UK Supreme Court: Litigation Funding Agreements Are Damages-Based Agreements Within the Meaning of Damages Based Regulations 2013

UK Supreme Court: Litigation Funding Agreements Are Damages-Based Agreements Within the Meaning of Damages Based Regulations 2013

The UK Supreme Court has held by a 4:1 majority that Litigation Funding Agreements (LFAs), pursuant to which the funder is entitled to recover a percentage of any damages recovered are Damages-Based Agreements (DBAs) within the meaning of Section 58AA Courts and Legal Services Act 1990 (in short- the 1990 Act) and the Damages Based Regulations 2013 (DBA Regulations 2013).

The bench was led by Justices Lord Reed (President), Lord Sales, Lord Leggatt, Lord Stephens and Lady Rose.

The decision in PACCAR Inc & Ors vs. Competition Appeal Tribunal & Ors overturned the rulings by both the Competition Appeal Tribunal (CAT) and the Divisional Court that the agreements did not constitute DBAs.

The brief background of the case is that in 2016, the European Commission (EC) found that five major European truck manufacturing groups, including Daf Trucks N.V. and Daf Trucks Deutschland GMBH (collectively DAF), infringed competition law.

Following that EC decision, the Road Haulage Association Ltd. and UK Trucks Claim Ltd, applied to the Competition Appeal Tribunal for collective proceedings orders (pursuant to Section 47B of the Competition Act 1998) in order to bring collective claims on behalf of persons who had acquired trucks from DAF and other manufacturers. Both applicants were funded by LFAs.

The LFAs provided that the third-party litigation funders’ only involvement in the collective proceedings would be to provide funding and that they were to be remunerated, in the usual way, by a share of any damages recovered. DAF opposed the orders. It contended that third-party litigation funding constituted ‘claims management services’ as defined under Section 4(2) Compensation Act 2006, by virtue of providing ‘other services in relation to the making of a claim’ in the form of ‘the provision of financial services or assistance’, and therefore the LFAs were actually DBAs within Section 58AA of 1990 Act and were consequently, unenforceable for non-compliance with the DBA Regulations 2013.

The Tribunal found that the LFAs were not DBAs and were therefore enforceable.

Thereafter, the Court of Appeal dismissed DAF’s application for permission to appeal, stating that it had no jurisdiction to hear the case and, sitting as the Divisional Court on judicial review, upheld the Tribunal’s decision confirming that LFAs were not regulated DBAs.

Aggrieved by the same, DAF appealed directly to the Supreme Court under the leap-frog procedure.

The Supreme Court has overturned the lower decisions and agreed with DAF that the LFAs fall within the express definition of ‘claims management services’ and therefore are DBAs and unenforceable.

The Court held that the words ‘claims management services’ in the Section 4(2) of the 2006 Act, when read according to their natural meaning, were capable of covering LFAs and that Parliament had deliberately used those broad words in the 2006 Act because of the vagueness of the notion of ‘claims management services’ at the time.

Lord Sales stated “Where Parliament has taken the trouble to provide a definition, it is the words of the definition which are the primary guide to the meaning of the term defined.”

Lady Rose, in her dissenting judgment, agreed with the Divisional Court and the Tribunal that the provision of financial assistance is only included in the term ‘claims management services’ if it is given by someone who is providing claims management services within the ordinary meaning of that term. However, she did not explicitly state what she thought should be the ordinary meaning.

The consequences of the majority ruling, she said, would deprive the funders, as they can no longer enforce their agreement for the repayment of the millions of pounds they have spent.

The decision has rendered the LFAs in the case unenforceable and the Court acknowledged that it had been informed that most third-party litigation funding agreements currently in place are likely to be unenforceable as the law currently stands.