LFA or DBA? That is the question!
The Supreme Court has recently handed down a decision that has caused widespread discussion in the litigation funding market.
Litigation funding is when an unconnected third party makes funds available, under certain terms, to finance all or part of the legal costs a party may incur in pursuing litigation.
Background
R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents), [2023] UKSC 28 considered the question of whether litigation funding agreements (LFAs) were, by definition, damage-based agreements (DBAs). In order for a DBA to be enforceable, certain conditions must be met and these are laid down in the Damage-Based Agreement Regulations 2013.
The facts that led to this claim are largely irrelevant but they relate to a group of customers who had purchased particular trucks during the period 1997 – 2011, the European Commission had found that the sellers of the trucks had been involved in anti-competition collusion and the customers wanted to bring collective ant-competition proceedings as a result.
The claim we are considering in this article however looks at the way the litigation was funded which was decided as a preliminary issue.
In order for the collective proceedings for breach of competition law to be brought an order from the Competition Appeal Tribunal was required and to be awarded that order the parties needed to show that they had adequate funding in place to meet both their own costs of pursing the litigation and to cover any adverse costs they may incur should their claim be unsuccessful.
Litigation funding to the tune of £50 million was made available for the underlying claim but the preliminary issue in relation to the vehicle by which the litigation funding was arranged needed to be decided in order for the Tribunal to be satisfied the costs would be covered, and hence hand down the requisite order to enable the claim to proceed.
The Supreme Court’s Decision
The Supreme Court have decided that litigation funding agreements (LFAs), under which funders are entitled to recover a percentage of damages, amount to damages-based agreement (DBAs) within section 58AA of the Courts and Legal Services Act 1990 (CLSA). This is because the litigation funders were considered to provide “claims management services” within the meaning of that section. The upshot being that such LFAs must comply with the Damages Based Regulations 2013 (the "DBA Regulations"), failing which, they will be unenforceable.
The repercussions for the funding industry
The decision of the Supreme Court not only ran contrary to the decisions of the Competition Appeal Tribunal and the Court of Appeal, but also the interpretation of large parts of the litigation funding industry. LFAs structured to take a percentage of damages are commonplace. Rendering such LFAs as DBAs, and therefore unenforceable if they do not comply with DBA regulations, will have a huge impact on how litigation is funded and particularly large group actions. Lady Rose, in her dissenting judgment, queried whether it would be possible for an LFA to comply with the DBA Regulations at all, and evidence was submitted that few if any LFAs would comply.
It remains to be seen whether litigation funders will attempt to draft LFAs which comply with the DBA Regulations. However, we expect, for many new LFAs, funders will likely look to avoid the DBA regulations by not linking recovery to the level of damages recovered, and instead making recovery a multiple of their investment. However, this could cause issues in large group action claims, as it would likely leave claimants not knowing what proportion of damages they will recover.
Where LFAs are already in place, should the proceedings be at an early stage, agreements may likely be replaced with those which are either not DBAs or DBA Regulation compliant. Litigation funders may be facing losses, however, where significant legal spend has already been incurred under unenforceable agreements. In this instance, where LFAs include severance clauses, consideration may need to be given to whether these clauses can be used to sever clauses requiring a return based on recoverable damages.
Opt-out proceedings in the Competition Appeals Tribunal, where DBAs are not permitted, are likely to be significantly impacted, as LFAs based on a percentage of damages are commonplace in such proceedings. Any Collective Proceedings Orders (CPOs), which are required in order to proceed to trial in such cases, may have been granted on the basis of now unenforceable LFAs. This opens up new lines of argument for defendants to resist the granting of CPOs, and existing CPOs may need revisiting, pushing funders to consider whether they wish to proceed on the basis of LFAs structured to create a return based a multiple of their investment.
This decision is hugely consequential for the litigation funding industry. Funders face a period of reflection as to their future investments and consideration of their current. Regulation in the sector will likely be forthcoming and welcome, but this is unlikely to aid funders who are required to make difficult, albeit possibly short-term, decisions.
How we can help
For any queries in relation to litigation funding please contact Katie Byrne or Steve Beahan in our Commercial Dispute Resolution team.
