The dust is settling around the recent Supreme Court decision in R (on the application of PACCAR Inc & Ors) v Competition Appeal Tribunal & Ors [2023] UKSC 28. For those that watched the proceedings, the decision by a majority of four to one was no great surprise. The breadth and effect of the decision was perhaps less predicted, but what does it mean for the litigation funding industry in the short- and longer-term and for the litigation that has come to rely on its possible availability?
The bases of the competing decisions have been well covered. It is probably over-simplistic to see this as a battle between black letter lawyers and those that take a more purposive view of legislation. The majority found in a circuitous route through section 58AA of the Courts and Legal Services Act 1990, the Damages Based Agreement Regulations 2013 and section 4(2) of the Compensation Act 2006 that litigation funders provide ‘case management services’ and thus that a litigation funding agreement based upon a return measured as a percentage of damages is, by statutory definition, a damages-based agreement (DBA). From that: first, any litigation funding agreement based on a percentage return is unenforceable for being an unenforceable DBA; and second, if the funding agreement is in fact a DBA, it makes any such agreement unenforceable if it relates to opt-out collective proceedings (section 47C(8) of the Competition Act 1998).
Lady Rose, who has had long involvement in competition work, and consequently in oversight of relevant funding arrangements, took a more purposive view of the legislation, particularly in relation to the statutory definition of ‘claims management services’ in section 4(2) of the Compensation Act. She concluded that it was not the intention of parliament to provide that litigation funding fell within the ambit of claims management services because funders, other than providing finance, do not provide what may be regarded more generally as claims management services. Funders are indeed specifically prohibited at common law from participating in or directing litigation.
The gut reaction from defendants and some in the litigation funding industry was that this was a game changer that threatened the very being of that industry. Worse, funders would face a sea of litigation themselves in relation to past and completed agreements. Whether it will be a huge swathe of claims remains to be seen but certainly parties have not been slow to resort to court, as we have seen in the very recent post-PACCAR decision in Therium Litigation Funding v Bugsby Property, mentioned below.
One area in particular was foreseen as potentially imploding: the collective process under the Competition Act as amended by the Consumer Rights Act 2015. The president of the Competition Appeal Tribunal (CAT) commented recently: ‘PACCAR is certainly good news for other jurisdictions. It’s bad news for access to justice, and it’s slightly worrying to see a clearly articulated legislative policy derailed. How far it’s been derailed, time will tell. But the derailment has certainly occurred. [Even if you look only] at the amount of tribunal time that’s been spent on this issue.’
It is early days, but are the prophets of doom for litigation funding likely winners or is this no more than a bump in the road for a growing industry?
Litigation funding has had a presence in UK litigation for many years, initially for funding claims in insolvency but it expanded its scope after both the 2008/09 world financial crisis and then in competition claims as a consequence of the changes wrought by the Consumer Rights Act 2015 and the introduction to competition claims of collective proceedings orders. But funding has grown hugely in other areas of dispute resolution, such as international arbitration and high-value commercial claims.
Initially, this was growth primarily seen with UK funders but in the last few years US funders have entered the field to significant effect both as direct investors and as investors in other funds.
For good or bad, legislation bearing on litigation funding, in its broadest terms, has been somewhat piecemeal. This developed with the Woolf reforms of the late 1990s and the Jackson reforms 10 years ago. Funders have not been the subject of regulation, save the self regulation of the Association of Litigation Funders. If anything, the relevant regulator, the Financial Conduct Authority (which regulates claims management companies), has positively steered clear of regulation. In Europe, however, the European Parliament has passed a proposal for regulation of funders following a report authored by German MEP Axel Voss (pictured). The report itself and the proposals are controversial. In Australia, attempts to regulate fees fell at the first hurdle. In Germany, there is pending legislation that may limit the funder’s payment in collective claims to no more than 10% of damages, which some suggest will kill off funding altogether in collective consumer actions.
In competition collective proceedings under the statutory scheme for collective proceedings orders (CPO) the court itself has oversight of funding agreements. First, to ensure that there is sufficient capital to run the case to finalisation; second, to ensure that the claimants take a fair share of the proceeds. It was within such oversight in the trucks cartel proceedings that one of the defendants, PACCAR, challenged the funding agreement leading to the Supreme Court decision.
One aspect of the CPO regime on which the PACCAR decision has had immediate effect is the consequence of the statutory ban on DBAs for opt-out CPO process. This has presented immediate issues in the CAT on which the president of the CAT has commented (above). In Gutmann v Apple Inc. and others, the claimant seeks an opt-out CPO but in a recent hearing asked the court to adjourn consideration while the agreement with the funder is considered in the light of PACCAR. The question for claimants will be how watertight can a fresh agreement be made to avoid further challenge. Since the CAT has oversight of agreements, it too will need convincing that the agreement will stand up to challenge.
One issue will no doubt be the ability of the funders to sever out of agreements the offending clauses that provide for payment by measure of a percentage of the proceeds. Most agreements have a severance clause which provides for the severance of clauses that may be found to be unenforceable. The court generally favours severance (Zuberi v Lexlaw Ltd [2021] EWCA Civ). But the solicitor/client relationship can raise issues of public policy. In Diag Human SE v Volterra Fietta [2023] EWCA Civ 1107, the Court of Appeal confirmed that solicitors entering into an unenforceable discounted CFA could not obtain any payment under the CFA by severance of offending contract provisions. In Therium Litigation Funding v Bugsby Property [2023] EWHC 2627 (Comm), the court accepted, in granting interim relief, that Therium may be able to rely on the contractual severance clause. If the case goes further it will be interesting to see if the courts, having taken away with one hand, give back with the other.
Other than these short-term hurdles, does PACCAR present long-term issues for litigation finance? Probably not. Those hurdles may be overcome by some simple statutory alterations. The Department for Business and Trade issued a statement on 31 August decision, saying: ‘The department is aware of the Supreme Court decision in PACCAR and is looking at all available options to bring clarity to all interested parties.’ The CAT, no doubt, will also be seeking clarity.
But there are other issues that may have more longer-term importance. Litigation funding serves as an alternative investment opportunity, but its worth is determined by the wider investment atmosphere. At a time of high interest rates litigation finance becomes less attractive unless the price of it rises. This may mean fewer cases have the substance to maintain those higher prices; in short the market may tighten. Additionally, statutory regulation and in particular the restriction on returns, as in Germany, will no doubt cause real issues for funders.
The international market for litigation funding is $13bn. We have seen huge growth over the past 10 years and that will continue. One recent report suggests that in 10 years the market will have grown to $50bn. The industry has a momentum. It will face many challenges, some more existential than others. PACCAR presents a domestic hurdle but more likely only in the short term and certainly not on an international basis.
David Greene is a committee member of the London Solicitors Litigation Association, senior partner at Edwin Coe and a past president of the Law Society
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