Litigation funding in the spotlight as UKSC rules agreements in the Trucks collective actions are unenforceable

We analyse the potential implications arising from the UKSC judgment in R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents)

Background

On 26 July 2023, the Supreme Court handed down a judgment allowing an appeal by a defendant, Paccar Inc. (Paccar), finding that funding arrangements entered into by two proposed class representatives in competition collective actions against the Trucks cartelists are void and unenforceable.

The appeal arose in the context of applications by the Road Haulage Association Ltd (RHA) and UK Trucks Claim Ltd (UKTC) to be certified as "class representatives" to bring competition collective actions seeking compensation from truck manufacturers for alleged overcharges paid for trucks as a result of the manufacturers' breaches of competition law. The RHA proposed to bring an "opt-in" claim on behalf of its members that chose to opt into the action; whereas UKTC sought to bring an "opt-out" claim or, alternatively, an "opt-in" claim.

In collective actions proceedings such as these, the proposed class representative must be able to demonstrate to the Competition Appeal Tribunal (CAT) that, among other things, it has adequate funding arrangements in place to pursue the claim. As is typical in these claims, both the RHA and UKTC had litigation funding agreements (LFAs) with third-party litigation funders to meet that requirement.

Paccar argued that the LFAs fell within the definition of "damages-based agreements" (DBAs) as defined in s58AA Courts and Legal Services Act 1990 (the 1990 Act). In order to be enforceable, the LFAs in these cases would therefore need to comply with the requirements of the Damages-Based Agreement Regulations 2013 (DBA Regulations).

It was common ground that: (a) the LFAs did not comply with the DBA Regulations, and (b) in the context of UKTC's proposed opt-out claim, s 47C(8) of the Competition Act 1998 prohibits DBAs being used to pursue opt-out collective actions before the CAT.

If Paccar's submissions were accepted, therefore, the funding arrangements that the RHA and UKTC had put in place would be unenforceable.

At first instance, the CAT held that the LFAs did not involve the provision of "claims management services", were not required to comply with the DBA Regulations and were therefore enforceable. On appeal, the Divisional Court agreed. Paccar then appealed to the Supreme Court.

Summary of UKSC judgment

The appeal therefore concerned a question of statutory interpretation: whether the LFAs involve the provision of "claims management services" as defined in the Compensation Act 2006 (the 2006 Act) such that the LFAs amount to DBAs.

The Supreme Court allowed the appeal by a 4:1 majority, holding that the definition of "claims management services" under the 2006 Act does not change, or differ from, the meaning of the same phrase when used in s 58AA of the 1990 Act. The majority found that the words "claims management services", when read according to their natural meaning, cover the LFAs. The "claims management services" defined in the 2006 Act includes "advice or other services in relation to the making of a claim". The definition is wide and does not require a third party to take on an active role in the management of a case. In addition, the judgment explains that the provision of "financial services or assistance" described in the 2006 Act must be understood to have its ordinary meaning in the context of "claims management services" and be interpreted as providing help to someone to bring a claim.

The majority did not consider there was any ambiguity under statutory definitions. The RHA and UKTC's third party funders, by providing the prospective class representatives with funding to bring the collective actions, were providing "claims management services". It followed that the LFAs in the RHA and UKTC proceedings are therefore DBAs and – since they did not comply with the DBA Regulations – were unenforceable.

Impact and next steps 

The Supreme Court's decision has potentially significant implications. Key takeaways from the judgment include:

1. Why is the decision important for litigation funders?

The Supreme Court has decided that LFAs containing an award-based return fall within the definition of a DBA. Therefore, all LFAs with an award-based return element – regardless of whether they are funding competition class actions or other claims – will need to be revisited to ensure they comply with the DBA Regulations or provide for an alternative return mechanism.

Accordingly, the judgment has significant implications for the broader litigation funding industry and claimants who rely on third party funding to being their claims. It changes the status quo.

2. Who else is impacted by the judgment?

The decision is also likely to be significant in terms of the development of the opt-out regime in the CAT.

For competition law collective actions, section 47C(8) of the Competition Act 1998 prohibits the use of DBAs to fund opt-out collective actions. The vast majority of collective actions in the CAT have been brought (and funded) on the basis that they are opt-out claims. LFAs, insofar as they relate to these types of claims, will therefore need to be carefully reviewed and potentially replaced with an LFA that provides for an investment-based (rather than award-based) return to the funder.

We had already seen some proposed class representatives stating, in a case management context, that there was sense in waiting for this decision to understand its implications and the impact on funding arrangements. Now that we have the judgment, there are likely to be delays in existing collective actions progressing through the CAT while funders consider their options, and class representatives seek to replace potentially unenforceable funding arrangements.

The decision may also result in a general pause in the commencement of new or threatened claims while the implications of the decision are worked through by the litigation funding industry.

The judgment – in opening up questions of enforceability of all funding agreements which underpin competition collective actions – also prompts defendants to question whether class representatives still meet the financial means requirements. This is because, to be approved to bring a competition collective action, class representatives must be able to demonstrate that they have the financial means to pursue the claim, including the means to pay the defendants' costs if necessary.

3. How will the Court's decision impact collective actions before the CAT?

• Certified claims

The CAT has an ongoing obligation to consider whether the claim should be certified, and funding arrangements are a key element of the certification process.

Existing claims will not be immune from the effects of the judgment, and LFAs in existing cases that are DBAs (that do not comply with the DBA Regulations), or have a robust severability clause that allows the agreement to be enforceable on the basis of an investment-based return, may mean the class representative is vulnerable to having their collective proceedings order reconsidered.

Funders and claimants will need to move quickly to replace their funding arrangements and ensure they are in a form acceptable to the CAT, to avoid the risk that the action will be dismissed, potentially with an adverse costs order.

• Opt in collective actions

DBAs can be used to fund opt-in collective actions, and funders may wish to amend their LFAs to either comply with the DBA Regulations (if maintaining any return based on damages) or provide for an investment-based return rather than a return based on any award of damages.

• Opt-out collective actions

As noted above, DBAs cannot be used to fund opt-out claims. Funders will need to ensure that opt-out claims are funded on an alternative basis such as an investment-based return rather than an award-based return. For existing cases, with potentially unenforceable LFAs, there is an issue of whether or not the funding arrangements can be amended and how that should be case managed, particularly in scenarios where a collective proceedings order has been granted.

4. What happens to LFAs now that they fall within the definition of a DBA?

LFAs which provide for an award-based return will now need to comply with the DBA Regulations. However, LFAs which determine a funder's return solely as a multiple of their costs outlay (i.e. provide for an investment-based return) are not likely to be affected.

If LFAs do not comply with the DBA Regulations, there are immediate and potentially significant implications for funders of existing and concluded claims:

• Existing Claims: LFAs which do not comply with the DBA Regulations are unenforceable. Where an LFA provides for an award-based return or investment-based return, and the LFA includes a severability clause, the severance clause may save the LFA such that the return based on the proportion of damages is removed, but the return based on investment may still be valid.
• Concluded Claims: claimants may seek to bring claims against funders for a return of monies paid out under an LFA on the basis of a "mistake of law". Similarly, it may be open to funders to seek to recoup monies already paid on the same basis. However, these sorts of claims are rarely brought and can be difficult to establish.
• Opt-out competition law collective actions: DBAs are prohibited for opt-out claims, so all such existing LFAs will be unenforceable. See also (3) above.
• Opt-in competition law collective actions: DBAs are not prohibited for opt-in claims, but existing LFAs which do not comply with the DBA Regulations will be unenforceable.

5. What should I do if I have an LFA with an award-based return?

• Audit all your LFAs to determine exposure

All LFAs should be reviewed to determine whether they fall within the definition of a DBA. It is important to note that not all LFAs will be unenforceable. As noted above, an LFA which contains a severability clause and provides for the higher of an award-based return or investment-based return may not be unenforceable if the severability clause would allow for the LFA to continue based on a return on investment only. This may, however, change the risk profile of an agreement and certain claims may no longer be financially viable.

• Consider whether to renegotiate your LFAs

Funders may wish to renegotiate their existing LFAs and either amend them to comply with the DBA Regulations or amend the return to be calculated by reference to the value of the investment. This will ensure that the LFA falls outside of the definition of a DBA. Any amendments will need to be considered carefully in order to avoid the more general rules against champerty and maintenance.

6. If renegotiations are unsuccessful, could I get my investment back?

A funder may be able to claim for costs already expended under an LFA, on the basis that costs were paid out under a "mistake of law". Mistake of law cases are rare, and to succeed they have a high threshold to meet.

Even if a funder was able to prove there was a mistake of law, any claim may well be limited to costs paid out under the unenforceable LFA and would be unlikely to include any return on investment.

7. Can the Court's decision be overturned?

There is no ability to further appeal the decision as the Supreme Court is the apex court in the UK.

The only way to change the practical impact of the judgment would be for Parliament to legislate, changing the statutory regime to at least clarify that LFAs are not DBAs or permit a reward-based return in the context of opt-out proceedings.

Authors: Anna Morfey, Partner; Tim West, Partner; Angus Rance, Senior Associate; Hayden Dunnett, Associate