UK Supreme Court: Litigation Funding Agreements Are Damages-Based Agreements

• Law Firm: Cooley LLP
• Subject Matter: Finance and Banking, Litigation, Mediation & Arbitration, Financial Services, Trials & Appeals & Compensation
• Author: James Maton and Victoria Barlow
• Published date: 31 July 2023

On 26 July 2023, the UK Supreme Court handed down a judgment that will cause serious disruption (at least in the short term) to the litigation funding market. In R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal and others ¹, the Supreme Court held by a majority that litigation funding agreements which entitled the funders to recover a percentage of the damages recovered were damages-based agreements and, as such, were unenforceable, as they did not meet the strict statutory conditions for such agreements.

Background

The Road Haulage Association and UK Trucks Claim Ltd. made applications to the UK Competition Appeal Tribunal to bring collective proceedings for breaches of competition law by various truck manufacturers. To obtain a collective proceedings order, they were required to have adequate funding arrangements in place, leading them to rely on litigation funding agreements. Under the terms of these agreements, the funders' remuneration was to be calculated by reference to a percentage of the damages ultimately recovered in the litigation.

The appellant truck manufacturers contended that these funding agreements constituted damages-based agreements, known as 'DBAs', within the meaning given in Section 58AA of the Courts and Legal Services Act 1990. Further, as the funding agreements did not comply with the strict requirements of that section, they were unlawful and unenforceable.

A DBA is defined in Section 58AA as an agreement with a person providing advocacy services, litigation services or 'claims management services' which provides for a payment to be made to the service provider only where the party to the litigation receives a specified financial benefit from the litigation - and the amount of payment is to be determined by reference to the amount of the financial benefit obtained.

Whether the funding agreements qualified as DBAs under Section 58AA therefore turned on whether they involved 'claims management services', which are defined in the Compensation Act 2006 and the Financial Services and Markets Act 2000 as 'advice or other services in relation to the making of a claim'. The Competition Appeals Tribunal ruled that the funding agreements were not DBAs within the meaning of Section 58AA, and that they were lawful and enforceable funding arrangements which could justify the making of collective proceedings orders. The appellants' judicial review challenge was dismissed by the Divisional Court, so the appellants...