Litigation funders will have to redraft the terms of their agreements following a widely awaited ruling by the Supreme Court this morning. In PACCAR Inc & Ors v Competition Appeal Tribunal & Ors, four out of five justices ruled that such agreements fall within the statutory definition of damages-based agreements (DBAs). As they had been entered in to without satisfying conditions for DBAs, they were therefore unenforceable. 

The ruling concerned collective proceedings brought against truck manufacturers following a European Commission decision that five companies had operated a cartel. The proceedings were supported by litigation funding agreements under which the funder’s remuneration is calculated by reference to a share of the damages ultimately recovered.

Truck manufacturer DAF contended that such agreements constitute DBAs. Its argument was rejected by the Competition Appeal Tribunal and the Divisional Court on judicial review; its appeal was leapfrogged to the Supreme Court. 

In lead judgment today, Lord Sales ruled that litigation funding falls within the express definition of ‘claims management services’ - which includes ‘the provision of financial services or assistance’ - in the Compensation Act 2006. Lord Reed, Lord Leggatt and Lord Stephens agreed. 

In a dissenting judgment, Lady Rose agreed with the Divisional Court and the Competition Appeal Tribunal that the provision of financial assistance is included in the term 'claims management services' only if it is given by someone who is providing claims management services within the ordinary meaning of that term. 

Experts said the ruling would have significant implications for litigation funders. 'The decision will send shockwaves through the funding industry and may lead to number of smaller operators going out of business,' said Glenn Newberry, head of costs and litigation funding at international firm Eversheds Sutherland. 'The decision is potentially a blow for the government as the collective funding of consumer claims has helped bridge the gap caused by the erosion of state funded legal assistance for civil claims. Funders themselves may well start to actively lobby to seek legislation which effectively reverses this decision.'

Alice Darling, senior associate at magic circle firm Clifford Chance, said the decision 'has rendered many funding agreements currently in place unenforceable'.

Funders however said the industry would rapidly adapt. In a joint statement, the International Legal Finance Association and the Association of Litigation Funders of England and Wales said: 'We are disappointed by this decision as it runs contrary to the accepted understanding that financing agreements are not damages based agreements.

'The decision is not generally expected to impact the economics of legal finance and will not deter our members’ willingness to finance meritorious claims. It will only affect how legal finance agreements are structured so that they comply with the regulations and individual financiers will have been considering what if any changes are needed to their own legal finance agreements as a consequence of this decision.'

Steven Friel, chief executive of litigation funder Woodsford, said: ‘Our business, and UK litigation finding generally, are now sufficiently mature that this decision, while frustrating, will not stop the access to justice momentum that we have created. We have prepared for this decision, and we will now work with our lawyers, class representatives and other claimants to move beyond this bump in the road.’ 

 

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