Supreme Court: Litigation funding agreements are “damages-based agreements”
In a decision with significant ramifications for the litigation funding industry, the Supreme Court1 has confirmed that litigation funding agreements (LFAs) under which the funder takes a share of any damages recovered are “damages-based agreements” (DBAs). Accordingly, the legislation regulating DBAs applies to LFAs, rendering non-compliant LFAs unlawful and unenforceable. Given the ever-increasing use of litigation funding, and the fact that funding is an important element of the collective redress regime, this decision will (absent legislative reform) require widespread changes to existing LFAs and to how funding agreements are structured going forward.
In July 2016, the European Commission found that five major European truck manufacturing groups had infringed European competition law.2 As a result, the claimant-respondents (being UK Trucks Claim Ltd. and the Road Haulage Association) (Respondents) issued two applications before the Competition Appeals Tribunal (CAT) in the UK for a collective proceedings order. They claimed damages against the defendant-appellants (the DAF parties, a group of truck manufacturing groups) (DAF) on behalf of the purchasers of trucks.
As is common in these types of collective proceedings applications, they were proposed to be funded through LFAs, under which the funders were to receive a fixed share of the damages recovered.
Issues under consideration
In a preliminary issue raised before the CAT, DAF argued that the LFAs were unenforceable because they constituted DBAs and did not satisfy the requirements of the regime regulating DBAs (being the Damages Based Agreements Regulations 2013) (DBA Regs).
DAF contended that, under s.58AA of the Courts and Legal Services Act 1990, the LFAs fall into the definition of DBAs as they were agreements to provide “claims management services”. DAF argued that LFAs amount to “claims management services” under s.4(2) of the Compensation Act 2006 (the 2006 Act), as the definition extends to “the provision of financial services or assistance”. The LFAs should therefore be treated as DBAs and as subject to the DBA Regs.
The lower court decisions
The CAT ruled that the LFAs were not to be construed under the above legislation as DBAs and were, therefore, exempt from the DBA Regs. In a rolled-up hearing, the High Court (by judicial review) and the Court of Appeal agreed that the funding arrangements did not amount to DBAs and so did not need to comply with the DBA Regs. DAF appealed those decisions.
The Supreme Court’s Analysis
The Supreme Court upheld DAF’s appeal by a majority, on the basis that the wide express language of s.4 of the 2006 Act should be given its natural meaning consistent with the overall purpose of Part 2 of the 2006 Act. Lord Sales, giving the leading judgment, held that the natural meaning of “claims management services” and the words used in the 2006 Act to define this phrase (including “other services in relation to the making of a claim” and “the provision of financial services or assistance”) covered the LFAs in this case. He also held that the definition of “claims management services” was not tied to any concept of active management of a claim, as the Respondents had argued.
Lord Sales considered that the wide language used in s.4, and the scheme of Part 2 of the 2006 Act (which gives the Secretary of State regulatory power over types of claims management services) were strong indications of the statutory purpose of Part 2 of the 2006 Act. This purpose was to provide a broad power to allow the Secretary of State to decide on what targeted regulatory response might be required as information emerged about litigation funding, which was then “a new and developing field of service provision to encourage or facilitate litigation, where the business structures were opaque and poorly understood at the time of enactment”. In this context, the wide language in s.4 was deliberate, and the words “claims management services” should be given their natural meaning, which would include LFAs under which the funder takes a share of the damages recovered.
Litigation funding is now a significant industry in England and is widely seen to promote access to justice, particularly in the context of collective actions. Given that the litigation funding market had previously been proceeding on the assumption that LFAs did not fall within the definition of DBAs and so were enforceable under usual contractual principles, the Supreme Court’s decision is likely to render a significant number of LFAs unenforceable, particularly those entered into in the context of collective actions. However, there has been a growing trend for LFAs to provide for funders to be compensated by way of a multiple of the funds invested in the event of success rather than through a share of the damages recovered, and these LFAs will not be caught by the DBA Regs. Going forward, litigation funders and litigants alike will need to ensure that their funding arrangements either comply with the requirements of the DBA Regs, or fall outside of their ambit, in order for the arrangements to be lawful and enforceable.
This will remain the case unless and until there is a change to the legislative framework by Parliament, which is something that funders may now lobby for in the wake of the Supreme Court’s decision. It does appear from this case that the legislative position has not kept pace with the development of the litigation funding market, and change may be needed to address this.
Whether there are any economic ramifications to the Supreme Court’s decision in terms of an effect on the financial terms available in the litigation funding market remains to be seen but, at the very least, there is now likely to be a wholesale restructuring of LFAs to ensure that they are legally compliant.
1 R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal and others (2023) UKSC 28
2 Case 39824