Competition Appeal Tribunal finds funding agreement based on multiple not a DBA, despite express cap by reference to proceeds

The Competition Appeal Tribunal (CAT) has held that litigation funding agreements were not damages-based agreements (DBAs) where the funder's fee was based on a multiple of the funding provided, rather than a share of damages recovered as per the arrangements considered in the Supreme Court's high-profile decision in Paccar (considered in our previous blog post). They were therefore enforceable in the context of applications for both opt-in and opt-out collective proceedings orders: Commercial and Interregional Card Claims I Ltd v Mastercard Incorporated [2024] CAT 3.

The decision is similar to the CAT's previous judgment in the Sony case (considered here), which likewise found that a funding agreement based on a multiple of funding was not a DBA - even though (as in the present case) the funder's fee would ultimately be capped by reference to the amount of the proceeds recovered in the litigation, or a subset of those proceeds. However, in the present case, unlike in Sony, the agreement contained an express cap on the funder's fee by reference to the proceeds. The defendant argued that this brought it within the statutory definition of a DBA, at s.58AA of the Courts and Legal Services Act 1990, as an agreement "which provides that" the amount of the funder's fee is "determined by reference to the amount of" the proceeds.

The present decision shows that even where there is an express cap limiting the funder's fee to the amount of the proceeds (or some subset of the proceeds), this will not necessarily mean the funding agreement is a DBA. In the CAT's judgment, the proper approach to deciding whether an agreement is a DBA is to consider whether, in substance, the amount of the proceeds determines the size of the funder's fee, and is not merely a factor that might affect it - standing back and taking a common sense view. On the facts here, the CAT found there was no DBA as the funder's fee was primarily based on a multiple of outlay and not a proportion of the proceeds.

The CAT decision appears to suggest, however, that in some cases a cap set at a percentage of proceeds might mean that the agreement is seen as a DBA. Although each case will turn on its own facts, the decision suggests that a court or tribunal would look carefully at the purpose of the cap. If, in contrast to the present case, its purpose was considered to be other than protecting the PCRs from having to pay more than the proceeds available to them, that would be relevant in considering whether the arrangement was in substance a DBA.

The CAT granted permission to appeal in the Sony case, on the basis that the uncertainty caused by challenges to funding arrangements are unlikely to cease until there has been a conclusive decision on these issues by the Court of Appeal. It remains to be seen whether permission might be granted in the present case on a similar basis.

Relatedly, it has been reported that the Justice Minister, Alex Chalk, has indicated that he intends to reverse the effect of Paccar, seemingly going beyond the proposed legislation to reverse the ban on funder DBAs in opt-out actions (which we considered here). Such steps could of course render academic the present decision, and that in Sony, as to when a funding agreement will, or will not, fall within the s.58AA definition.

Background

It was common ground that the Supreme Court’s judgment in Paccar in late July 2023 rendered unenforceable the litigation funding agreements entered into for the purposes of financing the costs of the proposed proceedings, as it became clear that those agreements were DBAs which did not comply with the relevant regulatory regime.

It was agreed that the CAT would consider any challenges to the enforceability of revised funding arrangements. Arguments as to the adequacy of those arrangements (as opposed to their enforceability) would be a matter for the hearing of the CPO applications.

The revised funding agreements between the Proposed Class Representatives (PCRs) and the funder for the opt-out proceedings replaced the reference to the funder being paid a percentage of the claim proceeds with a clause providing for payment of a multiple of funding outlay (namely 200%, increasing by 50% each January and July). The agreements also provided that the funder's fee would not exceed the amount of the claim proceeds that had not been distributed to class members.

The revised funding agreements for the opt-in proceedings were entered into between the funder and the PCRs' solicitors, rather than the PCRs. (The solicitors had separately entered into a DBA with the PCRs, and the enforceability of that DBA was not challenged.) Similar to the opt-out funding agreements (and simplifying slightly), the revised opt-in funding agreements replaced the reference to the funder being paid a percentage with a provision for payment of a multiple of funding. The agreements also provided that the funder's fee would not exceed the total amount of claim proceeds received by the solicitors under their DBA.

The defendants' key points of challenge were the same in respect of the revised opt-in and opt-out funding agreements, namely:

• The Proceeds Point: Under the revised agreements the funder was still to receive a share of the proceeds recovered by the PCRs, which was sufficient to constitute the agreements as DBAs.
• The Cap Point: The fact that the amount payable to the funder was capped, either by the proceeds recovered or some subset of that, meant it was "determined by reference to" the proceeds for the purposes of s.58AA.

Decision

The CAT held that the amended funding agreements were not DBAs and were not therefore unenforceable. It dismissed the defendants' challenges under both the Proceeds Point and the Cap Point.

The Proceeds Point

The defendants' submission was based on the Court of Appeal's judgment in Lexlaw v Zuberi [2021] EWCA Civ 16 (considered here), in which the majority held that only that part of a solicitor's retainer which dealt with payment out of damages in the event of a successful outcome (and not the part which dealt with termination) was a DBA and therefore had to comply with the DBA regulations.

The defendants in the present case pointed to the repeated references in Lewison LJ's leading judgment in Lexlaw to a "share of recoveries" or "payment out of recoveries". They argued that this reflected the proper construction of s.58AA - ie it showed that any agreement which provided for some connection between the funder's fee and the damages recovered would be a DBA.

The CAT rejected this argument, saying it was plain that Lewison LJ's references to a share of recoveries or payment out of recoveries were merely shorthand for the requirements of s.58AA. The decision did not assist with the interpretation of the requirement that the funder's payment is "determined by reference to" the proceeds.

The Cap Point

The defendants argued that the presence of a cap by reference to proceeds meant the funder's fee was "determined by reference to" the proceeds for the purposes of s.58AA, whether the cap was 100% of proceeds (or 100% of a subset of proceeds) or some lesser percentage of either.

The CAT referred to the decision in Sony, which considered (and dismissed) a similar argument, save that in that case the cap did not arise from any express provision in the funding agreements. The CAT commented that it would seem a rather arbitrary result for funding agreements to be DBAs where there was an express cap, but not otherwise, where the purpose of the cap was to protect the PCRs by limiting their potential exposure. The unsatisfactory nature of the defendants' arguments showed the need to approach the assessment of funding arrangements by reference to s.58AA on a "more holistic, common sense basis".

While there might be various factors that affect the size of the funder's fee, some of which might be reflected in the contractual arrangements, it did not follow that every such factor "determines" the amount of the fee in the way required by s.58AA. As the CAT put it:

"We consider there to be a difference between a factor which might have an influence, and one which is determinative in the sense of being the substantive mechanism by which the funder’s fee is arrived at. In other words, it is necessary to form a view about the true nature of the contractual arrangements and what can be said to be the real and substantive basis on which the funder’s fee is determined."

In the present case, the CAT concluded that, as a matter of substance, the funding arrangements did not have the character of a DBA. The funder's fee was primarily based on a multiple of outlay and not by reference to sharing in a proportion of the proceeds. The fact that other factors (apart from the multiple) might affect the fee in some circumstances did not change the analysis.

The CAT referred, however, to an example proposed by the defendant where a funder's fee was capped at less than 100% of the amount of financial benefit to the funded party. It commented that, in that scenario, the purpose of the cap would presumably not be (as in this case) to protect the PCRs from having to pay what they do not have. It suggested that, while each case would turn on its own facts, "in such a case there might be a very real question as to whether the cap at a level below 100% of the relevant proceeds was, as a matter of substance, creating the character of a success fee".

Note: The CAT has now given permission to appeal in the present case, again on the basis that a Court of Appeal decision is needed to resolve any uncertainty. The appeal is due to be heard by 17 February 2025.