UK Supreme Court Ruling Sends Shockwaves into English Litigation Funding Regime

At a Glance

• The UK Supreme Court recently ruled that litigation funding agreements — which entitle litigation funders to a payment based on the level of damages recovered in the case — are damages-based agreements, subject to the much-maligned Damages-Based Agreements Regulations 2013.
• This ruling will have a major impact on the litigation funding industry, particularly with regard to the developing area of collective actions.

The UK Supreme Court (UKSC) recently ruled, by a majority of four-to-one, that litigation funding agreements (LFAs) — which entitle litigation funders to a payment based on the level of damages recovered in the case — are damages-based agreements (DBAs), subject to the much-maligned Damages-Based Agreements Regulations 2013 (the DBA Regulations). Although on its face this might seem an academic distinction, the fact that LFAs of this sort are DBAs means that, unless the LFA complies with the restrictive regulatory regime that governs DBAs, the LFA will not be enforceable.

The case is significant for all parties involved in matters where the claims are funded through LFAs, particularly in the collective actions arena.

Background

The underlying case concerns two applications to bring collective proceedings for breaches of competition law under section 47B of the Competition Act 1998. The claims are follow-on proceedings in which compensation is sought for loss suffered as a result of overpaying for the purchase of trucks. The European Commission found in a decision from July 2016 (Case AT.39824 – Trucks) that DAF (a truck manufacturer) colluded with other manufacturers to inflate the prices paid for trucks.

UK Trucks Claim Limited (UKTC) and the Road Haulage Association (RHA) brought applications for a collective proceedings order (CPO). The RHA’s application was for an “opt-in” collective action; whereas the UKTC’s application was for an “opt-out” collective action. The difference between these two types of collective action is explained in our recent update on another collective action decision, found here.

For a CPO to be granted, one of the requirements is that the applicants must show that they have adequate funding in place to meet their own costs as well as any potential adverse costs order made against them. Both the UKTC and RHA had LFAs in place.

Three of the defendant truck manufacturers asserted that the LFAs used in this case constituted DBAs. They further alleged that the LFAs did not comply with the DBA regulations. As a result, the LFAs were unenforceable, meaning that the claimants did not have adequate funding, leaving the CPOs out of reach.

Relevant Legislative Framework

The court’s deliberations revolve around section 58AA of the Courts and Legal Services Act 1990 (CLSA).

The key provision is the definition of a DBA found under section 58AA(3) of the CLSA. The definition of a DBA in this section includes an agreement to provide “claims management services” where (1) the provider of the funds gets paid if the claimant is successful; and (2) the amount paid to the provider of the funds is determined by the level of financial benefit that the claimant obtains.

The definition of “claims management services” can now be traced back to section 419A of the Financial Services and Markets Act (FSMA). This section replaced an earlier reference found in sections 4(2) and (3) of the Compensation Act 2006.

The definition under section 419A of FSMA states that “‘claims management services’ means advice or other services in relation to the making of a claim,” and that “other services includes – […] financial services or assistance.”

Judgment

The bulk of the judgment dealt with what exactly “claims management services” meant in the context of section 58AA(3) of the CLSA, and crucially, whether these services included the provision of litigation funding. The court found that “claims management services” did include the provision of litigation funding.

The majority decision provided a detailed analysis of the history of the legislation, including the explanatory notes from Parliament. The UKSC found that there was no reason to depart from the natural meaning of “providing services”, including “financial services or assistance.” The explanatory notes from Parliament also made clear that the term was to include the provision of loans and other financial assistance.

The UKSC rejected the lower Divisional Court’s findings that the legislative provisions were only intended to regulate intermediaries. The UKSC found that the legislation intended to regulate activities regardless of who was performing them. Additionally, there was no accepted legal or general meaning of “claims management services” and any later attempt at defining the term in the Jackson Review or the Association of Litigation Funders Code of Conduct from 2011 was irrelevant since these occurred after the original legislation was enacted by Parliament.

The DBA Regulations were also ruled to be of limited use for interpreting “claims management services” as regulations are subordinate legislation made by the executive rather than an Act of Parliament.

Finally, UKTC tried to argue that an LFA that was used in “opt-out” proceedings would not be a DBA. They submitted that this was because recovery for the claimants would be at the discretion of the Competition Appeal Tribunal and recovery for the funders would only happen after all members of the class recovered their full payment. The majority rejected this argument, ruling that these arguments would not affect the application or interpretation of what, in substance, was still a DBA because the funder would get a percentage of the recovery.

Conclusion

The consequences of this decision are potentially significant for litigation funders and the claims that they support.

For new claims, funders will likely attempt to structure their agreements in a way that will be able to avoid the impact of the decision going forward. Theoretically this could be done in two ways: (1) structure the agreements so they comply with the requirements of a DBA; or (2) structure their success fee in a way that it is not tied to the amount of any damages recovered.

The UKSC’s decision does have much larger potential ramifications for existing agreements, particularly where the historic legal spend is significant. Litigation funders may have to replace existing agreements, thus potentially forfeiting any recovery for historic spend and leading to losses.

The decision also effectively prohibits damages based LFAs in “opt-out” collective actions. This has huge ramifications for these types of claims, especially since they appear to be gaining in momentum following a few recent decisions, as we discussed here. Any LFAs for “opt-out” claims will have to be drafted to give funders a return that is not based on a share of damages.

Following this decision litigation funders are likely undergoing a re-evaluation of their businesses and how exactly they will fund claims in the future. In the meantime, less meritorious claims will likely find it more difficult to find funding while the better claims will be more sought after by funders. It is possible that Parliament could also step in with further legislation if they do not agree with the UKSC interpretation; but given that stakeholder feedback on the DBA Regulations has been with the Ministry of Justice for a number of years now – funders won’t be holding their breath.