Supreme Court Bombshell as Litigation Funding Agreements Ruled to be Unenforceable.

On 26 July 2023, the Supreme Court handed down its decision in the case of Paccar Inc and Ors v Road Haulage Association and UK Claims Limited [2023] UKSC 28. The Supreme Court determined that Litigation Funding Agreement ("LFAs") were Damages-Based Agreements ("DBAs") rendering most LFAs unenforceable.

LFA = an agreement whereby a third-party funds litigation in return for a percentage of any damages recovered.

DBA = a 'no win, no fee' arrangement between a representative and a client which provides that the client will make a payment to the representative as a percentage of the compensation received by the client. DBAs are tightly regulated and must comply with strict statutory provisions to be enforceable (Courts and Legal Services Act 1990 ("CLSA90") and the Damages Based Regulations ("BDA13")).

The litigation funding industry had considered LFAs to be outside the scope of CLSA90 and BDA13 and so most do not presently comply with the relevant provisions to be enforceable as DBAs.

The Decision

The case concerned applications brought by 2 claimants for an order from the Competition Appeal Tribunal to enable them to bring collective proceedings against 5 truck companies for breach of European competition law. For the applicants to obtain a collective proceedings order, they had to demonstrate that adequate funding arrangements were in place to meet their own costs and any adverse costs awarded against them. The applicants relied on LFAs and the truck manufacturers challenged the applications on the grounds that the LFAs were unenforceable as they did not comply with the statutory requirements for DBAs.

The dispute hinged on whether the LFAs involved the provision of 'claims management services' as defined under section 58AA(7) of CLSA90 which would bring LFAs within the scope of the DBA provisions. The Competition Appeal Tribunal held that LFAs did not involve 'claims management services' and so were enforceable.

The Truck manufacturers appealed directly to the Supreme Court who granted the appeal in a 4 to 1 decision. The Supreme Court disagreed with the decision of the Competition Appeal Tribunal on the basis that the statutory definition of 'claims management services' was wide enough to include LFAs rendering those agreements as DBAs.

Where now?

The ramifications for funders engaged in LFAs is stark given that very few are likely to be compliant as DBAs and, therefore, unenforceable. Future LFAs will have to comply with the DBA statutory requirements and existing arrangements may require amendment.

The Supreme Court decision is particularly frustrating given the government's decision not to implement the draft Damages Based Agreements Regulations 2019 which expressly provided that an LFA is not a DBA. It is anticipated that the government will be lobbied to introduce primary legislation to fix the problems caused by this decision and ensure access to justice.