The Supreme Court finds that litigation funding agreements (“LFAs”) are damages-based agreements (“DBAs”) within the meaning of the legislation regulating DBAs
PACCAR: response or reversal by the UK government?
Développement en droit 28 novembre 2023 28 novembre 2023
Royaume-Uni et Europe
The Supreme Court’s decision in PACCAR has arguably rendered the use of litigation funding agreements that are based on a percentage of the damages recovered, unlawful in opt-out proceedings in the Competition Appeal Tribunal. Now, the government seeks to address the impact of PACCAR on such opt-out proceedings by legislating an amendment to the Digital Markets, Competition and Consumers Bill. However, whether the proposed amendment is a reversal of, or a response to PACCAR’s impact on the litigation funding market in the UK, remains to be seen.
The litigation funding sector in the UK was shaken up by the decision of the Supreme Court this July in R (on the application of PACCAR Inc) v Competition Appeal Tribunal  UKSC 28. By a majority of 4:1, the Court held that litigation funding agreements (“LFAs”) in which the funder’s recovery is specified as a percentage of the damages secured in the underlying funded claim are unenforceable in opt-out collective proceedings. It should be noted though that there is much debate as to the full scope of the PACCAR decision.
At one extreme, the outcome could mean that funded parties could simply refuse to (re)pay their funders and keep all the proceeds of the claim while also retaining all the benefits of the funding throughout its lifetime: something of a ‘nuclear’ approach. A more moderate position might see funders and parties seeking to amend the terms of their LFAs to avoid unenforceability by, for example, expressing the funder’s recovery as a multiple of the funding provided. Neither solution is without further complication. In the former, funders might pursue claims based on restitutionary principles and in the latter, it may be far from easy in practice to reach agreement on new terms given the very black and white outcome in PACCAR. An additional complication is that those facing claims against them funded using now-unenforceable LFAs may see the consequences of PACCAR as an opportunity to press for resolution on much more favourable terms than would have been possible had the LFA been enforceable.
The basis of the decision and its potential effects on LFAs
Claims relating to infringements of competition law are the only type of consumer collective proceedings permitted on an opt-out basis in England & Wales, meaning that the effect of the decision could be to bring any such claims in which the LFA is based on the funder taking a percentage of damages to a complete halt. This type of case is thought to represent a significant proportion of collective proceedings in this jurisdiction, with the Court noting in PACCAR that “this kind of litigation funding agreement underpins many if not all of the proceedings brought under [competition law]”.
Although other types of claims (opt-in claims in competition law, opt-in claims in other areas of law, and claims subject to group litigation orders) and other types of LFAs (those seeking a multiple of the funding rather than a percentage of damages) may or may not be caught by the rationale of PACCAR, the decision has created high levels of uncertainty.
The technical basis of the decision of the majority in PACCAR can be reduced to three steps. The first is that the LFA amounts to providing "financial services or assistance" to the funded party and therefore comes within "claims management services" as defined in section 419A of the Financial Services and Markets Act 2000 (“FSMA”). The second is that provision of “claims management services” by an LFA under which the funder seeks a percentage of damages brings such an LFA within the definition of a damages-based agreement (“DBA”) in the Courts and Legal Services Act 1990 (“CLSA”). Section 58AA of the CLSA provides, at paragraph (3) that:
- a damages-based agreement is an agreement between a person providing advocacy services, litigation services or claims management services and the recipient of those services which provides that-
- (i) the recipient is to make a payment to the person providing the services if the recipient obtains a specified financial benefit in connection with the matter in relation to which the services are provided, and
- (ii) the amount of that payment is to be determined by reference to the amount of the financial benefit obtained;
The final, and critical, step is that section 47C of the Competition Act 1998 makes such an LFA unenforceable in opt-out collective claims in competition law, providing at paragraph (8) that:
A damages-based agreement is unenforceable if it relates to opt-out collective proceedings.
A new legislative solution?
The government’s initial response to the decision was a somewhat cryptic statement from the Department of Business and Trade at the end of July: “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.” At the same time, the Digital Markets, Competition and Consumers (“DMCC”) Bill was being taken forward in the Commons and appeared, potentially, to offer a vehicle for bringing forward any possible legislative amendment in light of the decision.
The DMCC Bill was carried into the new session of Parliament that opened with the King’s Speech on 7 November 2023. As it completed its passage in the Commons, the government inserted a new clause said to be “in response to” the PACCAR decision. The effect of the new provision, which currently forms clause 126 of the Bill, looks much closer to a reversal, albeit in a limited area.
126 Use of damages-based agreements in opt-out collective proceedings
- (1) In section 47C(9) of CA 1998 (collective proceedings: damages and costs), for paragraph (c)
- "(c) "damages-based agreement" has the same meaning as in section 58AA of the Courts of Legal Services Act 1990 but as if in subsection (3)(a) of that section, in the words before sub-paragraph (i), for "litigation services or claims management services" there were substituted "or litigation services"
- (2) The amendment made by subsection (1) is treated as always having had effect.
Several issues arise out of the insertion of the new clause and the way it is currently drafted.
- First, the provision has not yet been the subject of any debate whatsoever. It was simply inserted into the Bill at the end of a debate in which only the sponsoring Minister spoke, simply to outline the briefest of explanations of what it is intended to achieve. The clause will come under closer scrutiny when the DMCC Bill reaches the Lords on 5th December.
- Second, is to note the narrow scope. Its heading refers to opt-out collective proceedings and, as noted above, competition law is the only area of English law in which the opt-out mechanism is permitted. Therefore, the clause would restore the enforceability of LFAs based on percentage of damages in this area only. There could still be ongoing uncertainty regarding the enforceability of this type of LFA in other areas of law. For this reason, it is possible that the government could come under pressure from Peers to extend the scope of the clause.
- Third is its mechanism. Its subsection (1) changes the interpretation of the section 58AA of the CLSA by what amounts to removal of the word “claims management services” from the definition of DBAs. This would appear to mean that the first two parts of the reasoning (above) of the majority in PACCAR are no longer met, meaning the LFA would not be unenforceable. A subsidiary question is to ask what is the rationale for the clause changing the interpretation of s58AA rather than simply amend it by removing the words “claims management services”?
- Fourth is to note that subsection (2) means that the change at (1) will have retrospective effect, so that when it is enacted it would remedy the unenforceability of LFAs based on percentages of damages entered into before the DMCC Act comes into force.
- Fifth and finally is the minor matter of the incorrect use of “of” instead of “and” in the reference to the title of the CLSA.
It is very clear from the government amendment to the DMCC Bill that it intends not only to “respond” to PACCAR but to reverse it, albeit only in relation to LFAs in opt-out competition law claims.
In speaking to the amendment in the Commons on 20 November 2023, business Minister Kevin Hollinrake stated that the amendment “effectively restores the previously held understanding of the status of litigation funding agreements under the [Competition] 1998 Act”.
It might be noted in passing that in her dissenting speech in PACCAR, Lady Rose might be said to have set out that “previously held understanding”: “Everything in the scheme of Part II of CLSA 1990 as amended over the years, in the pre-legislative materials, the 2010 and 2013 DBA Regulations and in the case law which Parliament is assumed to know shows that Parliament did not intend by enacting section 58AA suddenly to render unenforceable damages-based litigation funding agreements. Parliament must have read [section 419A of FSMA] as not covering the litigation funding agreements at issue in these proceedings.” [The bold emphasis has been added.]
What is much less clear is whether any further amendments seeking to extend the reversal of PACCAR to other types of LFAs and/or to other, wider areas of law will be tabled and will make their way into the legislation? It might also be added here that the DMCC Bill is a substantial one and will require time for careful line-by-line scrutiny in the Lords. However, the last line of a statement by Justice Minister Lord Bellamy on 23 November 2023 indicates that the wider issues arising from PACCAR are actively being considered.
“The Government is bringing forward an amendment to the Digital Markets, Competition and Consumer (DMCC) Bill to mitigate the impact of the judgment on litigation funding agreements for opt-out collective proceedings in the Competition Appeals Tribunal (CAT). The Bill is currently being considered by Parliament.
The Government is assessing the impact of the judgment and considering options for non-CAT proceedings.”
The government has clearly been lobbied to seek a reversal of PACCAR at least as regards to opt-out proceedings in the CAT. It will be interesting to see if attempts are made to clarify the position in relation to other LFAs that may or may not be caught by PACCAR. It is believed that there are attempts afoot to try and do this but, for the time being, we’re all going to have to watch and wait and see what happens when the DMCC Bill reaches the House of Lords.