The Supreme Court deals blow to litigation funding and collective proceedings regimes in the UK

On 26 July 2023, the Supreme Court handed down judgment in R (on the application of PACCAR Inc and others) (“Appellants”) v Competition Appeal Tribunal and others (“Respondents”) [2023] UKSC 28. The judgment ruled, in effect, that many litigation funding agreements (“LFAs”) constitute damages-based agreements (“DBAs”) for the purposes of section 58AA of the Courts and Legal Services Act 1990 (the “1990 Act”).  This judgment has immediate and acute consequences for litigation funding of competition class actions, but also for funding more broadly.  We first look at these implications and then summarise the Supreme Court’s analysis. 

Implications

• Competition class actions

DBAs are prohibited for opt-out competition class actions (section 47C(8) of the Competition Act 1998).  It is likely that many or all of the opt-out competition class actions presently on foot will be utilising LFAs that are now constituted as DBAs, and are therefore prohibited.

For an LFA to be a DBA, the amount payable to the funder must be “determined by reference to the amount of the [settlement sum or damages awarded]” (section 58AA of the 1990 Act).  Thus, LFAs where payment is calculated as a percentage of – or has another direct relationship with – the sum to be recovered, will no longer be viable for opt-out competition class actions.  What remains open to argument is whether LFAs where the recovery is calculated by reference to entirely separate criteria, such as a multiple of the funder’s investment, will be permitted for opt-out competition class actions.

The position is most acute for active class actions, several of which are seeking multiple £bn in damages.  Defendants will now use this Supreme Court decision to challenge these cases, including those already certified.

• Beyond competition class actions

As noted above, LFAs that calculate payment by reference to the settlement sum or damages awarded will be DBAs.  To be enforceable, DBAs must comply with the Damages Based Agreement Regulations 2013 (the “DBA Regulations”), a regime that prior to the PACCAR judgment was not thought to apply to third party litigation funders.

There is a question mark over whether LFAs are capable of complying with the DBA Regulations.  Certain elements of the DBA Regulations are not exacting, such as that the agreement must state the reason for the fee that has been agreed.  A further requirement is that the DBA must give credit for adverse costs recovered from the defendant.  In her dissenting opinion, Lady Rose stated that “[DBAs] entered into by litigation funders cannot realistically comply with the [DBA Regulation]…” (para [227]).  If she is proven correct, then the PACCAR ruling will have very broad implications.

Again, the judgment will have the greatest immediate impact for live cases where an LFA is in place.  Funders have already been seeking to renegotiate LFAs even in advance of the PACCAR judgment to provide for a multiple based return where previously there was only a percentage mechanism in place.  Where those negotiations have not yet concluded, and where the underlying case is strong, the funded party may feel that their negotiating position has improved in light of uncertainty over enforceability.

• Potential statutory changes

Depending on the scope of its impact, the PACCAR judgment could prompt legislative changes.  If LFAs using a multiple of investment are not viable for opt-out competition class actions, then it may take primary legislation to address the DBA prohibition set out above.  The DBA Regulations are secondary legislation and so less onerous to change. 

If there is legislative change, it will hopefully prompt a broader evaluation of other safeguards to be implemented.  One unintended consequence of PACCAR will be the shift towards payment as a multiple of investment; this mechanism is arguably less transparent than percentage recoveries.  Class members, particularly for consumer class actions, have little or no control over expenditure, and where claims are moving toward settlement there is an incentive to invest increased sums to take advantage of the pending return.  Any regulatory re-evaluation in this area must have regard to commercial realities and incentives.

Background to the PACCAR case

The Respondents were representative claimants in group litigation proceedings, both on opt-in and opt-out basis, brought against the respondents as part of the long-running so-called “trucks cartel” competition cases in the UK and Europe.  The Respondents initially applied to the UK Competition Appeal Tribunal (“the CAT”) for collective proceedings orders for alleged breaches of competition law under section 49B of the Competition Act 1998. 

As part of these applications, each of the Respondents needed to show that adequate funding arrangements were in place to meet the costs (including potential adverse costs) of bringing proceedings.  In collective proceedings, this is usually achieved by third party litigation funding.  Under the relevant LFAs, the Respondents’ funders would be entitled to a percentage of any damages awarded if their funded claims succeeded.

The Applicants argued, unsuccessfully in the first instance and on appeal, that the Respondents’ funders were providing “claims management services” for the purposes of s. 58AA of the 1990 Act.  If this was correct, then their LFAs were “DBAs” for the purposes of that Act, meaning that they had to comply with a number of requirements and formalities – as set out earlier – to be enforceable. 

The Court’s Ruling

The Supreme Court granted the Applicants’ appeal, and ruled that the Respondents’ funders did, in fact, provide “claims management services” by virtue of their “provision of financial services or assistance” – with the result that their LFAs were, in fact, unenforceable DBAs within the scope of the 1990 Act.

The parties’ arguments related primarily to rules and considerations of statutory interpretation.  While a number of arguments were made, and principles of statutory interpretation employed, the key thrust of the judgment followed the following 2 steps:

• Firstly, it is an established rule of statutory interpretation that if a statute adopts a definition from an earlier statute, that definition needs to be interpreted by reference to the earlier “source” statute (para [2]).  S. 58AA of the 1990 Act defined “claims management services” by reference to such an earlier statute – originally, s.4(2) of Part 2 of the Compensation Act 2006 (the “2006 Act”).
• Secondly, the task of statutory interpretation is to consider that statute’s meaning, primarily by reference to the statute as a whole without resorting to external interpretative aids, in the context of the legislative and policy purposes which it was intended to achieve when enacted (paras [40 – 42]).

Therefore, the definition of “claims management services” had to be considered in the context of the 2006 Act when it was enacted, with limited, if any, interpretative assistance from any later instrument or development, such as an extensive review by Sir Rupert Jackson, resulting attempts at self-regulation, and later statutory instruments such as the DBA Regulations.  To summarise the strict ‘black-letter’ approach taken: “Even if it might be said that it is desirable in public policy terms that third party funding…should 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” (para [90]). 

In that context, the Court ruled that Parliament deliberately made the original definition of “claims management services” wide and vague.  The 2006 Act’s policy objective was to allow the Secretary of State to “regulate effectively in future in a new and fast developing area in which, as at the time of enactment, the financing and business models being used were not firmly understood” (paragraph [62]), including by making specific follow-on enactments. 

The Respondents’ argument that “claims management services” meant, more narrowly, “active” management of a claim (unlike what a typical litigation funder does) failed for that reason, among others.  Further, the definition’s components as drafted did not have any connotation with such “active” management in any event (para [63 – 64]), while the words used for the definition – “claims management services” – had no generally established and accepted meaning that could have coloured the statute’s interpretation (paras [78 – 79]).

The fact that the 2006 Act’s mechanism allowed for fine-tuning by specific enactments also meant that, in that Act’s context, a wide definition of “claims management services” would not have offended the presumption against absurdity in statutory interpretation, including as the Secretary of State would have been able to act with precision to avoid absurd outcomes (paragraphs [84] – [86]).

At the same time, the Court emphasised, in the same paragraph, that third party DBAs can be enforced provided they satisfy the various requirements that apply to them e.g., in the DBA Regulations.

This article was prepared with the assistance of Frankie McPeanne, trainee in CMS London.