The Court observed that the effectiveness of group litigation may depend on the use of third-party funding and also noted that third-party funding arrangements where the funder can take a share of the compensation recovered in the proceedings have proved to be an attractive and effective model in the UK and other jurisdictions.

The implications of the issue in the appeal are significant. The Court was told that if LFAs of this kind were held to be DBAs within the meaning of section 58AA, the likely practical consequence would be that most third-party LFAs would be unenforceable as the law currently stands.

In a Judgment delivered by Lord Sales, with Lady Rose dissenting, the Supreme Court (Lords Reed, Sales, Leggatt, Stephens and Lady Rose) decided that the LFAs at issue were DBAs for the purposes of section 58AA. They were therefore unenforceable and unlawful.

Significantly, the Court’s view was that the services provided by the funders constituted “claims management services” pursuant to section 4 of the Compensation Act 2006 and section 419A of the Financial Services and Markets Act 2000 by virtue of providing “other services in relation to the making of a claim” in the form of “the provision of financial services or assistance”.

The Court observed that participants in the third-party funding market may have made the assumption that this form of LFA did not constitute a DBA but that this did not justify the Court in changing the meaning of “claims management services” as defined.

According to the current Chair of the Association of Litigation Funders, who provided a witness statement in the case, the consequences of this decision will extend to all or most litigation funding agreements and will likely be massively damaging for the administration of justice and future access to justice of parties who would otherwise have employed LFAs to fund their cases. It could bring to an abrupt end hundreds of funded claims with potentially catastrophic consequences for all involved in the case. With over £500 million of costs incurred annually by litigation funders in the UK alone, the financial consequences are enormous.