Business People Walking Down The Hallway

Is your Litigation Funding Agreement a Damages Based Agreement?

On 26 July 2023, the Supreme Court handed down its judgment in R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents) [2023] UKSC 28.

In summary, four of the five justices held that litigation funding agreements (LFAs) where the funder (funding all or part of the litigation process) is to be remunerated by receiving a share of any compensation recovered by the claimant, fall within the statutory definition of damages-based agreements (DBAs).

Why it matters

The Court’s conclusion is important because it has wide ramifications for the suitability of English law and jurisdiction as a forum of choice for resolving global disputes as well as the litigation funding industry.

As per the judgment, “funding of litigation by third parties is now a substantial industry which, although driven by commercial motives, is widely acknowledged to play a valuable role in furthering access to justice.”

Also, if (as in the present case), the LFA in question does satisfy the definition of a DBA but does not comply with the relevant regulations applicable to DBAs it will be deemed unenforceable.

One can clearly see the importance of either (a) an LFA being classed as a DBA, or (b) a DBA being unenforceable. Particularly for claimants looking to use LFAs to access English law and the flexibility of our common law with specialist lawyers, courts and an independent judiciary, as well as investors seeking a return on their outlay (who in turn, rely on Claimants using the English legal system -especially in relation to funded group actions).

The Court’s decision

Under s. 58AA of the Courts and Legal Services Act 1990 (CLSA), a DBA is an agreement between a person providing (i) advocacy services (ii) litigation services or, relevant to this article, (iii) claims management services, where the financial benefit received by the provider is directly related to the sum recovered/compensation received.

The Supreme Court concluded that the LFAs in question met the s.58AA CLSA statutory definition of ‘claims management services’ – which includes ‘financial services or assistance’. As the LFAs fell within ‘claims management services’, and in circumstances where remuneration under the LFAs was based on the share of compensation the client receives, they were held to be DBAs.

The alternative argument

The two previous (and now overturned) decisions in this case had held that funding arrangements entered into with claimants by third parties who play no part in the conduct of the litigation, but whose remuneration is fixed as a share of the damages recovered by the clients, are not DBAs within the meaning of the relevant legislation.

Lady Rose, dissenting, reached the same conclusion as the earlier courts. One of her bases for reaching such a conclusion was that financial assistance from the funders only meets the statutory definition where ‘claims management services’ are being given. Here, as is standard, the funders played a passive role in the conduct of the litigation itself and Lady Rose therefore felt that they were not providing claims management services pursuant to the Act. Unfortunately for funders, the majority of the Supreme Justices disagreed with Lady Rose.

Key takeaways

  • The judgment will limit and vary the fee structures on offer to clients from litigation funders.
  • All parties to litigation involving an LFA where the funder is to be remunerated based on the damages the claimant(s) receives should re-assess the enforceability of the governing agreement.
  • Claimants considering entering into LFAs or being asked to accept amended terms within their ongoing funding agreements should seek independent advice.
  • If you were party to litigation which involved an LFA, you should consider whether you have a claim to be able to recover monies paid under the contract, which may now be held to be unenforceable.