The Supreme Court has handed down its eagerly-awaited judgment in the case of PACCAR Inc and others v Competition Appeal Tribunal and others [2023] UKSC 28, and it is likely to cause a major rethink by litigation funders as to the basis on which they offer their services going forward.

Background

The underlying dispute related to compensation being claimed by customers who had bought certain trucks during the period 1997-2011, in relation to which the European Commission found the sellers had been involved in anti-competitive collusion. However, for the purposes of the Supreme Court judgment, which was to determine a preliminary issue only, the key question related to the funding of such claims.

Specifically, the debate centred on whether the litigation funding agreements that provided the funding for the claimants to bring their claims (that made over GBP50 million available for this purpose) constituted “damage-based agreements” (DBAs). The answer to this question depended on whether litigation funding itself constituted “claims management services” for the purposes of the Compensation Act 2006. The appellants argued that in relation to the relevant funding agreements, the funders were providing such services. The respondents disagreed and argued that as the funders had no involvement in the management of the underlying claims, they were not providing claims management services as a result.

If the funding agreements did constitute DBAs, as was submitted to the Supreme Court and recorded in its judgment (at paragraph 13), for any funding agreements where the funder played no active part in the litigation, but was remunerated by a receiving a share of any compensation received, “the likely consequence in practice would be that most [such] agreements would…be unenforceable”.

The Supreme Court was told during the hearing that litigation funders incur costs of over GBP500 million a year in the UK. Accordingly, suffice to say, that the stakes were very high: if the funding agreements were found to be unenforceable, then the collective proceedings orders being sought on behalf of claimants (both in these claims and others) could not be made, as a pre-requisite to such an order is that appropriate (i.e. enforceable) provision is made for any costs order made in favour of the defendants in the prospective proceedings. If the underlying funding agreement was unenforceable, this requirement would not be satisfied (leaving aside the equally important fact that the prospective claimants would have no enforceable agreement to require funding either) and therefore such claims would never get off the ground.

Decisions of the lower courts

The Divisional Court of the Queen’s Bench Division (as was) upheld the earlier decision of the Competition Appeals Tribunal that the funders were not providing “claims management services” and, accordingly, the underlying agreements did not constitute DBAs (and were therefore enforceable, or at least not unenforceable on that ground).

The Supreme Court decision

By a 4:1 majority, the Supreme Court overturned the previous decisions and concluded, following detailed consideration of the correct approach to statutory determination, that “claims management services” was a phrase of sufficient breadth so as to encompass litigation funding, and it did not produce an absurdity to interpret it in such a way.

Accordingly, if the funders were providing claims management services, the underlying funding agreements did constitute DBAs. That being the case, and given it was common ground that the funding agreements did not satisfy the strict requirements of the Damages-Based Agreements Regulations 2013 (because the funders did not consider their funding agreements to constitute DBAs), the funding agreements were therefore rendered unenforceable.

Consequences of the decision

The full impact of the Supreme Court’s decision remains to be seen. Many funders were already protecting their position against such a judgment by avoiding providing for their return by reference to the damages recovered. For those which were not, it is likely that steps will swiftly be taken to  ensure their existing funding agreements are amended so as to not constitute DBAs (for example, to amend their returns from a percentage of recoveries to a multiple of the amount invested instead). Alternatively, now that such agreements are considered to be DBAs, it may be that funders choose to comply with the DBA Regulations instead.

Where agreements that have effectively been rendered DBAs following the decision are in place, funders may seek to use the decision as justification for withholding funds pending a new (non-DBA and therefore prima facie enforceable) agreement being put in place. Funded claimants appear likely to be at an immediate disadvantage as a result, given they are now potentially exposed to adverse costs that prior to the Supreme Court’s decision, they would have assumed they had an enforceable agreement in place so as to ensure that the funder picked up the tab. Defendants to funded claims are likely to be emboldened by the decision and seek to use it to their tactical advantage. It looks likely to be a fascinating battleground for the foreseeable future whilst the various permutations are considered.