Government proposes legislation to permit funder DBAs in opt-out competition class actions

The post below was first published earlier today on our Litigation blog.

The government has tabled an amendment to the Digital Markets, Competition and Consumers Bill to allow the use of damages-based agreements (DBAs) with litigation funders in opt-out collective proceedings in the Competition Appeal Tribunal (CAT). DBAs with solicitors and barristers would still be prohibited for such actions.

The amendment is a response to the high-profile decision in Paccar in July (considered in our previous blog post). The Supreme Court held that litigation funding agreements which provide for the funder to be paid a share of damages are DBAs within the meaning of the legislation which regulates such agreements, and must therefore comply with the relevant regulatory regime (in particular the 2013 DBA Regulations) to be enforceable. The government announced shortly after the decision that it was "looking at all available options to bring clarity to all interested parties", and it was widely understood that litigation funders were lobbying for legislative change to address the decision.

The proposed amendment does not, however, go as far as funders might have liked. Assuming the amendment is passed, it will solve one of the problems for litigation funders arising out of Paccar, namely that funding agreements in opt-out proceedings in the CAT are unenforceable if they fall within the definition of a DBA. However, it does not remove the need for funding agreements to comply with the DBA Regulations if they fall within that definition, whether in opt-out proceedings or in other proceedings in the CAT or in other courts and tribunals. In other words, in all UK cases, funders will need to either ensure that their funding agreements are not DBAs or ensure that they comply with the DBA Regulations. Otherwise they will be unenforceable.

There have been two recent CAT hearings to consider funding agreements that have been amended in light of Paccar, in each case with a view to the agreement falling outside the definition of a DBA (unsurprisingly, since each case involves an application for an opt-out collective proceedings order so that, on the current state of the law, a DBA would be unenforceable). In each case the amended funding agreements have pivoted to charging a multiple of the funding provided, rather than a percentage of damages, and in each case the CAT's decision is awaited as to whether that means the agreement is not a DBA (because the funder's payment is not "determined by reference to" the amount of the financial benefit received by the claimant – a point contested by the defendants in both cases).

Interestingly, in each case the amended funding agreements also include a contingent provision allowing the funder to be paid a percentage of damages in certain circumstances, if such a provision becomes lawful, as an attempt to "future proof" the funding arrangements in anticipation of legislative change to address Paccar. It is unclear, however, whether the legislative amendment currently proposed would render those agreements enforceable, as they would still need to comply with the DBA Regulations, which are notoriously difficult to interpret and apply (see for example this blog post on a decision in which the Court of Appeal was split in its reasoning as to how the Regulations applied). Those difficulties are likely to be compounded for litigation funders given that much of the language in the Regulations assumes that a DBA will be with a legal representative rather than a funder. It will be interesting to see whether funders take up that challenge, or continue with what seems to be their current strategy of seeking to avoid falling within the DBA regime altogether.