Robert Marven KC and George McDonald consider the decision and its consequences.
The Supreme Court’s decision in Paccar Inc and Ors v Road Haulage Association Limited and UK Claims Limited [2023] UKSC 28, handed down on 26 July 2023, has overturned the Divisional Court’s decision, and gone against conventional wisdom in the industry, to hold that Litigation Funding Agreements (“LFAs”) are (or at least can be) Damages-Based Agreements (“DBAs”).
The consequences of this for the funding industry and the funding of disputes are significant. This decision means that very many existing LFAs are now vulnerable to unenforceability challenges on the basis that they do not comply with the statutory regime for DBAs in the Courts and Legal Services Act 1990 section 58AA and the Damages-Based Agreements Regulations 2013. The consequences will be particularly significant in opt-out collective actions in the Competition Appeals Tribunal, because in such actions DBAs are prohibited altogether.
Supreme Court’s decision
The courts below had held that LFAs were not DBAs because litigation funding did not amount to “claims management services”, to which the statutory DBA regime applies. This reflected the general view in the industry with the result that many existing LFAs do not attempt to comply with the statutory DBA regime.
However the Supreme Court has decided that “claims management services” includes litigation funding. Whilst the reasoning is detailed, involving consideration of the context and history of the relevant statutory definition, the core of the reasoning comes to this. The statutory definition of “claims management services” includes “advice or other services in relation to the making of a claim” and “services” include “the provision of financial services or assistance”. The Supreme Court held (para 50) that these words “according to their natural meaning, are apt to cover the LFAs in this case”. Furthermore (para 72) “Parliament used wide language in section 4 deliberately and with the intention that the words of the definition of “claims management services” should be given their natural meaning.”
The Supreme Court rejected the arguments that had prevailed below holding, first, that the existence of a separate statutory regime (albeit never brought into force) for litigation funding specifically (intended to address issues such as champerty) did not point against the claims management regime covering LFAs (paras 70-71). Second, the Court rejected the argument that the term itself in referring to “claims management” meant that it should be construed as including only something recognisable as “claims management”, both because that was inconsistent with the statutory definition and because the term “claims management” had no established meaning (paras 78-79).
Issues for the future
Despite the clear findings made by the Supreme Court, The decision poses more questions than it answers. Further disputes are likely to arise about existing and future LFAs, including the following:
- Whether the funder’s percentage-based return can be severed from the LFA leaving the remainder intact, either through the law of severance or by application of Zuberi v Lexlaw Ltd [2021] EWCA Civ 16 (where the Court of Appeal held that the DBA only constituted the percentage-based payment part of the retainer rather than the retainer as a whole?
- Whether LFAs that entitle the funder to a multiple of their investment upon success comprise DBAs, particularly where the remuneration is capped or staged by reference to the level of damages recovered? In Paccar the LFAs provided for the funders’ remuneration to be calculated by reference to a percentage of damages, so clearly this was “damages-based”. It remains open for argument whether other remuneration structures, which have some less direct connection to the amount of damages, would constitute DBAs.
- Whether there are any regulatory issues that arise given that the Supreme Court has held that funders are providing claims management services? This may be of particular concern for certain types of claim, including those relating to financial products or personal injuries where such services are specifically regulated.
What to do about existing LFAs?
Funders, funded parties and their solicitors will need to consider whether existing LFAs should be amended to be rendered enforceable. Solicitors will need to advise their clients of the consequences of the Supreme Court decision and the best way forward.
If it is in all parties’ interests, then it may well be that variations to LFAs can be agreed. Where this is not possible, then funders and solicitors will need to consider the funder’s ongoing obligations under a potentially unenforceable LFA; whether offending clauses can be severed; and perhaps even whether the funder can terminate the LFA and with what consequences.
These issues will require careful consideration on a case by case basis and will depend on the precise terms of the relevant LFA.
