The fallout from the Supreme Court’s PACCAR ruling

Late in July, as lawyers around the country were preparing for summer breaks, the UK Supreme Court handed down a hugely significant judgment for them to sweat over on their sun loungers. The decision in R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal and others [2023] UKSC 28 – in short that certain types of litigation funding agreement (LFA) may constitute unenforceable damages-based agreements (DBAs) – has major ramifications for litigation funding in the UK. In this article we look at the decision and consider its implications for existing and future litigation funding agreements. Three months on, are we any closer to knowing the true fallout from the decision?

The trucks cartel

The background to the case is as follows. In July 2016, the European Commission issued a decision finding that five major European truck manufacturing groups had infringed competition law by participating in a price-fixing cartel. On the basis of that finding, two UK groups representing claimants who had bought trucks from the infringing manufacturers sought to bring collective proceedings before the UK Competition Appeals Tribunal, seeking damages for the breach of competition law. There were two separate claims, brought both on an opt-in basis (where individual affected purchasers needed to opt-in to the represented group) and an opt-out basis (where all purchasers were deemed included in the represented group unless they opted out). As is common (indeed required) in such collective proceedings, the claimant groups had the benefit of LFAs to demonstrate that they had adequate funding to meet their own costs, and any adverse costs order, in the event they lost.

The LFA argument

The LFAs in question provided (again, as is – or at least was – common) that the funders would receive, by way of reimbursement and a return on their investment, a proportion of any damages recovered.

One of the truck manufacturers argued that an LFA structured in this way constituted a DBA within the meaning of s.58AA of the Courts and Legal Services Act 1990, as amended in 2013 when DBAs were first permitted. If the manufacturer succeeded in this argument, there would be two key consequences:

1. Since DBAs are not permitted in opt-out collective proceedings, the LFA would be unenforceable in the opt-out claim.
2. Even in proceedings where DBAs are permitted, in order to be enforceable, a DBA must comply with the requirements laid out in the Damages-Based Agreements Regulations 2013 – in particular the agreement must specify the claim to which the DBA relates; the circumstances in which payment is due; and the reason for the agreed level of payment. Since it was common ground between the parties that the LFAs in dispute did not in fact comply with the requirements of the DBA Regulations, the LFAs would be unenforceable even in the opt-in claims.

In both cases, if there was no enforceable LFA, then that would undermine the basis on which the claimant groups had been permitted to bring the collective proceedings.

The key question for the court was, therefore, whether an LFA, which provided for the funder to receive a percentage of any damages recovered, constituted a DBA under s.58AA – ultimately a question of statutory interpretation.

The truck manufacturer's argument did not find favour with either the Competition Appeals Tribunal or with the Lord and Lady Justices of the Court of Appeal (sitting as a Divisional Court) – both finding that the LFAs were not DBAs within the meaning of s.58AA.   

The Supreme Court decision

At its core, this dispute was a fraught exercise in statutory interpretation. Under s.58AA, a DBA is an agreement:

• between a person providing advocacy services, litigation services or claims management services; and the recipient of those services;
• which provides that the recipient is to make a payment to the person providing the services if the recipient obtains a specified financial benefit in connection with the matter…; and
• the amount of that payment is to be determined by reference to the amount of the financial benefit obtained.

The provision of litigation funding was not apt to be described as an ‘advocacy service’ or ‘litigation service’. But could it constitute a claims management service? Claims management services were defined (originally in the Compensation Act 2006, and now in an amendment to the Financial Services and Markets Act 2000) as ‘advice or other services in relation to the making of a claim’, and where, in turn, ‘other services’ includes ‘financial services or assistance’.

By a majority of four to one, the Supreme Court held that ‘claims management services’ had no generally accepted meaning, which should colour the statutory definition the term had been given (known as the ‘potency of the term defined’ argument). Given their natural meaning, the words used in the statute, in particular the provision of financial services or assistance, were capable of covering the LFAs in this case. The majority also held that, when looking to the legislative purpose and context, there was no reason to give the words used a more restrictive meaning – Parliament’s purpose had been to create a broadly framed power, which would then allow the Secretary of State to provide more targeted regulation as and when required in what was then an emerging area. In the majority view, Parliament had intended the term ‘claims management services’ to be wide – a view also supported by contemporaneous ancillary documents, which were part of the same legislative exercise, including the explanatory memorandum and scope order.    

Accordingly, in the majority decision, the provision of litigation funding was found to constitute the provision of financial assistance, and so was caught by the definition of ‘claims management services’; the LFAs in dispute were therefore DBAs within the meaning of the legislation; and so were unenforceable either because DBAs are not permitted in opt-out proceedings, or because they did not comply with the formalities stipulated in the DBA Regulations.

The short-term fallout

Wide ranging impact – the decision has been keenly felt in the funding market, as the LFAs in question (where the funder's remuneration is calculated as a percentage of the damages recovered) are fairly typical and in widespread use. There was evidence before the court (including from the Association of Litigation Funders of England and Wales, who intervened in the appeal) that to decide that these LFAs were DBAs would affect a large number of extant LFAs, both in the Competition Appeals Tribunal and further afield. This practical impact was clearly not lost on the dissenting judge, Lady Rose (a former chair of the Competition Appeals Tribunal) who recognised that "this kind of [LFA] underpins many if not all of the proceedings brought under [the collective claims] statutory procedure". The majority judgment also recognised that "the effectiveness of group litigation may depend on the use of third-party funding, since such litigation often involves high numbers of claimants who have individually suffered only a small amount of loss, where the pursuit of claims on any other basis would be uncommercial". However, the impact of this decision is not just limited to those sorts of collective actions – it also has immediate impacts both for opt-out proceedings in the Competition Appeals Tribunal, as well as High Court litigation more generally.

Redrawing agreements – as a consequence of the decision in PACCAR, funders have spent the intervening months seeking to redraw existing agreements and reviewing their terms for the future, to ensure their agreements are enforceable. Outside of opt-out collective proceedings, it is theoretically possible for LFAs to be drawn in terms which comply with the formalities of the DBA Regulations and so would be, at least in principle, enforceable. However, difficulties remain with this approach. Not least because the DBA Regulations were not drafted with funder LFAs in mind and/or do not take into account the reality as to how such arrangements operate in practice – in particular where solicitors and the funder are both now (as a result of this decision) operating under DBAs – how can they each give credit for sums that have been paid by another party, as required under the DBA Regulations?

The second option is to draw agreements which provide for the funder's remuneration to be calculated as a multiple of the funding provided, rather than by reference to the damages received – an input rather than an output basis. Indeed, many LFAs already provide an alternative structure where the funder's return is to be either [x] per cent of damages, or a multiple of the committed funds, whichever is higher. In this case though, two considerations arise. Firstly, for pre-existing LFAs, is it possible simply to sever the percentage alternative and thus prevent this being a DBA? Although not in the context of a DBA, the Court of Appeal's recent decision in Diag Human SE v Volterra Fietta [2023] EWCA Civ 1107 casts some doubt on the availability of severance. In that case, lawyers were not permitted to sever offending parts from a non-compliant conditional fee agreement (CFA) and, moreover, were required to repay sums already paid by their client under the offending CFA. Secondly, even in an LFA where remuneration is primarily calculated as a multiple of committed funds, there is often a cap on the funder's return, expressed as a percentage of damages. This sort of ‘cap within a cap’ arrangement is intended to protect the client in the event that the damages are insufficient to cover the requested multiple, and acts as a secondary safeguard rather than the primary means of calculating the funder's fee. For that reason, it would perhaps be surprising from a public policy perspective if a court were to find that this turned the LFA into a DBA (particularly as, by analogy, this sort of protective cap is mandatory in CFAs for personal injury claims, where a success fee is capped at 25 per cent of damages). However, post-PACCAR, one can see that this structure is certainly still capable of being caught by the wording of the legislation, giving rise to the very real risk that a LFA, which is capped in this way, would still be caught by the decision and deemed to be a DBA. At the very least, it would be open to challenge on that basis.

Satellite litigation – as a result of the uncertainty, we are seeing, and are likely to continue seeing, satellite litigation on this topic – on existing agreements, completed agreements, and on new or redrawn LFAs – which are now being prepared in the context of the PACCAR decision. For instance, in separate PlayStation opt-out proceedings before the Competition Appeals Tribunal, a new, post-PACCAR LFA is being challenged, with lawyers for Sony arguing that the new agreement is still a DBA, and provides a much-enhanced return to funders to the detriment of the represented consumer class. Meanwhile, funders Therium and Omni Bridgeway are defending a case in which a client who succeeded on their underlying claim is now refusing to pay the funder, arguing that the LFA in question is unenforceable under PACCAR. Such cases, probing the limits of the PACCAR decision, will continue in the short-term adding to the immediate uncertainty, although will hopefully provide some much-needed clarity to the scope of PACCAR as a result.       

Unintended consequences – this probing of limits is unlikely to be limited to the world of pure litigation funders either – the PACCAR decision could have far-reaching unintended consequences. By way of example, is an after the event (ATE) insurance premium, which is calculated as a percentage of damages, potentially also caught by the definition of ‘claims management services’? How does the decision apply where an intervening law firm receives the return and pays a percentage to funders? There will also be questions about the application of the decision in funded arbitrations and in cases with a cross-border element, where there is a mismatch of governing law and jurisdiction clauses. These are just some examples where the potential fallout is not yet properly understood. 

Longer term - legislative action needed

In the longer term, it is essential (and, thankfully, likely) that legislative action will be taken to regularise the position. It is notable that, after the Courts and Legal Services Act defines DBAs in s.58AA, the very next section, s.58B, goes on to define LFAs. Crucially though, this latter section has never been brought into force. It is arguable (and indeed the claimants in the PACCAR case did argue) that this indicates that Parliament intended LFAs to be regulated separately, rather than falling under the s.58AA definition of DBAs. Clearly that argument didn't find favour with the majority in the Supreme Court, who found they were not mutually exclusive alternatives – it being possible that Parliament could have intended LFAs also to be capable of being regulated as DBAs. It does, however, seem likely in practice that a separate scheme of regulation was intended, and may now need to be brought into force.

Similarly, it is notable that the uptake of DBAs by lawyers, since they were introduced in 2013, has not been enthusiastic, due to perceived issues in applying the DBA Regulations, and the perceived risks in the enforceability of such agreements. It may not be an exaggeration to say that the number of DBAs, which have indirectly come into existence as a result of the PACCAR decision, will be a significant increase on the number that had been entered into intentionally before that date. Efforts to encourage or facilitate the use of DBAs have been ongoing since they were introduced. As early as 2015, a working group tasked with reviewing the DBA Regulations reported "for the removal of any slight prospect of satellite litigation on this point, however vainly pursued, the Ministry of Justice has conveyed the view to the Working Group that LFAs should be expressly omitted from the scope of the 2015 DBA Regulations". And in 2019, following on from that working group, Nick Bacon KC and Professor Rachael Mulheron from Queen Mary University of London were tasked with drafting amended DBA Regulations. Their resulting draft regulations expressly provided that an LFA is not a DBA. Their draft regulations, however, were never implemented. Had those draft regulations been enacted, the issue in the PACCAR case that we are all grappling with now may never even have come to court, because it would have been perfectly plain on the face of the legislation that an LFA is not a DBA.

It's clear that government have heard the concerns from the litigation funding industry and are now likely to legislate to regulate the position. The Department of Business and Trade (not, interestingly, the Ministry of Justice) has said it is aware of the Supreme Court decision and "is looking at all available options to bring clarity to all interested parties". Admittedly that may take longer than many in the industry would like, and so workarounds are likely to be required in the meantime, but it is likely the position will be regularised through legislation in the coming years.

Emma Carr is a partner and Christopher Richards is a PSL principal associate at Gowling WLG (UK) LLP
gowlingwlg.com/en/

Copyright & permissions