Third party funding for English-seated arbitration: do the English DBA regulations apply?

The English Supreme Court has confirmed in Paccar Inc v Road Haulage Association Ltd [2023] UKSC 28 that litigation funding arrangements based on a share of recovery are damages-based arrangements (DBA) for the purposes of s.58AA of the Courts and Legal Services Act 1990. The court held that such agreements fall within the scope of the provision because litigation funders provide "claims management services" as defined for these purposes. Such litigation funding arrangements must therefore comply with the statutory requirements for DBAs. The decision only affects third party funders, as it was always clear that DBAs issued by law firms were within the scope of the legislation.

More details about the decision can be found on our litigation blog post here.

Implications for arbitration?

The regulatory regime surrounding success fee arrangements in England & Wales is complex and unclear regarding its application to arbitration.  Without judicial guidance on this point, most arbitration practitioners have adopted a conservative interpretation and considered the regulatory regime to apply to both English litigation and English-seated arbitration. This approach was also validated in the judgment in Diag Human SE and Mr Josef Stava v Volterra Fietta [2022] EWHC 2054 (QB) where the regime was applied to a conditional fee arrangement in respect of an English-seated investment treaty case.

For funders of English arbitration matters, the lack of clarity in the application of the wider regime may raise questions about the application of Paccar to such funding arrangements. The definitions of "advocacy services" and "litigation services" as they apply to s.58AA are expressly expanded to such services relating to "any sort of proceedings for resolving disputes (and not just proceedings in a court)", leading arbitration practitioners to adopt the cautious approach mentioned above. There is no similar provision for "claims management services". However, funders may decide it is prudent, in the circumstances, to assume that the Paccar decision may apply equally to any funding arrangements in place for English-seated arbitrations.

More broadly, we expect funders to be looking at ways to ensure their funding agreements fall outside of the DBA definition, or to ensure they comply with the statutory requirements, in either case using termination or renegotiation clauses to amend existing arrangements where necessary.

The regulation of the third party funding market has changed significantly over the past decades. There are signs of an increase in regulation to come, with moves such as the European Parliament's proposed regulation of litigation funders (see our blog here). Given that the scope of the Paccar decision is limited to England and Wales, and that it relates to a specific piece of legislation, it is unlikely to cause a significant change in approach by funders to their international portfolios, although funders will need to give thought to whether the decision could influence the approach of other common law jurisdictions. We also expect funders to be focused on protecting their future position and reviewing their existing arrangements internationally to ensure they have strong termination or renegotiation provisions.

If you would like to discuss any of the issues discussed in this blog post, please contact Hannah Ambrose, Partner, Vanessa Naish, Professional Support Consultant, John O'Donoghue, Head of Legal Operations, Elizabeth Kantor, Professional Support Lawyer, or your usual Herbert Smith Freehills contact.