The Future of Litigation Funding

Litigation funding is an essential tool for commercial entities accessing justice. Launching litigation proceedings entails enormous risks to an organisation's cashflow. Working with a funder ensures that risk is passed on. Litigation funding has also become an increasingly common vehicle for corporates seeking damages for infringements of competition law, such as cartel behaviour, where companies conspire to fix the price of a product at an illegally high rate, in breach of the Chapter I prohibition of the Competition Act 1998 and/or Article 101 of the Treaty on the Functioning of the European Union (TFEU), and exploitation of a dominant market position in breach of the Chapter II prohibition of the Competition Act and/or Article 102 of the TFEU. Given that these types of actions require hundreds of thousands of pounds to run, litigation funding allows companies to keep such actions off their balance sheets to ensure investor and shareholder confidence.

In July 2023, the Supreme Court sent shockwaves through the litigation funding section when it ruled in R (on the application of PACCAR Inc and others)  v Competition Appeal Tribunal and others [2023] UKSC 28 that Litigation Funding Agreements (LFAs) are Damage Based Agreements and therefore, will be unenforceable unless they comply with the provisions set out in Section 58AA of the Courts and Legal Services Act 1990.

Background to the decision

The Respondents each sought an order from the Competition Appeal Tribunal (the CAT) to enable them to bring collective proceedings on behalf of persons who acquired trucks from the Appellants (collectively, DAF) and other truck manufacturers. The proposed proceedings took the form of follow-on proceedings in which compensation was sought for loss caused by an unlawful arrangement between DAF and other manufacturers in breach of European competition law.

To obtain collective proceedings, each Respondent had to prove they had an adequate funding agreement in place to meet their own costs and any adverse cost orders.

The Supreme Court's decision

The two key pieces of legislation the Supreme Court considered when deciding whether the Respondent's had adequate funding in place were the Compensation Act 2006 (CA 2006) and the Courts and Legal Services Act 1990 (CLSA 1990).

The CA 2006 made provisions, among other things, to regulate claims management services (CMSs). Section 4(2)(b) defined a CMS as "advice or other services in relation to the making of a claim". Section 4(3) provided that "services" include "the provision of financial services or assistance" among other things. The regulatory restrictions only applied to regulated  CMSs, and services were regulated if they were prescribed by the Secretary of State's order or provided in cases or circumstances prescribed by the Secretary of State. 

Section 58AA of the CLSA 1990, as amended, defines a Damages Based Agreement (DBA) as "an agreement between a person providing advocacy services, litigation services or claims management services and the recipient of those services", whereby the recipient must pay the service provider if they obtain a specified financial benefit in connection with the services provided and the amount of that payment is calculated by reference to the amount of the financial benefit. Section 58AA also initially specified that "claims management services" had the same meaning as in section 4(2) of the CA 2006.

By majority, the Supreme Court ruled that an LFA, in which the litigation funder is to receive a percentage of any damages won by the Claimant, is a DBA within the meaning of 58AA of the CLSA 1990. Following detailed consideration of the legislation, Lords Sales, Reed, Leggatt, and Stephens, ruled that litigation funding falls within an express definition of "claims management services", which includes "the provision of financial services or assistance" and that those services are provided "in relation to the making of a claim".

Lady Rose gave a lengthy dissenting judgment. She held that simply because the legislative definition of a claims management service included providing financial assistance, this did not necessarily mean that all providers of litigation financial assistance were a claims management service. She observed that litigation funders were not managing claims but were funding the litigation and advocacy services or claims management services provided by others.

The consequences of the decision

Following the Supreme Court decision, it is likely that almost all LFAs that do not comply with section 58AA of the CLSA 1990 are unenforceable. Therefore, Solicitors must advise their clients accordingly and Litigation Funders must amend their LFAs. In addition, the decision has particularly significant implications for collective actions in the CAT, given that adequate funding is a prerequisite for such a claim to be heard and given that many collective actions are funded, at least in part, using LFAs. It also appears to prevent the use of most LFAs altogether for opt-out collective proceedings in the CAT, as section 47C(8) of the Competition Act 1998 provides that a DBA is unenforceable if it relates to opt-out proceedings. The only way around this will be if the LFA can be drafted to give the funder a return that is not based on a share of damages.

Albion Legal provides various added-value products and services, from bespoke employment disputes insurance cover to white-labelled HR software. To discuss any points in the above article or how we can help your business, please phone 0113 2471 717 or email our team.