Litigation funders sweat on Supreme Court

In a few weeks, the entire litigation funding industry could be turned on its head. The industry’s fate rests in the hands of the Supreme Court. Last month, it heard a case that could potentially render most – if not all – litigation funding agreements unenforceable.

R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal and others concerns two collective actions being brought on behalf of truckers against a truck manufacturing group, DAF.

In 2016, the European Commission found that DAF and four other manufacturing groups had infringed competition law. On the back of that EC decision, the Road Haulage Association (RHA) Ltd and another group, UK Trucks Claim Ltd (UKTC), applied to the Competition Appeal Tribunal (CAT) to be certified to bring collective action claims under the new regime that was established by the Consumer Rights Act 2015.

Both claims are supported by litigation funding, which is accepted as a necessary aspect of the new regime. And as in most funding agreements, the maximum amount that the funder can receive is calculated with reference to a share of the damages ultimately recovered.

But in the Supreme Court last month, DAF argued that these litigation funding agreements (LFAs) are invalid. It contends that they should be classed as ‘damages-based agreements’ (DBAs), falling within the DBA Regulations 2013. If so, then the LFAs will not be enforceable – because, as all the parties accept in the PACCAR case, the agreements do not comply with those regulations. The same will be true of virtually all LFAs out there.

So if the Supreme Court rules that a litigation funding agreement is a DBA, then in a single stroke, the vast majority of these agreements will be thrown into doubt. As Steven Meyerhoff, lawyer at Backhouse Jones who is acting for the RHA, told me, an adverse decision would have ‘seismic consequences to the entire litigation funding industry’. Indeed, when PACCAR was considered on appeal in 2021, Lord Justice Henderson spelt out that if LFAs ‘whose remuneration is fixed as a share of the damages recovered’ do fall within the DBA legislation, then ‘the likely consequence would be that most, if not all, litigation funding agreements currently in existence would be unenforceable’.

But after diving deep into the wording used in the relevant statutory definition of a DBA, Henderson LJ and his judicial colleagues sitting on the appeal unanimously upheld the lower court’s view, that an LFA should not be classed as a DBA. However, the judge did give permission for DAF to apply for judicial review, on the basis that the issue is ‘arguable’.

So which way will the Supreme Court go? You might think that there is little chance that the Supreme Court justices will do anything so rash that it could put the entire collective action regime in jeopardy. And after all, DAF’s arguments have already failed twice, at first instance and on appeal.

But this is the Supreme Court we are talking about. It can do what it likes, without being shackled by what has gone on down below. Once you get to the Supreme Court, you never quite know what will happen; and there were no clues as to which way the court was leaning to be gleaned from the hearing itself, in which the judges put difficult questions to all three leading counsel.

What happens if disaster strikes and litigation funding agreements are held to be invalid DBAs?

This is not the first major collective action question to come before the senior court. In 2020, it dealt with a key issue in the mammoth £10bn-plus Merricks v Mastercard claim, ruling on whether the CAT was right to refuse to certify that claim, and what criteria it should have applied. Overall, that decision was positive for the claimants; the Supreme Court dismissed Mastercard’s appeal and sent the claim back down to the CAT with guidance on the test to be applied – and indeed the CAT has now certified that claim. But two Supreme Court judges disagreed with the majority and found that on one particular point, the CAT had been correct to find the claims unsuitable for the collective actions regime. Notably, the same two judges who would not have allowed the Mastercard collective action to proceed – Lord Sales and Lord Leggatt – both sat in last month’s hearing in PACCAR (together with Lord Reed, Lord Stephens and Lady Rose).

Viewed in the round, it seems more likely than not that the claimants’ arguments will win out in the Supreme Court, as they did in the lower courts. But if – from the claimant perspective – disaster strikes, and litigation funding agreements are held to be invalid DBAs, what will actually happen? Current agreements could perhaps be urgently renegotiated to comply with the DBA Regulations. But in the collective action context, that will only be possible for ‘opt-in’ actions (such as RHA’s); not for ‘opt out’ collective proceedings (such as UKTC’s). That is because of the express wording of section 47C(8) of the Competition Act 1998, which says that ’A damages-based agreement is unenforceable if it relates to opt-out collective proceedings’.

All this also leaves open the broader question of what happens in relation to past LFAs, if they now turn out to have been invalid.

So the government could find itself needing to step in very quickly with primary legislation to amend the relevant definition of DBAs – or risk a serious blow to access to justice and the viability of class actions. Let us hope it does not come to that.

Rachel Rothwell is editor of Gazette sister magazine Litigation Funding, the essential guide to finance and costs.

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This article was amended on 15.3.23 to clarify the relevant legislation that renders opt-out DBAs unenforceable in collective proceedings (section 47C(8) CA 1998).