Supreme Court rules that litigation funding agreements are ‘damages based agreements

 

Supreme Court rules that litigation funding agreements are ‘damages based agreements’

By a 4 to 1 majority, the Supreme Court has upheld an appeal by truck manufacturer DAF challenging the litigation funding agreements (LFAs) in two separate follow-on collective claims against members of the EU trucks cartel.  The judgment renders those arrangements unenforceable until certain conditions are met.

At the heart of this case is the definition of a damages-based agreement (DBA), derived from one legislative context  - the Compensation Act 2006 (the CA 2006) - and its use in a different legislative context (section 58AA of the Courts and Legal Services Act 1990 (CLSA 1990)).

Section 58AA(1) and (2) CLSA 1990 provide that a DBA will be unenforceable unless certain conditions are satisfied. Shortly after the insertion of section 58AA, the Damages Based Regulations 2013 (the "DBA Regulations 2013") came into force. These set out further requirements which must be satisfied if a DBA is to be enforceable. It is accepted that the LFAs in this appeal would not satisfy these conditions.

The relevant part of the definition of DBA in this appeal, pursuant to section 58AA(3), is whether the LFAs involve the provision of “claims management services".

The Court held that claims management services are capable of covering LFAs when “read according to their natural meaning”.

As a result, the claimants’ funding arrangements fall under the scope of the DBA Regulations 2013 since damages-based funders provide “client management services” and would be paid based on how much the tribunal awarded as damages.

The judgment has been seen as a setback to the burgeoning litigation funding industry.  Existing and future collective competition claims within the scope of the judgment will need to structure their funding arrangements to be compliant.

It may be questioned whether LFAs where the funder’s return is not linked to the damages awarded will be immune from the same strictures.  However the court noted that the 2013 Regulations defined “claims management services” as providing advice “or other services in relation to the making of a claim” and gave this a wide construction.                              

Early reactions to the judgment suggest, however, that the judgment – though unwelcome – will not sound a death knell to the growing body of funded collective competition law claims.  Funding agreements will need to be revised to reflect the ruling but certain of the more prominent funders in the industry have reacted to say the judgment will not stem their appetite to fund a claim with merit. 

While the highest court in the land has ruled on the issue, this may not be the end of the matter. But reversing this position would require legislative change.

R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents) [2023] UKSC 28