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

Dramatic ruling has important implications for structure of litigation funding in complex disputes

In a judgment handed down this week (26 July), 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 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. This is because 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. Also to be resolved is 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.

For in-depth coverage of the ruling see our full article, which was first published on our Litigation Notes blog.

There is further analysis in the latest episode of our Commercial Litigation podcast.