Supreme Court decision today means most existing UK litigation funding agreements likely to be unenforceable

In a judgment handed down this morning, the Supreme Court has held that litigation funding agreements with third parties who play no part in the conduct of litigation, but who are to be paid a share of any damages recovered by the claimant, are “damages-based agreements” (or DBAs) within the meaning of the relevant legislation which regulates such agreements. Such agreements must therefore comply with the relevant regulatory regime and, if they do not, they are unenforceable: Paccar Inc v Road Haulage Association Ltd [2023] UKSC 28.

The issue arose in the context of the "Trucks" litigation in the Competition Appeal Tribunal (CAT). Since it was common ground that the litigation funding agreements entered into by the applicants for collective proceedings orders (CPOs) in that case did not comply with the regime governing DBAs, the effect of the Supreme Court's decision is that the agreements are unenforceable. That means that there are no effective funding arrangements for the claims, which is a pre-requisite for a claim to be certified as collective proceedings in the CAT.

But the consequences go much further than this case. As the Supreme Court recognised, the likely effect of the decision in practice is that most third party litigation funding agreements currently in place for litigation in the English courts will be unenforceable as the law currently stands, since participants in the litigation funding market have generally assumed that their agreements are not DBAs and therefore do not have to comply with the relevant regulatory regime.

And specifically in the context of competition cases, the decision would appear to prohibit litigation funding agreements where they are entered into in respect of opt-out collective proceedings in the CAT, at least where the funder's remuneration is calculated by reference to a share of the damages ultimately recovered, since the statutory regime governing such cases provides that a DBA is unenforceable if it relates to opt-out collective proceedings. This is the case for a number of funding agreements in CPO cases currently – which so far have progressed past certification with this appeal pending in parallel. There is now a question of how any such existing, potentially non-compliant, funding arrangements can be amended (if at all) and how the CAT will case manage that, especially for the claims well advanced past the certification stage.

The implications of the decision are therefore potentially dramatic, both for collective proceedings in the CAT - which almost invariably rely on funding from third party litigation funders - and for other cases supported by litigation funders. While funders may be able to amend their models so that they comply with the regulatory regime governing DBAs, and potentially renegotiate existing agreements so that they comply, it remains to be seen how that will be done, and whether there will ultimately be amendments to the statutory regime to permit the use of (at least some) DBAs in the context of opt-out collective proceedings. One immediate question is whether a funding arrangement which provides for a return based on a multiple of the funding, rather than a share of damages, will solve the problem in opt-out collective proceedings.

Background

In the Trucks litigation, UK Trucks Claim Ltd (UKTC) and the Road Haulage Association (the RHA) applied to the CAT for CPOs in respect of follow-on damages claims arising from a decision of the European Commission of 19 July 2016 which found that certain truck manufacturing groups had infringed competition law.

In order to certify a claim to proceed under a CPO, the CAT must be satisfied (among other things) that it is just and reasonable for the person who brought the proceedings to act as the class representative. The CAT rules set out various factors to be considered in that regard, including as to the adequacy of the representative's funding arrangements.

In this case, the CAT heard as a preliminary issue the question of whether, as a result of the litigation funding agreements they had entered into (the LFAs), UKTC and/or the RHA should not be authorised to act as class representative. In particular, certain of the respondents to the CPO applications argued that the LFAs constituted DBAs for the purposes of the relevant statutory regulations and were therefore unenforceable.

The relevant provision, s.58AA of the Courts and Legal Services Act 1990, provides that a DBA is unenforceable if it does not satisfy the relevant statutory conditions, which include a requirement to comply with the 2013 DBA Regulations. It was common ground that the LFAs did not satisfy those conditions and therefore would be unenforceable if they were DBAs.

A DBA is defined as an agreement with a person providing advocacy services, litigation services or (crucially for present purposes) "claims management services" which (in summary) provides for a payment to be made only if the party to the litigation obtains a specified financial benefit from the litigation, and for the amount of that payment to be determined by reference to the amount of the financial benefit obtained. In other words, a DBA provides that the person providing the services is to be paid by way of a share of the proceeds of the litigation.

The term "claims management services" in s.58AA was defined, at the time of the LFAs in this case, by reference to s.4(2) of the Compensation Act 2006, which defines a claims management service as "advice or other services in relation to the making of a claim". Under s.4(3)(a), a reference to the provision of services includes, in particular, a reference to (at s.4(3)(a)(i)) "the provision of financial services or assistance". (The definition in s.58AA has since been amended to refer to s.419A of the Financial Services and Markets Act 2000, rather than s.4(2) of the Compensation Act 2006, but the wording is very similar and nothing turned on any differences between the provisions.)

The CAT held that the LFAs were not DBAs within the terms of s.58AA, and consequently were lawful and enforceable funding arrangements that could justify the making of CPOs in favour of UKTC or the RHA. This decision was upheld by the Divisional Court following a judicial review challenge by the respondents to the CPO applications. Essentially, the CAT and the Divisional Court found that the statutory definition was to be interpreted as applying in the context of the management of a claim, and could not have been intended to bear its broad literal meaning.

The applicants appealed directly to the Supreme Court. The Association of Litigation Funders of England & Wales intervened to make written submissions in the appeal.

Decision

The Supreme Court allowed the appeal, by a majority. Lord Sales gave the majority decision, with which Lords Reed, Leggatt and Stephens agreed. Lady Rose gave a dissenting judgment which would have dismissed the appeal.

The court held that the words used in s.4(2) and (3) of the 2006 Act to define "claims management services", read according to their natural meaning, are apt to cover the LFAs in this case - as in fact the respondents and the Divisional Court accepted.

The language of the definition, "advice or other services in relation to the making of a claim", was wide and was not tied to a concept of active management of a claim. That basic point was strongly reinforced by the wide language of section s.4(3)(a) which stipulated that "the provision of services" included a non-exhaustive list of items stated in very broad terms, none of which had the connotation of or involved a power of management of a claim.

The 2006 Act did not prohibit or limit the provision of claims management services generally. Instead, s.4(1) provided that a person could not provide regulated claims management services unless certain conditions were fulfilled. Which services were regulated was to be prescribed by order made by the Secretary of State. Accordingly, the legislation created a broadly framed power for the Secretary of State to regulate in this area.

In the Supreme Court's judgment, the textual and contextual indicators from the 2006 Act clearly led to the conclusion that the definition of “claims management services” was intended to be wide and was not coloured by the notion of “claims management”, which was inapt to qualify the various aspects of the express definition set out in s.4(2) and (3). The majority did not consider there to be any ambiguity as to the correct interpretation.

The various arguments put forward by the applicants did not affect the court's view, for the reasons summarised below:

• While the "potency of the term defined" may provide some guidance as to the meaning of a term set out in a statutory definition, the extent to which it did so would depend on the circumstances. Here the term "claims management services" did not have any established legal meaning, or any generally accepted meaning in ordinary parlance, which was capable of exerting any significant "potency" in qualifying the words used. Further, where Parliament has provided a definition of a term, that is the primary guide to the meaning of the term defined. The weaker the inherent or established meaning of the term defined, the weaker is its ability to throw light on the proper interpretation.
• The presumption against absurdity may be used as a tool of interpretation. However, the courts cannot rely on the presumption against absurdity to substitute their view of what is reasonable for the policy chosen by Parliament. Here, the Supreme Court did not consider that their interpretation produced any absurdity - even recognising that the power to regulate claims management services conferred by s.4 of the 2006 Act would cover "normal lending by reputable banks if provided in relation to the making of a claim" (though presumably such lending would not fall within the definition of a DBA unless, unusually, the bank's return was contingent on the customer recovering damages and calculated by reference to those damages). As the court said, it was not for it to limit the ambit of the wide power Parliament conferred on the Secretary of State to regulate this area by "imagining situations in which use of the power might be unreasonable, but where it is very unlikely to be used and where there are controls in place to police and prevent such use".
• The DBA Regulations could not be taken into account in construing the definition of "claims management services" under the 2006 Act. While there is authority to suggest that, if a statute is ambiguous, a later Act of Parliament might be relied on as persuasive authority as to its meaning, the principle only comes into play where there are two interpretations of the earlier statute which are both equally tenable. That was not the case here. And in any event, in the Supreme Court's judgment, the principle does not apply where the later legislation is subordinate legislation rather than an Act of Parliament.

As the Supreme Court commented, the problem in this case had arisen not from the effect of the definition of "claims management services" in the context of the 2006 Act, but because the same definition was used in s.58AA, which provided that a DBA which did not satisfy the conditions set out there was unenforceable. The effect of that provision was general and immediate and was not predicated on any further exercise of discretion by the Secretary of State or further supervision by Parliament.