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Supreme Court rules litigation funding deal unenforceable

R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents) [2021] EWCA Civ 299

In a seminal decision handed down last week, the Supreme Court has held by a majority (Lord Sales giving the substantive judgment, with which Lord Reed, Lord Leggatt and Lord Stephens agreed) that litigation funding agreements (‘LFAs’) which involve the lender being entitled to a proportion of any damages recovered are damages based agreements (‘DBAs’) within the meaning of s.58AA Courts and Legal Services Act 1990 (the ‘1990 Act’) and the Damages Based Regulations 2013 (the ‘DBA Regulations 2013’). Lady Rose gave a lengthy dissenting judgement. The case summary, judgments and press summary are available here.

The decision overturns that of the Divisional Court and is fundamentally contrary to established practice in the litigation funding industry. The consequences for the industry are far-reaching. As Lord Sales noted at [13], most third-party litigation funding agreements currently in place are now vulnerable to unenforceability challenges on the basis that they do not comply with the 1990 Act and the DBA Regulations 2013. At [244], Lady Rose noted this and two further consequences. First, no collective proceedings order could be pursued in the Competition Appeal Tribunal (the ‘CAT’), “given the reliance that has been placed on litigation funding in the development of this aspect of the work of the CAT.” Second, the decision necessitates “a radical review … of the entire litigation funding sector as it has developed in the United Kingdom.”

The case concerned two collective actions being brought on behalf of truckers against a truck manufacturing group, DAF. In 2016, the European Commission found that five major European truck manufacturing groups (including DAF) had infringed competition law. UK Truck Claims Ltd (‘UKTC’) and the Road Haulage Association (‘RHA’) applied for an order from the CAT to enable them to bring collective proceedings against DAF, relying on LFAs to demonstrate their ability to meet their own costs and adverse costs orders. DAF opposed the orders, arguing that the LFAs constituted DBAs within the meaning of section 58AA and were unenforceable because they did not comply with the requirements made applicable by that provision. In granting the order, the CAT found that the LFAs were not did not involve the provision of ‘claims management services’, which was the relevant part of the definition of DBAs in section 58AA, as defined by reference to the Compensation Act 2006 (‘CA 2006’) until 1 April 2019 and the Financial Services and Markets Act 2000 (‘FSMA 2000’) thereafter.

In a decision available here, the Court of Appeal dismissed DAF’s application for permission to appeal, stating that it had no jurisdiction to hear the case and, sitting as the Divisional Court on judicial review, upheld the Tribunal’s decision confirming that LFAs were not regulated DBAs. DAF appealed directly to the Supreme Court under the leap-frog procedure.

The Supreme Court held that the words ‘claims management services’ were capable of covering the LFAs [50]. The statutory definition of the term in the CA 2006 includes ‘advice or other services in relation to the making of a claim’ and ‘services’ include ‘the provision of financial services or assistance’. The Court held that these words “according to their natural meaning, are apt to cover the LFAs in this case” [50]. Additionally, it held that there was good reason to think that Parliament deliberately used broad words in the CA 2006, in the context of a “new and developing service provision to encourage or facilitate litigation, where the business structures were opaque and poorly understood at the time of enactment” [72].

Litigation funders, particularly those involved in more than 20 collective actions brought by consumer groups backed by litigation funding which are currently lodged with the CAT, will need to move quickly to review funding arrangements and amend existing LFAs – or risk seeing those actions dismissed.

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