On 26 July 2023, the UK Supreme Court handed down a hugely significant judgment for litigation funding in the UK. By a majority of four to one, the court decided that a litigation funding agreement providing for the funder to receive a proportion of any damages recovered was a damages-based agreement and, in the circumstances of this case, unenforceable. We look at the decision and what it means for funders, funded parties and the market.
As we reported previously, the question for the Supreme Court was whether a Litigation Funding Agreement (LFA) which provided for a funder to receive a percentage of any damages recovered was a Damages Based Agreement (DBA) within the meaning of s.58AA of the Courts and Legal Services Act 1990. For more detailed background to the recent Supreme Court decision, please access our previous article. However, in a nutshell:
- The issue arose in the context of collective proceedings in the Competition Appeal Tribunal, in which two claimant groups representing truck purchasers sought compensation from various truck manufacturers who had been found to have breached competition law. One group sought to bring "opt-in" proceedings (where individual participants opt-in to join the class represented in the claim); the other sought opt-out proceedings (where persons in the affected class are represented unless they opt-out).
- In order to bring such collective proceedings, the claimant groups had to demonstrate they had adequate funding to meet their own costs, and any adverse costs order, in the event they lost. They relied on LFAs which provided that, in return for funding the claim, the funders would receive a proportion of any damages recovered.
- One of the defendant manufacturers argued that the LFAs constituted DBAs as defined in UK legislation. In order to be enforceable, DBAs must comply with certain regulatory requirements. Even if compliant DBAs however are unenforceable in opt-out collective proceedings.
- It was common ground that the LFAs in question did not comply with the regulatory requirements and so, if the Supreme Court found that the LFAs were DBAs, then they would be unenforceable. Since the court heard evidence that these LFAs were fairly typical of LFAs in the UK, the decision would also have ramifications for the wider litigation funding market.
Supreme Court decision
The Supreme Court's decision hinged on an exercise of statutory interpretation. DBAs are defined as "an agreement between a person providing advocacy services, litigation services or claims management services and the recipient of those services" in which "payment is to be determined by reference to the amount of the financial benefit obtained". The court had to determine whether the provision of litigation funding fell within the meaning of "claims management services", which was itself defined to include "the provision of financial services or assistance".
The majority in the Supreme Court held that the provision of funding did fall within that definition, the LFAs were therefore DBAs and, since they did not comply with the necessary DBA formalities, they were unenforceable. Even if they had complied with the necessary regulations, such a DBA would have been unenforceable in opt-out proceedings. Their reasoning included the following points:
- Natural meaning – given their natural meaning, the words used in the statute were capable of covering the LFAs in this case.
- Legislative purpose and context – the legislative context did not support giving the words a more restrictive wording. Parliament's purpose had been to create a broadly framed power allowing the Secretary of State to provide more targeted regulation as required in what was then an emerging area. Parliament had intended the term "claims management services" to be wide, and the words should be given their natural meaning.
- Ancillary documents – the Explanatory Memorandum and Scope Order, which were broadly contemporaneous and part of the same legislative exercise, supported the argument for a wide natural meaning – but the much later DBA Regulations could not be used as an aid to interpretation of the earlier statute.
- The "potency of the term defined" – the term being defined ("claims management services") had no generally accepted meaning. It should not therefore colour the words used to define it.
- Presumption against absurdity – the wide interpretation did not produce absurd results, and it is not for the court to imagine unlikely situations where the exercise of a wide power might be unreasonable. The fact that Parliament had also enacted (but never brought into force) an adjacent section 58B in the Courts and Legal Services Act 1990 expressly addressing LFAs did not mean they did not also intend for LFAs to be capable of being regulated as DBAs.
Where does this leave litigation funding?
So, we now know that a LFA which provides for a funder to receive a proportion of damages recovered is a DBA, and so will be unenforceable (a) in opt-out collective proceedings generally; and (b) in other proceedings unless it complies with the DBA regulations. However, this decision arguably raises more questions than it answers.
- LFAs which are not DBAs – this decision, and the DBA regulations, only applies to LFAs which provide for the funder to receive a proportion of damages ultimately recovered. The obvious solution is therefore to draw (or re-draw) LFAs so that the funder's return is instead expressed as a multiple of the funding provided – a solution which in principle works both for opt-out collective proceedings and wider litigation. That this is obvious does not however make it straightforward – many LFAs will now need to be revisited and renegotiated in light of this decision.
- DBA Regulations – outside of opt-out collective proceedings, the alternative is that LFAs are (re)drawn in terms which comply with the formalities of the DBA Regulations. However, these are opaque, and have been in need of clarification for some years. It is notable that new draft regulations issued (but not enacted) as a result of a Ministry of Justice commissioned review in 2019 expressly stated that LFAs are not DBAs (see draft regulation 1(4)(c)). Will legislators now revisit the regulations to make them workable and reflect this development?
- Satellite litigation – the decision is likely to prompt satellite litigation in existing cases. In many cases being run under similar LFAs, it is likely to be acknowledged without challenge that those LFAs will need to be redrawn as described above, causing delay. And in general commercial litigation, where a security for costs application has previously been answered (in full or part) by the existence of a LFA, will this decision lead to renewed security applications?
- Unintended consequences – there is also the possibility that this wide interpretation of "claims management services" could have unintended wider reaching consequences. Could, for instance, an After the Event insurer whose premium is calculated as a percentage of damages recovered also be caught?
While this decision is therefore unlikely to impact the availability of litigation funding outside of collective opt-out proceedings in the long term, it is going to cause significant ripples in the short term, as funders, funded parties and their litigation opponents work through the implications for existing and future funded cases.
If you would like to discuss the decision, please contact Emma Carr or Alexander Wrixon.