In July 2023, the Supreme Court handed down what has come to be known as the 'PACCAR judgment'. This meant that certain Litigation Funding Agreements (LFAs) were deemed to constitute Damages Based Agreements (DBAs).
Turmoil seeped into many legal and legal funding spheres but, as the dust has settled, we are now seeing how industry practices have and are changing and how the UK Government and the Court of Appeal are responding. We consider the impact and fallout of the PACCAR judgment below.
Background
The story begins in 2016 when the European Commission (the Commission) decided that several truck manufacturers had breached European antitrust rules by partaking in a cartel based on inflating prices and passing on costs. Interestingly, the Commission fined the manufacturers a record amount of €2.93 billion.
This Commission decision spurred two UK bodies to seek damages from the truck manufacturers based on loss suffered arising out of the existence of the cartel. In 2018, UK Trucks Claim Ltd (UKTC) and Road Haulage Association (RHA) applied to the UK Competition Appeal Tribunal (the Tribunal) to commence follow-on damages collective proceedings. ‘Follow-on’ indicates that the regulator, in this instance the Commission, had already issued a binding decision of unlawful behaviour which could be piggybacked. ‘Collective’ indicates that this was a class action where a class representative, in this case UKTC and RHA, claimed on behalf of a class of claimants, in this instance a broad class was proposed by UKTC and RHA of “…persons who, between 17 January 1997 and 18 January 2011 acquired one or more new medium or heavy trucks registered in the United Kingdom”. The application to the Tribunal to commence these proceedings covered both opt-out and opt-in proceedings, meaning that in some cases members of the class would need to actively opt out if they wished to be excluded but in other cases they would need to actively opt in if they wished to be included.
To get off the starting block with these proceedings, UKTC and RHA were obliged to obtain a Collective Proceedings Order (CPO) from the Tribunal. One of the requirements of a CPO is that the applicants can show that they have adequate funding arrangements in place to meet their own costs relating to the proposed proceedings as well as any adverse costs order made against them. UKTC and RHA chose to do this via LFAs based on the funder receiving a percentage of any damages awarded (the Specific Agreements).
In a bid to prevent UKTC and RHA from obtaining a CPO, the respondents (the truck manufacturers) argued that the Specific Agreements were in fact DBAs. On this basis, a CPO could not be granted for the opt-out proceedings as DBAs cannot be used in opt-out proceedings pursuant to section 47C(8) of the Competition Act 1998, and a CPO could only be granted for the opt-in proceedings if the DBAs satisfied all statutory formalities relating to DBAs which the Specific Agreements did not.
UKTC and RHA acknowledged that the Specific Agreements did not satisfy the statutory formalities relating to DBAs, but they asserted that this was inherently irrelevant as the Specific Agreements were LFAs not DBAs.
This is where the key question arose.
Do LFAs, pursuant to which the funder is entitled to recover a percentage of any damages awarded, constitute DBAs?
The Tribunal considered this question as a preliminary issue in 2019 and found the answer to be 'no', thus the Specific Agreements were LFAs and the respondents’ argument was dismissed. The respondents sought a judicial review of this ruling, but the Court of Appeal followed suit in 2021 and also found the answer to the question to be 'no'. All was going well for UKTC and RHA.
Then the respondents appealed again to the Supreme Court (the SC) and the tide changed; in July 2023 the Supreme Court held the answer to the question to be 'yes' - LFAs pursuant to which the funder was entitled to recover a percentage of any damages awarded constituted DBAs.
Logic
Informally, LFAs are understood to be agreements where a third party, unconnected to the litigation, agrees to finance all or part of the legal costs of litigation in return for a fee paid out of the proceeds recovered by the litigant.
The SC considered whether there was a statutory definition of a LFA. The short answer is, there was not one. The SC flagged that there was a draft definition within section 58B of the Courts and Legal Services Act 1990 (the CLS Act), but this never came into force therefore the SC did not afford it much weight.
The SC considered the same in relation to a DBA. Section 58AA(3) of the CLS Act provides that a DBA is:
- “…an agreement between a person providing advocacy services, litigation services or claims management services and the recipient of those services which provides that—
- 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
- the amount of that payment is to be determined by reference to the amount of the financial benefit obtained…”
The SC then considered whether the Specific Agreements satisfied the statutory definition of a DBA. The SC decided that the Specific Agreements definitely satisfied subsections (i) and (ii) of the above definition, in the sense that they provided for a payment to be made to the funders upon the claimants being awarded damages and that this payment would be determined as a percentage of the damages awarded. The question, therefore, was whether the funders under the Specific Agreements were “…providing advocacy services, litigation services or claims management services…”.
The SC thought the provision of claims management services to be the most likely sticking point here. ‘Claims management services’ is defined within two statutes, section 419A of the Financial Services and Markets Act 2000 and section 4 of the Compensation Act 2006, as “…advice or other services in relation to the making of a claim”. The phrase “…other services…” includes “…financial services or assistance…”. Therefore, the SC declared that, when read according to their natural meaning, the words 'claims management services' were capable of covering the role of a litigation funder. The SC stated that the words had a wide definition and were crucially never tied to the concept of active management of a claim.
The SC concluded that the Specific Agreements did constitute DBAs.
Why was this noteworthy?
The respondents were successful in the SC and prevented UKTC and RHA from obtaining the CPO required in order to commence the follow-on damages collective proceedings.
All applications before the Tribunal for CPOs were set to fail – for opt-out proceedings, if applicants attempted to use a DBA at all, and for opt-in proceedings, if applicants attempted to use a DBA which did not satisfy the statutory formalities for DBAs.
Critically, to prevent their entire stock of active agreements being rendered wholly unenforceable, the litigation funding industry had to find a way to either prevent their LFAs from being determined as being DBAs or to ensure that all of their DBAs fully satisfied the statutory formalities. The statutory formalities for DBAs are outlined at section 58AA(4) of the CS Act and further expanded upon within The Damages-Based Agreements Regulations 2013, the specifics of which are beyond the scope of this article.
Response
The impact of PACCAR has been significant.
The UK Government realised that there was an immediate issue relating to CPO applications for opt-out proceedings, putting a real blocker on competition law in the UK. In November 2023, the Government tabled an amendment to the Digital Markets, Competition and Consumer Bill (the DMCC Bill) (currently progressing through the House of Lords) which inserted clause 127. This clause effectively removes the key phrase ‘claims management services’ from section 58AA(3) of the CLS Act.
This Government amendment to the DMCC Bill, if passed, would hopefully solve the immediate issues relating to CPO applications for opt-out proceedings but this is just the tip of the iceberg – we know that the effect of the PACCAR judgment flows further than just the Tribunal. In a debate in the House of Lords on 5 December 2023, Viscount Camrose stated that “…the Ministry of Justice is actively considering options for a wider response” but that “…this Bill is not the appropriate vehicle to deliver this aim”. This does not, therefore, strike swift chords of hope.
Today, 4 March 2024, the Government has published a brief press release which confirms that new legislation will be introduced by the Lord Chancellor, Alex Chalk, to combat the wider impacts of the PACCAR judgment. This legislation will apply to England and Wales only, will be introduced "shortly" and will "restore the position that existed before" the PACCAR judgment. Today's update also states that the Government is considering a wider review of the litigation funding sector, particularly in relation to increased regulation and safeguards to protect individual claimants.
We will keep a careful eye on any Governmental action taken in the coming months and endeavour to publish relevant updates.
As to industry practices, the PACCAR judgment forced litigation funders and applicants/claimants to review their agreements and take appropriate action. Alex Neill Class Representative Limited (ANCRL) was in the midst of an application to the Tribunal for a CPO when the PACCAR judgment hit, causing it to have to either adapt its LFA or have its entire application thrown out. ANCRL amended its LFA so that the funder’s fee was based on either a multiple of the costs stumped up by the funder or a percentage of the damages awarded but subject to "the extent enforceable and permitted by applicable law”. ANCRL was the first party to attempt the use of this ‘either/or/subject to’ drafting within a LFA in front of the Tribunal. It evidently succeeded as, in October 2023, the Tribunal determined ANCRL’s LFA to in fact be a LFA and therefore be valid, ANCRL successfully obtained its CPO.
A few other parties have since publicly followed ANCRL’s lead and have presented LFAs to the Tribunal which include variations of the ‘either/or/subject to’ drafting including Commercial and Interregional Card Claims I Limited in November 2023 and Mark McLaren Class Representative Limited in February 2024. Both parties have succeeded, with their LFAs deemed to be LFAs and therefore valid, and this seems to indicate a viable way forward for cases in front of the Tribunal.
However, the Tribunal has recently granted the respondents in the ANCRL case permission to appeal the CPO decision to the Court of Appeal solely in relation to funding grounds.
Interestingly, the Tribunal stated that the respondents have no reasonable chance of success but that the PACCAR judgment has led to increasing numbers of applicants amending their funding agreements which has in turn led to increasing numbers of challenges by respondents. The Tribunal explained that:
“This is creating uncertainty and consuming the resources of the Tribunal and the parties, and that is unlikely to cease until there has been a conclusive decision on these points by the Court of Appeal. We do therefore consider there to be a compelling reason why we should grant permission to appeal in relation to the funding grounds. It is likely that permission will be granted in other similar cases and it would be expedient for those to be dealt with together in any hearing in the Court of Appeal.”
We await the outcome of any test case taken to the Court of Appeal regarding the ‘either/or/subject to’ drafting of LFAs, or really any drafting of LFAs which intentionally seeks to respond to the PACCAR judgment.
What is clear is that the fallout from PACCAR is continuing but there is a drive from Government to ensure that England and Wales continue to be centres for legal funding and legal disputes globally and that the legal funding market will continue to be innovative and flexible in seeking to meet challenges as and when they arise.
If you would like advice or assistance relating to any of the topics raised in this article, please contact Ginny Butcher or Alex Sharples in our Commercial Litigation team in Exeter.
