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Background
The dispute arose from applications to bring collective proceedings in the Competition Appeal Tribunal (the Tribunal), under section 49B of the Competition Act 1998, against various truck manufacturers, including DAF, who had been found to have breached competition law (European Commission, Sept. 27, 2017, AT.39824). The Road Haulage Association Limited (RHA) and UK Trucks Claim Limited (UKTC) sought the Tribunal’s permission to bring separate collective claims for damages on behalf of those who acquired trucks from DAF and other manufacturers. RHA and UKTC had litigation funding agreements (LFAs) in place, under which, in return for funding the claim, the funder would get a share of the damages recovered. However, DAF asserted that the funding agreements fell under the category of damages-based agreements (DBAs) per section 58AA(3)(a) of the Courts and Legal Services Act 1990 (CLSA ). They argued that LFAs amount to “claims management services” under s.4(2) of the Compensation Act 2006 (the 2006 Act), as the definition extends to “the provision of financial services or assistance”. They were, therefore, unenforceable as they failed to comply with the statutory requirements for DBAs.
Proceedings
On judicial review, the Tribunal and the Divisional Court dismissed DAF's contention that the agreements constituted DBAs. As the Court of Appeal held itself lacking jurisdiction to hear an appeal from the Tribunal in
such a case, DAF subsequently appealed directly to the Supreme Court. The hearing and proceedings took place in the UK Supreme Court on the 16th of February, 2023, and the judgment was subsequently issued on the 26th of July, 2023. The Court, by a majority of 4:1(Lords Reed, Sales, Leggatt and Stephens, with Lady Rose dissenting), held that an LFA where the funder’s recovery is specified as a percentage of the damages secured in the underlying funded claim is a DBA within the meaning of s.58AA of the CSLA. As a result, such LFAs are unenforceable in opt-out collective proceedings in the CAT and any other proceedings unless they comply with the formalities in the DBA Regulations.
Relevant Law
Before the Supreme Court, the issue was whether litigation funding agreements, wherein the funder is entitled to a percentage of damages recovered, qualify as “damages-based agreements” for the purposes of s.58A, CSLA. The issue’s core centred around the meaning of the phrase “claims management services” and whether the funders of the claims provided “claims management services” within the meaning of the section. While the appeal concerned s.58AA of the CSLA, the Court started its analysis with its forerunners – s.4 of the 2006 Act and s.419A of the Financial Services and Markets Act 2000 (“FSMA”). S.58AA(7) provides that “claims management services” has the same meaning given to that term in section 419, FSMA. Under s.419A, FSMA claims management services are defined
to be “advice or other services concerning the making of a claim”, and “other services” include a reference to “the provision of financial services or assistance”. Section 28 of the Access to Justice Act 1999 (“the AJA 1999”) made provision for a new section 58B to be inserted into the CLSA to make enforceable certain litigation funding agreements which were otherwise thought to be unenforceable at common law (“section 58B”). This provision was, however, not brought into effect. On April 1, 2013, the Damages-Based Agreements Regulations 2013 (SI 2013/609) (the
DBA Regulations 2013) came into effect, outlining additional requirements that must be met for a DBA to be enforceable under section 58AA.
Judgment
Following a detailed analysis of the relevant principles of statutory interpretation, the majority reasoning included the following points: Context and legislative purpose: The Court held that the language used in ss. 4(2) and (3) of the 2006 Act were wide and “not tied to any concept of active management” [63-64]. Contrary to the conclusions drawn by
the Divisional Court, there was no basis for the inference that s. 4(2) and (3) of the 2006 Act intended to regulate “claims intermediaries” only [68].
The Court highlighted that the legislative intent was to establish a broadly defined authority, enabling the Secretary of State to implement more precise regulations as needed in an evolving domain. Therefore, the wide language in s.4 was deliberate, and the term “claims management service should be given its natural meaning [72].
The existence of Section 58B in the CLSA did not constitute a reason to deviate from the interpretation of Sections 4(2) and (3) of the 2006 Act in accordance with their natural meaning. Lord Sales noted that “contrary to the view of the Divisional Court, section 58B did not provide a comprehensive scheme of regulation for litigation funders” [70]. There was no inherent rationale for treating statutory powers found in separate legislations as mutually
exclusive.
Natural Meaning:
Given their natural meaning, the words used in ss. 4(2) and (3) of the 2006 Act to define
“claims management services” covered LFAs in this case [50]. Explanatory Memorandum to the 2006 Act and Scope Order: The Court observed that reference to the Scope Order and the Explanatory Memorandum further supported the Appellant’s interpretation as to the wide meaning of the definition in s.4 of the 2006 Act. The Explanatory Memorandum supports the interpretation of s.4 as a grant of wide regulatory authority to the Secretary of State, focusing on addressing specific areas of activity causing concern as they arise. It further highlights the legislative foresight regarding potential issues related to making loans or providing financial assistance.
The activities specified in the Scope Order did not imply “management of, or having the power to manage, a claim” [76].
The potency of terms defined:
The respondents based their argument on the language of the defined term “claims management services”, asserting that the definition should be confined to services related to claim management. This concept, referred to as “the potency of the term defined”, was deemed irrelevant to the appeal by the Court for three reasons. Firstly, the terms explicitly used in the definition within the primary legislation and the Scope Order could “not be read as involving the management of claims nor as having claims management as a unifying core of meaning” [78]. Secondly, the term “claims management services” had no established and generally accepted meaning which could qualify or “colour” the meaning of the definition in the legislation[79]. Thirdly, interpreting the definition in section 4 in this manner would counter the overall scheme and purpose of the 2006 Act[83]. The presumption against absurdity: The Court held that the broad interpretation of s.4 of the 2006 Act covering LFAs did not produce any absurdity when juxtaposed with section 58B, given the power conferred on the Secretary of State was wide enough to allow them to tailor its use according to need as more information became available and problems were identified [86]. Events after 2006: Lord Sales noted [at 90] that neither Sir Rupert Jackson’s reports nor the Code of Conduct assisted in interpreting s.4 of the 2006 Act since they post-dated the legislation for several years. He further noted that funders may have assumed that LFAs could not constitute DBAs and did not justify the court in changing or distorting the meaning of the term as defined under the 2006 Act and 419A, FSMA[91]. The Court further held [92-94] that neither s.58AA, CLSA, nor the DBA Regulations 2013 assisted with interpreting the term. While s.58AA could be used as a guide to the interpretation of an earlier Act, only where there was a genuine ambiguity in the earlier act and there was none in the case at hand[93]. Further, the principle also did not apply where the later legislation, DBA Regulations 2023, “sought to be relied on is subordinate legislation made by the executive” [94].
Opt-out funding:
UKTC additionally submitted that, unlike a standard DBA, the funders’ recovery was subject to :
(a) Prior payment to members of the class of their full share of damages and
(b) Discretion of the Tribunal pursuant to s.47C(6) of the Competition Act 1998.
They further submitted that there was no reason to expand the concept of a DBA under
s.47C(8), where the agreement
(a) Involves a very significant sharing of risk by the funder;
(b) is subject to judicial control by the Tribunal; and
(c) provides for full recovery by individual claimants if their claim for an
aggregate award of damages is successful.
The Court rejected the submission, noting that as a matter of substance, such an LFA
retained the character of a DBA as defined [99]. The Court, therefore, held that LFAs in which funders are entitled to payment by reference to a percentage of the damages recovered are DBAs and unenforceable if they fail to comply
with the requirements of DBAs.
Dissenting judgment
Lady Rose disagreed with the majority interpretation. She agreed with the Divisional Court and Tribunal that “the giving of financial assistance is only included in the term claims management services if given by someone who is providing claims management services within the ordinary meaning of that term” [254]. However, she did not explicitly clarify what she thought the ordinary meaning should be.
Commentary
At the outset [13], the Judgment acknowledges the decision’s impact on market practices and existing LFAs. They noted that most LFAs in force provided for funders to receive payment as a reference to a proportion of damages recovered. Following the decision, these are now likely unenforceable (at least in part) to the extent their payment provisions are concerned.
In what appears to be the first ruling taking into account this decision, the Commercial Court has found that there is a “serious issue to be tried” regarding the enforceability of specific provisions in a litigation funding agreement, including the possibility of severing unenforceable elements(Therium Litigation Funding A IC v Bugsby Property LLC [2023]EWHC 2627 (Comm)). Jacobs J considered whether the Claimant’s arguments, which were resisted on the grounds of the underlying funding agreement’s unenforceability post-PACCAR, raised a serious issue to be tried; in a detailed judgment, he concluded that they did. The funding agreement involved three types of payments to the funder, and while the damages-based agreement aspect was deemed unenforceable, Jacobs J found it arguable
that this did not invalidate the entire contract. He granted asset preservation orders pending arbitration of the substantive disputes.
The decision may impact the types of claims funders are willing to fund. For existing claims, it remains to be seen how funders might seek to restructure LFAs so they are not considered DBAs. Reclaiming historical legal expenses may become challenging when legal proceedings have been ongoing for a long time, even when the agreements are replaced going forward. This could potentially result in significant losses for some lenders. The decision firmly closes the door on LFAs in opt-out collective proceedings before the Tribunal, where DBAs are expressly prohibited under s.47(C)(8). In the first judgment from the Tribunal on the enforceability of litigation funding arrangements post this decision, the Tribunal held that an LFA revised to take into account this decision was not a DBA and, therefore, enforceable (Alex Neill Class Representative Ltd v Sony Interactive Entertainment Europe Ltd [2023] CAT 73). The decision was influenced, at least in part, by the absence of a specific limit on the funder fee outlined in the funding agreement. Instead, the fee would be established either by the Tribunal itself in the case of a judgment or by the terms of an approved settlement. The amount of proceeds would only be one of the factors influencing
the decision. In the future, it remains to be seen if the judgment will trigger a reassessment of the
relevant legislation.
Written by Sonalakshi Naidu
