Over the past two decades, litigation funding in the UK has become increasingly important and more commonly used.  Once deemed contrary to public policy and unlawful, litigation funding is now regarded as playing a significant role in providing access to justice.  Over £500 million of costs are incurred each year by litigation funders in the UK.  Funding is provided for all types of litigation, but it has played a particularly significant role in collective proceedings before the UK’s Competition Appeal Tribunal (CAT).  As the Supreme Court (SC) explained in Merricks, in this type of group litigation the “monetary amount of the consumer’s individual loss means that it will rarely, if ever, be wise [for a] consumer to litigate alone.”[1]

The main question before the SC in R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal and others (the Judgment) was whether litigation funding agreements (LFAs) under which the funder is entitled to recover a percentage of any damages awarded constitute damages-based agreements (DBAs) and are therefore unenforceable and unlawful unless certain prescriptive conditions are met. [2]  The evidence before the SC was that if these types of LFAs were held to be DBAs, it would impact all or most LFAs that have been agreed since litigation funding began, would bring to an abrupt end to hundreds of funded claims with potentially catastrophic financial consequences, and mean that no collective proceedings order in the CAT could ever be pursued.[3]  The SC nonetheless ruled – by a four to one majority – that these LFAs fall within the meaning of DBAs under the relevant statutory scheme. 

The Statutory Scheme

DBAs are defined and declared unenforceable by s. 58AA of the Courts and Legal Services Act 1990 (CLSA 1990) unless certain conditions are met.  Under subsection (3), a DBA is defined as an agreement between a person providing “advocacy services, litigation services or claims management services” and the recipient of those services under which:

  • the recipient is to make payment to the service provider if the recipient obtains a “specified financial benefit” in connection with the matter for which the services are provided; and
  • the amount of the payment is to be determined by reference to the amount of the financial benefit obtained.

An agreement which satisfies the definition in subsection (3) will be unenforceable unless it meets the conditions of subsection (4) and the Damages-Based Agreements Regulation 2013 (DBA Regulations 2013).[4]  Among other things, these conditions prescribe that, for a DBA to be enforceable, it must:

  • specify the reason for setting the payment amount at the level agreed;[5]
  • not require payment of any costs or disbursements incurred by the service provider that have been paid or are payable by another party to the proceedings;[6] and
  • not provide for a payment above an amount which, including VAT, is equal to 50% of the sums ultimately recovered.[7]  

Even if all conditions of the DBA Regulations 2013 are satisfied, a DBA is nevertheless unenforceable in relation to “opt-out” collective proceedings before the CAT under section 47C(8) of the Competition Act 1998 (CA 1998).

Prior to the Judgment, funders and claimants had proceeded on the basis that LFAs under which a funder is entitled to a percentage of any damages fell outside the definition of a DBA. 

Background to the Judgment

The appeal to the SC concerned two follow-on damages claims brought pursuant to the UK’s collective proceedings regime under s. 47B CA 1998: Road Haulage Association Limited v Man SE and others (Case 1289/7/7/18) and UK Trucks Claim Limited v Stellantis N.V. and others (Case 1282/7/7/18).  The claims relate to the European Commission’s infringement decision AT.39824 – Trucks, which found that certain truck manufacturers had engaged in price-fixing arrangements in the EEA between 1997 and 2011.[8]  

In both claims, the proposed class representative (respectively, RHA and UKTC) sought to recover damages on behalf of UK consumers who had allegedly suffered loss as a result of the infringement.  RHA’s claim was brought on an “opt-in” basis, meaning that affected consumers had to agree to being represented in the claim.  UKTC’s claim was instead brought on an “opt-out” basis, meaning that these consumers would automatically be represented unless they declined.  Provision was also made by UKTC for the claim to be brought on an opt-in basis in the alternative.

Under the UK collective proceedings regime, in order for a claim to be brought on behalf of a class of claimants, the CAT must first grant a collective proceedings order (CPO).[9]  One of the requirements for a CPO is that the proposed class representative must secure sufficient funding to pay the defendant’s recoverable costs if ordered to do so.[10]  RHA and UKTC each agreed LFAs with third-party funders as part of their litigation funding arrangements: RHA entered into a LFA for its opt-in claim with the Therium Group (Therium), whereas UKTC entered into two separate LFAs with Yarcombe Ltd (Yarcombe), one for an opt-out claim and the other for an opt-in claim.  Under each of the LFAs, the funders’ maximum remuneration was calculated by reference to a percentage of the damages ultimately recovered in the respective claims.[11]  Neither Therium nor Yarcombe played any active role in the management of the claims.

As a preliminary issue to granting a CPO, certain defendant truck manufacturers argued that the LFAs agreed by RHA and UKTC were unenforceable under s. 58AA CLSA 1990.  It was common ground that the LFAs did not meet the conditions of the DBA Regulations 2013,[12] so the question was whether the reference to “claims management services” under CLSA 1990 covered the funding provided by Therium and Yarcombe.  The CAT held that since the funders were not involved in the management of the claims, they were not involved in claims management services and, therefore, the LFAs were not DBAs within the meaning of s. 58AA CLSA 1990.[13]  The CAT’s decision was upheld by the Court of Appeal (sitting as a Divisional Court) following a judicial review brought by the manufacturers. 

The Judgment

The SC held that a funder’s provision of financial services or assistance to a claimant constituted a “claims management service” and that the LFAs in question were therefore unenforceable.  The SC gave five main reasons for this:

  • No significance should be given to the word “management” in claims management service.  The SC held that no established meaning had been attributed to the term so as to give it particular “potency.”[14] 
  • Claims management service is defined in an earlier statute so must derive meaning from that statute.  The term had been imported from the Compensation Act 2006 (CA 2006),[15] in which it had been broadly defined as advice “or other services in relation to the making of a claim,” by implication, including “the provision of financial services or assistance.”[16]  This broad definition of the term was, moreover, consistent with the objective of CA 2006, which was to confer a general power on future Governments to enable regulation in the public interest of new commercial models to facilitate litigation and access to justice.[17] 
  • Parliament deliberately defined claims management service widely in CA 2006.  The SC considered that the definition was intendedto be wide so as to allow future Governments to regulate in a new and fast developing area.[18] 
  • Pre-existing regulation of funders on the statute book was beside the point.  The SC considered that while section 58B CLSA 1990 was focused on regulating particular persons identified as funders,the power to regulate under CA 2006 was focused on regulation of service activities and was intended to be wide and highly flexible.[19] 
  • Events after 2006 cannot assist in answering the question of statutory interpretation.  The SC held that neither (i) Rupert Jackson LJ’s final report on civil litigation costs, which was published in 2010,[20] nor (ii) the Code of Conduct it recommended for litigation funders, which was later issued by the Association of Litigation Funders of England and Wales (ALF) in 2011, provided guidance regarding the policy context in which CA 2006 was enacted or its purpose.[21]  Even if it were desirable in public policy terms for LFAs of the kind in issue to be available to support claimants to have access to justice, this is not a reason why there should be any departure from the conventional approach to statutory interpretation.[22]

The SC also considered the enforceability of LFAs in the context of opt-out collective proceedings before the CAT.  It held that the fact that the funder’s payment was subject to the CAT’s approval did not exclude it from constitutinga “specified financial benefit”[23] and the fact that under the opt-out LFA Yarcombe as funder shares the financial risks associated with the litigation provides no basis to say that this LFA falls outside the statutory definition of a DBA.[24]  Accordingly, the S concluded that section 47C(8) CA 1998 provided an additional reason why UKTC’s opt-out LFA with Yarcombe was not enforceable.[25] 

Observations

Many cases are potentially affected.  Based on the evidence before it, the SC indicated that its decision could impact the lawfulness and enforceability of “all or most”LFAscurrentlyin place in the UK.  Given the view that previously existed among funders and claimants that a funder could legitimately recover a percentage of damages, funders and claimants had not typically sought to ensure their LFAs were drafted to comply with the DBA Regulations 2013.  In practice, a damages-based LFA would still be unlawful and unenforceable in the context of opt-out collective proceedings in the CAT, even if it complied with the DBA Regulations 2013.  Since damages-based LFAs are prevalent in collective proceedings, all opt-out actions currently before the CAT may be affected to some extent.  Proceedings in the English courts, including group litigation and representative actions, are also likely to be affected where a funder has provided funding pursuant to a DBA.

Reassessment of unlawful funding arrangements.  Because so many LFAs will have been rendered unenforceable by the Judgment, funders and claimants will have to re-assess their funding arrangements. 

Risk allocation of parties to LFAs may be affected.  Where claimants and funders seek to revise their funding agreements to bring them into compliance with the law, it may impact the risk allocation among, inter alia, claimants, solicitors, insurers, and funders, and may raise questions about whether particular claims merit investment (e.g., in terms of funding or solicitors’ time).  For current claims, the Judgment represents an inflection point that might allow a claimant or funder to get out of, or re-negotiate, what has turned out to be a bad bargain. 

Past costs and recoveries may be challenged.  There are unresolved issues relating to the effect of an unenforceable LFA on costs that have already been advanced.  For example, can a defendant be held liable for costs that were met by a funder under an unenforceable LFA?  Can a claimant who paid a success fee to a funder under an unenforceable LFA seek to recover the success fee?  These are questions that will undoubtedly be litigated.

Delays to ongoing proceedings may be required.  For existing claims backed by unlawful LFAs, proceedings may have to be paused pending resolution of the funding issues.  For instance, delay may be required because claimants are unable to take steps necessary to pursue their claim or because defendants no longer have adequate security for costs.  For opt-out collective proceedings in the CAT, the Judgment also calls into question the basis on which CPOs were granted.  The CAT must be satisfied that it is just and reasonable for the class representative to represent the class, which includes an assessment of whether the class representative (i) can adequately act in the interests of class members, (ii) has a plan in relation to arrangements as so costs, and (iii) can pay the defendant’s costs if ordered to do so.[26]  These certification criteria must continue to be satisfied throughout the lifetime of the claim and can be challenged after the CAT has ordered a CPO.  The CAT may have to decide how much time class representatives should be afforded to ensure that they have legitimate funding arrangements in place.

[1]        Merricks v Mastercard Inc [2020] UKSC 51.

[2]        R (on the application of PACCAR and others) v Competition Appeal Tribunal and others [2023] UKSC 28, paragraph 3.

[3]        Ibid., paragraphs 243-244.

[4]        CLSA 1990, s. 58AA(1)-(2).

[5]        DBA Regulations 2013, paragraph 3(c).

[6]        Ibid., paragraph 4(1)(a).

[7]        Ibid, paragraph 4(3).

[8]        Case AT.39824 – Trucks dated 19 July 2016.

[9]        CA 1998, s. 47B(4).

[10]      Competition Appeal Tribunal Rules 2015 (CAT Rules), r. 78(2)(d).

[11]      Judgment, paragraph 6.

[12]      UK Trucks Claim Limited v Fiat Chrysler Automobiles N.V. and others and Road Haulage Association Limited v Man SE and others [2019] CAT 26, paragraph 15.

[13]      Ibid., paragraph 41.

[14]      Judgment, paragraph 49.

[15]      The relevant provisions of the CA 2006 were replaced in 2019 by substantively equivalent provisions under section 419A of the Financial Services and Markets Act 2000.

[16]      Judgment, paragraph 50.

[17]      Ibid., paragraph 49

[18]      Ibid., paragraph 62.

[19]      Ibid., paragraph 70 (emphasis added).

[20]      Lord Justice Jackson, Review of Civil Litigation Costs: Final Report (Her Majesty’s Stationery Office, 2010).

[21]      Judgement, paragraph 90.

[22]      Ibid.

[23]      Ibid., paragraph 99.

[24]      Ibid.

[25]      Ibid., paragraph 95.

[26]      CAT Rules, rr. 78(1)(b), 78(2)(d), and 78(3)(c)(i).