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

The court found, contrary to previous rulings by the Competition Appeal Tribunal (CAT) and Court of Appeal, that litigation funding agreements (LFAs) under which funder remuneration was calculated by reference to a percentage of the damages ultimately recovered constituted "damages-based agreements" (DBAs).

This is significant - as DBAs are subject to certain formal requirements relating to form and content - which many existing LFAs (including those in the present case) may not meet, thereby rendering them unlawful and unenforceable in their current form.

The effects are particularly acute in this case and similar collective proceedings, as class representative will need to obtain valid funding arrangements before the claim can proceed much further.

What was this case about?

The issue arose from competition law collective proceedings brought against truck manufacturers following a European Commission decision that the manufacturers had acted in breach of competition law. This type of litigation, known as a "follow-on" claim, is brought in the CAT under a regime that allows for collective proceedings to be brought on an "opt-out" basis on behalf of a class of claimants.

The CAT's permission is needed to allow this type of claim to proceed. One condition for granting permission will be that the claimant team has adequate arrangements in place to cover its own legal costs, as well as those of its opponent if it is unsuccessful.

The proposed class representatives in this case were funding their claims using LFAs. The manufacturers applied for a preliminary issue on the LFAs, arguing that the proceedings should not be certified because the agreements were invalid due to not complying with the statutory rules governing DBAs.

The key legal question for the Supreme Court was whether the LFAs constituted "claims management services", which is part of the statutory definition of DBAs (in section 58AA of the Courts and Legal Services Act 1990).

Why did the Supreme Court allow the appeal?

The manufacturers/appellants relied on the fact that "financial services or assistance" was one of the examples of claims management services listed in the statutory definition, which they argued included litigation funding. The proposed class representatives/respondents argued that such financial assistance was only relevant if the funder was involved in the management of the claim, which it was not.

Both the CAT and the Court of Appeal had found in favour of the respondents, reasoning that Parliament had legislated separately in relation to litigation funding and did not intend to subject LFAs to the stringent requirements of the DBA regime.

The Supreme Court agreed (by a majority of four to one) with the appellants, preferring the view that "claims management services" should be interpreted broadly. Giving the lead judgment, Lord Sales held that the wording within the definition, including the reference to "financial services or assistance", was clear and should be given its ordinary and natural meaning. It was not clear that the inclusion of litigation funding would be anomalous or contrary to parliamentary intention.

What will this case mean for businesses?

The judgment will have wide-ranging consequences for the litigation funding industry. The Association of Litigation Funders of England & Wales had intervened in the case and, at paragraph 13, Lord Sales noted that the court had been told that the consequences of it finding for the appellants would be that "most third party litigation funding agreements" would be "unenforceable as the law currently stands".

As such, funders and their clients will likely rush to restructure current agreements to either comply with the DBA requirements or include a payment mechanism which is not tied to the damages recovered.

The judgment causes particular problems for "opt-out" competition collective proceedings as section 47C(8) of the Competition Act 1998 excludes the use of DBAs for such claims. More widely, with litigation funding crucial to the growing body of group claims that is being brought in areas including consumer protection, data breaches and ESG, claimant firms and funders will need to re-assess and renegotiate the models for different types of claim.

Now is a good time for businesses to take stock of their exposure to group litigation in different fields and how this case might impact current or prospective claims.