News

Counsel Lucy Keane examines the recent UK Supreme Court decision in PACCAR Inc v CAT and whether it will drive a juggernaut through the UK litigation funding industry.

Lucy’s article was published in New Law Journal, 13 October 2023, and can be found here.

On 26 July 2023, the UK Supreme Court (“UKSC”) took many by surprise when it issued its Judgment in an appeal brought by Paccar Inc, DAF Trucks N.V. and DAF Trucks Deutschland GmbH against the Competition Appeal Tribunal (“CAT”), UK Trucks Claim Ltd (“UKTC“) and the Road Haulage Association Ltd (“RHA”). To the astonishment of many, the Court’s decision struck at what had hitherto been regarded as solid ground and the foundation for very many litigation funding arrangements in the United Kingdom. The implications of this surprising decision are reverberating around the litigation funding industry in the UK with many players expressing concern about whether funding in its previously accepted form can continue.

The UKSC’s Judgment that Litigation Funding Agreements (“LFAs”) that take the form of a damages-based agreement (“DBA”) might be unenforceable in certain circumstances has driven the modern equivalent of a coach and four through accepted norms.

It is clear that this shock ruling could have profound and long-lasting implications for public access to justice; for the litigation funding industry in the UK; and for litigation lawyers for whom third-party funding has become an accepted and necessary source of funding for clients, often in high-value and complex cases. Without this funding, it is conceivable that many significant cases could simply wither away and die.

The brief facts of the case (full citation: R (on the application of PACCAR Inc and others v Competition Appeal Tribunal and others [2023] UKSC 28) are that UKTC and the RHA made an application to the CAT for a collective proceedings order (“CPO”) in relation to proceedings for breaches of competition law under section 49B of the Competition Act 1998. The purpose of the CPO was to enable UKTC and the RHA to bring proceedings on behalf of claimants who had acquired trucks from the appellants. The European Commission had declared the arrangement that subsisted between the truck manufacturers to be in breach of European competition law.

Significantly, it was necessary for UKTC and the RHA to show that they had adequate funding arrangements in place to meet both their own costs and any adverse costs order if they were to obtain a CPO from the CAT. The Paccar claimants were many, numbering more than 18,000, with the claim itself being worth more than £2 billion.

The relevant parties obtained funding from third-party litigation funders. In terms of the applicable LFAs, the funders’ maximum remuneration was calculated by reference to a percentage of the damages ultimately recovered in the litigation.

The truck manufacturers’ position before the CAT was that the LFAs constituted DBAs within the meaning of the relevant legislation (section 58AA of the Courts and Legal Services Act 1990, as amended). As such, they were unenforceable because they did not comply with certain regulatory formalities. If this was right, there was no proper basis on which a CPO could be made by the CAT in favour of either UKTC or the RHA.

The CAT ruled that the LFAs were not DBAs and were therefore not struck at by the relevant provision. A CPO could therefore be made.

The truck manufacturers sought review of this decision in two ways. They took an appeal to the Court of Appeal and, at the same time, challenged the CAT’s decision by way of judicial review. The Court of Appeal decided that it had no jurisdiction to hear an appeal. It then convened as a Divisional Court to hear the judicial review claim, which it dismissed. The manufacturers appealed directly to the UKSC under the leap-frog procedure, with the Association of Litigation Funders of England & Wales intervening.

By a majority of 4:1, the UKSC (Lords Reed, Sales, Leggatt and Stephens, with Lady Rose dissenting) decided that the LFAs at issue were DBAs within the terms of section 58AA. They were therefore unenforceable and unlawful.

In delivering the unexpected Judgment, Lord Sales acknowledged that the old common law restrictions on litigation funding had relaxed. The litigation funding industry was now well-developed in the UK and widely acknowledged to play a valuable role in furthering access to justice. Significantly, Lord Sales noted that the effectiveness of group litigation (such as the CAT claim) often depends on the use of third-party funding, since such litigation often involves many claimants who, individually, may have suffered only a small amount of loss. Without funding, the pursuit of such claims would be uncommercial.

The implications of the issue before the UKSC were not lost on their Lordships. On a detailed analysis of the relevant statutory provisions, the Court came to the view that the LFAs did not comply with section 58AA. That provision was clear – if a third-party funding arrangement takes the form of a DBA, it will be unenforceable unless certain conditions are met. It was common ground that those conditions had not been met by UKTC or the RHA, indeed it was not usual for them to be met in other cases where the funding arrangements are based on the funders sharing in the compensation which might be awarded. An assumption had been made, and was commonly held in the industry, that the LFAs in issue, which assign a passive role to the funders in relation to the conduct of the litigation, were not DBAs within the meaning of section 58AA, not contrary to public policy and therefore enforceable as ordinary binding contractual arrangements. However, if they were DBAs, the UKSC was aware that the likely consequence of its decision would be that most third-party litigation funding agreements be unenforceable as the law currently stands.

Against that background, the UKSC undertook an analysis of the definition of a DBA starting with the forerunners of section 58AA (section 4 of the Compensation Act 2006 and section 419A of the Financial Services and Markets Act 2000). The principal issue in the appeal was the meaning of “claims management services”, a phrase that did not have any defined legal meaning. The UKSC reached the view that third-party funders did provide “claims management services” 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 LFAs were therefore to be considered as DBAs. If a DBA was to be enforceable, it had to meet certain regulatory requirements and it was common ground that the relevant LFAs did not do so.

While expressing a view that public policy might dictate that access to justice by means of third-party funding might be desirable, the UKSC did not consider this to be a reason to depart from the conventional approach to statutory interpretation. If application of this approach meant that the previously held assumptions of those in the funding industry were displaced, then that was the inevitable, if challenging, consequence of the Court’s decision.

There is no doubt that the UKSC’s decision is a body-blow to the UK litigation funding industry. The assumption by funders that LFAs were not DBAs and not subject to stringent regulatory requirements has been shattered. In opt-out collective proceedings before the CAT, DBAs are not permitted. This will have profound consequences for those looking to pursue claims and for those left wondering whether existing claims are properly financed at all.

It is fair to say that there is a significant risk that funds already advanced may not be recoverable if the relevant LFA is unenforceable. Funders could face heavy losses in cases where the basis of recovery is linked to the damages awarded to the claimant. As Susan Dunn, the Chair of the Association of Litigation Funders has observed, the decision could lead to “potentially catastrophic financial consequences” if many hundreds of funded claims are brought to an abrupt end. With some £500 million of costs incurred annually by the UK litigation funding industry, it is easy to understand the extent of the anxiety within the industry and the legal profession.

Despite this, reaction from funders has been mixed. Some funders, whose LFAs are structured so that the return on capital is calculated as a rising multiple of invested capital over time, are optimistic that their LFAs will survive the decision. By comparison, those funders whose interest or return is calculated as a percentage of the award made to the funded party are having to look long and hard at the way in which their agreements are structured. Many believe that careful review of funding agreements will provide a solution, with the possibility of amendments to existing LFAs being touted as a way forward.

Initial concern in the international arbitration sphere has died down, given that, by its international nature, workarounds such as LFAs governed by non-English law would be a potential solution. Funders involved in non-UK markets are relaxed and foresee little or no difficulty in funding arbitrations seated outside England.

Despite such upbeat responses, it remains to be seen whether the challenges presented by the Paccar decision will be truly capable of resolution in the ways suggested. Another, and perhaps very sensible option, would be for the UK Government to legislate to ensure continued public access to justice – surely a matter of the highest public policy. Many claimants, especially in competition claims, now face being excluded from this most fundamental of rights. With public access to justice so vastly under-funded, it is perhaps time that this issue was acknowledged by those in power. Some funders have already called for clarity from the UK Government and the expectation that the Government should put its mind to this seems eminently reasonable. As matters stand, the balance is now tilted in favour of well-funded multi-nationals who stand to gain an unfair advantage over small businesses and consumers. For the benefit of all, that can never be a good thing.

It can be expected that disruption and fall-out from this case will continue for the foreseeable future, with, no doubt, more twists and turns along the way to clarity on whether third-party litigation funding is to remain a viable option in the United Kingdom.