Civil Justice Council to review litigation funding in the wake of PACCAR

There has been much discussion and debate in the wake of the controversial PACCAR decision (otherwise known as R (on the application of PACCAR Inc and others v Competition Appeal Tribunal and others [2023] UKSC 28) which drove the modern equivalent of a coach and four through previously accepted views on the enforceability of litigation funding agreements (LFAs). The decision by the UK Supreme Court (UKSC) in July 2023, that LFAs that take the form of a damages-based agreement (DBA) might be unenforceable in certain circumstances, took many by surprise, with everyone from litigation funders to legal professionals reacting with shock and consternation.

Litigation funders were suddenly forced to grapple with the possibility that their funding agreements, hitherto thought to be sound in law, might not be so. Not only did this cause much scratching of heads in the funding industry but litigation lawyers, now used to utilising third-party funding on a regular basis to provide a necessary source of funding for clients, were faced with the potential loss of this important source of finance. Clients with sound claims but insufficient resources were on the back foot.

The ruling

The basic facts of the PACCAR case were that the defendants (UK Trucks Claim Ltd (UKTC) and the Road Haulage Association (RHA)) made an application to the Competition Appeal Tribunal (CAT) for a collective proceedings order (CPO) in relation to breaches of competition law by the claimants (Paccar Inc, DAF Trucks NV and DAF Trucks Deutschland GmbH) 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 defendants. The European Commission had declared the arrangement between the truck manufacturers to be in breach of European competition law.

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 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 out 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 truck 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 to the extent that 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.

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.

The implications of the issue before the UKSC were not lost on their Lordships. In 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 are unenforceable as the law currently stands.

The aftermath

There is no doubt that the UKSC’s decision in PACCAR was a body blow to the litigation funding industry. Many feared significant losses in cases where recovery is linked to the damages awarded to the client. There is a risk that funds already advanced may not be recoverable.

While many in the litigation funding industry thought that a number of legal workarounds might be possible in order to maintain the validity of their LFAs, there was undoubtedly a generally held view that the best way to resolve the dilemma was for the UK government to legislate to plug the hole caused by the PACCAR decision.

With public interest in the concept of litigation funding now very much piqued by the high-profile ITV drama Alan Bates v The Post Office and the ongoing public inquiry into the fate of the many sub-postmasters who suffered, the UK government has recognised the need for urgent legislation to address the issue and avoid what the Chair of the Association of Litigation Funders, Susan Dunn, referred to as the “potentially catastrophic consequences” of many hundreds of funded claims being abruptly brought to an end.

The Civil Justice Council (CJC) was asked by Alex Chalk MP, the Lord Chancellor, to conduct a review of litigation funding in light of the PACCAR decision. It has issued Terms of Reference and aims to provide an interim report by the summer of 2024 and a full report by summer of 2025. These reports are intended to provide advice to the Lord Chancellor and, where considered appropriate by the CJC, will make recommendations for change.

In the meantime, the UK government has introduced a Bill (the Litigation Funding Agreements (Enforceability) Bill) intended to address the fallout from PACCAR. However, despite having reached the report stage in the House of Lords, it has fallen foul of the General Election announced by Prime Minister Rishi Sunak, that will take place on 4 July 2024. The Bill was not listed for consideration in the wash-up period where final bills that could become law are considered by parliament. As a result, the Bill will fall until a new government comes in and picks it up.

That is, of course, disappointing for the many interested parties eagerly awaiting the legislative changes necessary to remove the consequences of PACCAR.

Be that as it may, the CJC’s review is to be welcomed. By the time it reports, a new government will be installed and the current Bill will hopefully be resurrected.

The CJC’s six-person working group will undertake the review based on the CJC’s function to make civil justice more accessible, fair and efficient. The scope of the review is to:

• Set out the current position of third-party funding (TPF) including the background to the TPF’s development in England and Wales, with particular reference to the development of the current self-regulatory approach and the effects of the 2009 Jackson Costs Review;
• Consider the current position concerning self-regulation;
• Consider approaches to TPF in other jurisdictions and how TPF sits within the broader context of funding options; and
• Consider access to justice, effectiveness and regulatory options and whether the current arrangements for TPF deliver effective access to justice, and identify possible alternatives and limitations.

The working group will set out clear recommendations for reform, which will include a consideration of:

• Whether and how and, if required, by whom, TPF should be regulated;
• Whether and, if so, to what extent a funder’s return on any TPF agreement should be subject to a cap;
• How TPF should be best deployed relative to other sources of funding, including but not limited to legal expenses insurance and crowd funding; and
• The role that rules of court, and the court itself, may play in controlling the conduct of litigation supported by TPF or similar funding arrangements including:
  • Whether and, if so, what provision needs to be made for the protection of claimants whose litigant is funded via TPF and the interaction between pre-action and post-commencement funding of disputes;
  • The relationship between TPF and litigation costs;
  • Duties concerning the provision of TPF including potential conflicts of interest between funders, legal representatives and funded litigants; and
  • Whether funding encourages specific litigation behaviour, such as collective action.

With cases using LFAS including equal pay cases; motorists using the group litigation procedure to bring claims against car manufacturers over diesel emissions; consumers bringing claims against multinational companies regarding data breaches and data misuse; and the Post Office Horizon case by the sub-postmasters, it is clear that LFAs have a significant role to play in providing access to justice. They are not just the preserve of high-value commercial litigation but can give the man in the street a chance to seek redress through the courts where a lack of funds would otherwise deny that most fundamental right.

The CJC review, together with the now (temporarily) defunct Bill are steps welcomed by both consumers and funders alike. The PACCAR decision, no doubt helped by Mr Bates and the Post Office, has brought the litigation funding industry and how it works into the public eye and public interest is generally favourable, indeed there seems to be much public enthusiasm for this form of funding. The cloud of PACCAR may yet have a silver lining.