The question of whether litigation funding agreements that promise a percentage of any damages recovered amount to damages based agreements (DBAs) has been brought before the Supreme Court. On Thursday 16 February 2023, the court heard DAF Trucks' appeal on this issue, considering the meaning of such agreements under existing UK legislation.
If these type of agreements do amount to DBAs, the likely consequence will be that most, if not all, litigation funding agreements currently in existence would be unenforceable. This judgment is therefore hugely significant for the litigation funding industry and those involved with third party litigation-funded matters. Here, we take a closer look at the case and what this could mean for future litigation funding agreements.
The issue came to the fore in the context of applications to bring collective proceedings for breaches of competition law. In a decision of the European Commission in 2016, five major European truck manufacturing groups, including DAF Trucks (DAF), were found to have infringed competition law. Road Haulage Association Limited (RHA) and UK Trucks Claim Limited (UKTC) then launched a collective claim for an order from the Competition Appeal Tribunal, authorising them to bring collective claims for damages on behalf of purchasers of trucks.
Litigation funding agreements
Both RHA and UKTC have litigation funding agreements in place, under which the funder's maximum remuneration is calculated by reference to a share of the damage ultimately recovered in the litigation. DAF argues that these agreements constitute DBAs, with the consequence that they are unenforceable because: (i) they do not comply with the requirements for DBAs set out in the UK's DBA Regulations 2013; and (ii) even if they did, the use of DBAs in opt-out collective actions is prohibited. If DAF is successful in this argument, RHA and UKTC do not satisfy the requirements for being authorised to bring the collective proceedings. Authorisation is a crucial gateway for collective proceedings to be able to proceed.
DAF Trucks unsuccessfully argued at the Competition Appeal Tribunal and in the High Court on judicial review that the collective claim should fail because the litigation funding agreements amount to DBAs. The Court of Appeal dismissed the DAF defendants' appeal in March 2021 (PACCAR Inc and others v Road Haulage Association Ltd and another), causing DAF to appeal directly to the Supreme Court.
The decision turns on the statutory construction of the meaning of the definition, "claims management services", in section 4(2) of the Compensation Act 2006. DAF argues that litigation funding agreements comprise "claims management services" under section 4(2) of the Compensation Act 2006, as the definition of that phrase extends to "the provision of financial services or assistance".
The phrase "claims management services" was imported into section 58AA of the Courts and Legal Services Act 1990, which defines a DBA as an agreement between a person providing either: (i) advocacy; (ii) litigation; or (iii) claims management services. Such agreements are unenforceable, unless compliant with specific requirements, including that remuneration be fixed to a prescribed amount or percentage.
The Court of Appeal decided that litigation funding agreements did not fall within the DBA regime of section 58AA of the Court and Legal Services Act 1990, and so did not need to comply with it.
What could the decision mean for future litigation funding agreements?
Litigation funding in England and Wales has evolved into its own substantive industry over the last 30 years, and especially within the last ten. It is attractive both because of its potential for claim monetisation for corporates and because of the opportunity it provides for greater access to justice in many contexts. We discuss this further in our report 'Taking AIM: How litigation can strike company value', which, among other things, looks at the potential scenarios and options for claimants in managing potential disputes.
On the issue in this case, it is anticipated that the Supreme Court will decide the same way as the Court of Appeal, so that litigation funding agreements promising a percentage of damages recovered are not labelled as DBAs and so are not subject to regulation as DBAs. But if the Supreme Court rules the other way, many current litigation funding agreements will be deemed unenforceable, and the role of litigation funding will certainly be thrown into question.
For more insight into litigation funding and how the Supreme Court's decision could affect your position, contact Emma Carr.