Whilst many funders are seemingly more relaxed than others and take the view that the decision impacts form over substance, there is no doubt that this judgement is an unwelcome development and adds an element of uncertainty which the industry could well do without.
Director Mohsin Patel and Barrister Imran Benson explore the future of litigation funding in Law360
Following the UK Supreme Court’s shock ruling in PACCAR Inc. v. Competition Appeal Tribunal, Director Mohsin Patel and Barrister Imran Benson of Hailsham Chambers explore the uncertainty this has created within the litigation funding industry, and the legal sector more widely.
Mohsin and Imran’s article was published in Law 360, 8 August 2023.
Has the Supreme Court abolished litigation funding? The PACCAR judgments have caused astonishment in the Temple and surprise in the City, tempered only for those who witnessed the torrid time had by counsel for the funded.
The effect of the majority judgment is that Competition Appeal Tribunal (CAT) opt-out claims funded by Litigation Funding Agreements (LFAs), which claim a percentage recovery of the damages, are impermissible. Notably, the dissenting Lady Rose has actually tried cases where successful claimants were funded; most famously in Daiwa v Singularis, which revived Quincecare claims in the modern era.
The building blocks to the majority’s conclusion were:
- The definition of “claims management services” in s.4 of the Compensation Act 2006 includes LFAs since an LFA is the provision of “financial services or assistance” which is “in relation to the making of a claim“.
- An agreement between a person providing “claims management services” which provides for a “specified financial benefit” which is “determined by reference to the amount of the financial benefit obtained” is a DBA: S.58AA of the CLSA 1990. It must comply with the Damages Based Agreement (DBA) Regulations.
- The DBA Regulations cap the percentage at 50%, require credit for costs receipts and require reasons to be given.
- A DBA is unenforceable if it relates to opt-out collective proceedings: s.47C(8) of the Competition Act 1998.
- DBAs which relate to personal injury claims are also subject to FCA Regulation as a result of Part 3B of the Regulated Activities Order 2001. A large number of mass tort Group Litigation Orders (GLOs) might be caught by this drag net.
The first instance tribunal and the Divisional Court gave these arguments short shrift, and much of the Costs Bar and industry thought they were plainly right to do so. However, the Supreme Court has now found otherwise.
The practical impacts of this decision have vital importance for the litigation funding industry, and legal system more broadly. We set out the key areas impacted below:
The biggest fish in the ocean of funded litigation are large scale opt-out collective claims, which enable a law firm and a representative litigant to claim on behalf of all persons who have been affected by a breach of competition law.
The scale of litigation can be mind-boggling. For instance, in the Mastercard competition claim  the class is some 40 million people (every living UK based adult who ever shopped at a Mastercard accepting retailer) and the amount claimed is around £14billion. Litigating on such a vast scale is naturally rather costly and in addition to lawyers’ time, expensive experts have an enormous role in measuring the loss.
Typically, this work is paid for by litigation funders who recover a share of the damages. The Competition Act, alarmed by U.S.-style profiteering, prohibits DBAs in opt-out claims and was therefore vital for funders that their funding agreements were not held to be DBAs if they sought to have a legally enforceable right to be repaid.
In light of the decision, one would expect that most existing opt-out funded claims no longer have a valid funding arrangement. The House of Lords has previously held that it has the power to order a statute’s declared meaning only has prospective effect. This would be exceptional, but the House of Lords stated in Nat West v Spectrum Plus that this might be appropriate where “the decision would have such gravely unfair and disruptive consequences for past transactions or happenings that this House would be compelled to depart from the normal principles relating to the retrospective and prospective effect of court decisions.” . It is not clear if the Supreme Court was asked to exercise that mercy.
Since the CAT will only permit a collective claim if satisfied that is appropriately funded, funders and lawyers will have to try to rescue the position in opt-out claims by engineering a funding agreement which is not a DBA on the new meaning of the legislation.
If that is not possible then it is likely that the CAT could not properly certify the claim and it would collapse.
General Litigation and Insolvency Claims
As for general commercial litigation, in theory the nature of funding is a private matter between claimant and funder. However, in Meadowside Building Developments Ltd v 12-18 Hill Street Management Company Ltd  EWHC 2651 the High Court held that a funding agreement which was caught by and did not comply with the DBA Regulations was champertous and this potentially rendered the claim itself an abuse of process. Thus, the fact that the impecunious claimant needed to resort to funding to get the claim could be used by a defendant to terminate the main claim.
One therefore anticipates defendants demanding sight of funding agreements in order to police champerty and with the incidental advantage of disrupting the pursuit of the claim and seeing how risky the funder thought it was by seeing what percentage they are demanding. This is despite that fact that such information is often said to be covered by privilege.
More practically, if a funder is only advancing cash on the assumption they will get a percentage back, money won’t be leaving the door until they get a legally watertight arrangement in place. This will mean that funders will want to make sure the agreement is either not a DBA, or complies with existing regulations.
As for insolvency claims, the right of liquidators to assign claims under s.246ZD of the IA 1986 is not affected by this decision and is likely to be even more attractive.
Considering some of the arising from the decision
Is it possible to sever offending clauses from an LFA thus making it compliant? Possibly, however this depends on the nature of the problem. The Courts have long said that they want to make contracts work, and if this means deleting clauses which are illegal or offensive in some way, they will do so.
This arose in the context of a DBA dispute in Lexlaw v Zuberi, but it does depend on the problem and the solution. If the problem is the LFA does not give reasons for the percentage then severance will not help. If, rather, the percentage is offensive or too high, then severance might work, but it is surely better to amend and reinstate the funding agreement.
The bigger issue might be commercial attractiveness – as often the funder only agrees to fund the claim on the basis that the risk is outweighed by a healthy percentage return and if that isn’t available, they may be less attracted to the claim. Where a funder has already committed funds to a case, they should typically seek to agree a sensible alternative pricing structure, but this assumes a willing and agreeable claimant.
Multiples of Outlay?
Many LFAs allow funders to get back the costs outlay plus the greater of a fixed multiple or a percentage of damages; both capped at recoveries (to make it non-recourse). The percentage element is clearly enough to make the LFA a DBA, but can a funder who gets only a multiple of outlay be confident the DBA regulations don’t apply?
Recovering a multiple of the outlay does not naturally seem to be “determined by reference to the amount of the financial benefit obtained” which is how a DBA is defined, yet if the outlay is £250k and the claim only ends up recovering £1m, a liability to pay the funder a multiple of 5 but capped at the damages could fall within this scope. This is due to the fact that the amount paid, the capped £1m, is determined by reference to the amount of the benefit obtained (the £1m damages). That would potentially mean the agreement has to satisfy the DBA regulations, even though it is a multiple based funding agreement.
Funding Law Firms?
Can the problem be avoided by simply providing funding to a firm, which itself acts on a DBA, and who then promises to pay a cut to the funder? This would be closer to providing working capital.
A DBA is a deal between (1) a funder/firm and (2) the recipient of those services whereby (3) the recipient makes a payment if the recipient obtains a financial benefit in relation to those services, which is (4) defined by reference to the financial benefit.
The recipient is normally seen as the client with the cause of action, but if a funder is paying money to the firm, and the firm is on a DBA and so receives a qualifying benefit, it seems the arrangement between the funder and firm might itself be a DBA and have to satisfy these regulations.
In terms of cases that have now resolved, through settlement or judgment, where claimants received litigation funding under an LFA which would now fall within the definition of a DBA, clearly there is a risk that they may seek to unwind those arrangements to the detriment of the funder.
Indeed, some office holders may well consider they are duty-bound to attempt to do so. No doubt funders would have strong arguments to make as why a claimant should be stopped from making such a claim, not least that without their funding there would have not been any recovery from which to make payment. The position, however, is certain to be litigated.
In non-opt-out proceedings, parties might just decide to redraft the LFA so it does comply with the DBA regulations. The regulations are painful, but plenty of lawyers work on a DBA basis and it is hard to see why funders cannot, if push came to shove, do the same. Lady Rose thought funders could not realistically comply because of drafting problems, yet that rueful observation might be thought by entrepreneurial businesspeople to be a little defeatist.
There is also a rumour that the problem has landed on the desk of the Lord Chancellor, who was initially minded to implement the 2019 Mulheron/Bacon modernising DBA regulations, however that does not fix matters since it too has a number of definitions of a DBA regulation which it is unlikely any existing arrangement will have satisfied, though new non-CAT claims would find it a more congenial regulatory environment.
Mass Tort/Financial Services Claims?
When fears of a “compensation culture” were dominating the headlines (which seems rather quaint in light of the news in recent years), the FCA were tasked with the job of regulating claims management companies dealing in personal injury claims and financial services claims, of which there are plenty of funded group actions.
Now that LFA’s are claims management services, what does this mean for those claims? Since most funders do not source or refer clients, or investigate or represent them, they will not be engaging in activities specified by 3B of the Regulated Activities Order 2001 and so it is unlikely that funders will be in breach of the FCA regulations, however they will still need to comply with the DBA regulations.
The level of consternation expressed since the PACCAR decision suggest that the repercussions of this judgment are widespread and have significant consequences on how funders approach funding for cases going forward. Whilst many funders are seemingly more relaxed than others and take the view that the decision impacts form over substance, there is no doubt that this judgement is an unwelcome development and adds an element of uncertainty which the industry could well do without. Overall, this serves as a backwards step for funders, lawyers and claimants in the UK.
 R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents), judgment handed down on 26 July 2023
 Singularis Holdings Ltd (In Official Liquidation) (A Company Incorporated in the Cayman Islands) (Respondent) v Daiwa Capital Markets Europe Ltd (Appellant), judgment handed down on 30 October 2019
 Walter Hugh Merricks CBE v Mastercard Incorporated and Others