PACCAR – A POSSIBLE PROGNOSIS
That the majority decision in PACCAR v Competition Appeal Tribunal (see [2023] Costs LR 1193) has thrown a spanner in the works of Litigation Funding Agreements (LFAs), is a unanimously accepted fact throughout the legal profession. This short article attempts to reduce to its simplest, how this has come about, and the possible prognosis in so far as cases funded by this means, are concerned, looking ahead.
The starting point
In the beginning, the common law prevented lawyers and anyone else who wished to fund civil claims, from sharing in the spoils of victory. Those restrictions have been swept away over the past 30 years: solicitors can now provide their services on the basis of payment by result, for example by using a Damages Based Agreement (DBA) which complies with s.58AA of the Courts and Legal Services Act 1990 (CLSA). Instead of being paid on a conventional hourly rate, the solicitor is permitted to conduct the case on the basis of contingency fees being a percentage of the damages, provided that in doing so, the DBA also complies with the Damages Based Agreements Regulations 2013. Funders of litigation, on the other hand, can recover their investment by taking a percentage of the damages, and the courts have recognised that “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” – see PACCAR at [11].
The Competition Appeal Tribunal (CAT)
In the CAT, Claimants in collective proceedings must obtain the CAT’s permission to proceed. To do so, inter alia, they must prove that adequate funding exists, not only to cover their own costs, but also those of the opponent if the litigation fails. In the CAT, LFAs have been accepted as a popular vehicle with which to provide such proof, as follows.
Litigation Funding Agreements
Where claimants are either unable to afford to pay their own legal costs, or to face adverse costs risks if the case were to fail, they are permitted to manage these risks by obtaining litigation funding provided by a third-party funder. By this means, the funder commits at an early stage to fund the costs and expenses of the claimant in pursuing the claim. If the case be lost, the funder loses its money. If the case be won, the funder’s reward for its investment is to take an agreed percentage of the damages ultimately recovered in the litigation. In the CAT, such agreements can be “opt-out” if members do not wish to be represented, or “opt-in” where members wishing to participate, opt-in to the class it represents.
Life before PACCAR
Until PACCAR was decided by the Supreme Court, it was commonly assumed that the DBA Regulations did not apply to third party funders involvement under LFAs because such agreements were not considered to be DBAs. Indeed, that was the view of the Court of Appeal -see [2021] EWCA Civ 299. It followed that it mattered not a jot whether an LFA complied with those Regulations. They did not need to do so for the LFA to be enforceable, nor was s.47C(8) Competition Act 1998 relevant, which provides that a DBA “… is unenforceable if it relates to opt-out collective proceedings”. No mention is made in the section of an LFA also being unenforceable.
PACCAR : the facts
The claimants in PACCAR belong to a group action brought against truck manufacturers. They (the manufacturers) had been parties to an unlawful agreement which operated in the truck manufacturing sector. That had been the finding of the European Commission who had decided that they had engaged in anti-competitive collusion for 14 years between 1997 and 2011 throughout the European Economic Area. The claimants, being customers who had purchased trucks from the manufacturers during the operation of that agreement, have been seeking compensation on the basis that the price they paid for the trucks, was artificially inflated because of the covert agreement of the defendants and the other parties to the agreement. One Group’s application was for an “opt-in” collective proceedings order. The other’s application was for an “opt-out” order. Each relied on LFAs to prove funding.
PACCAR : the preliminary issue
As a preliminary issue, the truck manufacturers advanced an argument that the LFAs constituted DBAs within the meaning of s.58AA. If that be right, the LFAs would be unenforceable by virtue of section s.58AA owing to failures to comply with the formality requirements to be found in that provision. If so, the practical consequence would be that no proper basis would exist on which a collective proceedings order could be made by the Tribunal. Below, the Court of Appeal had rejected the truck manufacturers’ contentions.
PACCAR : what the Supreme Court decided
The LFAs were DBAs! The definition of a DBA in s.58AA included an agreement which provided “claims management services”, and the funders had been providing financial services or assistance, which was one of the examples of “claims management services” given in the statutory definition. It followed that the LFAs were DBAs falling within s.58AA of the 1990 Act. The opt-out LFA was caught by s.47C(8) and was unenforceable and could no longer satisfy the funding requirements for a collective proceedings order. By concession, it was accepted that the opt-in LFA could not do so either, as the LFAs had not been drafted with the DBA Regulations in mind, and neither had complied with them.
Prognosis
The view of the funders is that if LFAs of this kind are DBAs, under which they play no active part in the conduct of the litigation but are remunerated by a percentage of the damages recovered, the likely consequence is that most such agreements will, by virtue of s.58AA, be unenforceable as the law currently stands [see judgment paragraph 13].
The likely upshot will be two-fold.
First, as has already happened, there will be an unseemly rush to repair existing LFAs between the third-party funders and the parties who they are funding. Where, however, actions have been tried or are on the point of settlement, any repair work is likely to be too late.
Second, a wedge is likely to be driven between funders and the parties with whom they have existing LFAs, albeit that they are supposed to be on the same side!
First wedge. If damages have been recovered, but the LFA in the light of PACCAR is unenforceable, is there any longer an obligation on the claimant to divide up the damages? In Therium Litigation Funding A IC v Bugsby Property LLC [2023] EWHC 2627 (Comm) the successful claimants did not think so, where, to do otherwise, would have meant that the entirety of the spoils of victory (£27,636,512) would be taken by their solicitors and funders. Pending a decision about who has first snout in the damage’s trough, Jacobs J has frozen the loot by way of an injunction.
Second wedge. Claimants will seek to re-negotiate the terms of their existing LFAs by exacting a lesser percentage deduction from damages as the price for putting the agreement right. Not a happy outcome for the funders, perhaps, but joyous for the lawyers who will be instructed to sort out the third-party funding morass that the Supreme Court has created through its decision.
The final word, however, must go to Lady Rose in order to exonerate her from any culpability. She dissented. The majority judgment ran to 100 paragraphs: that of her Ladyship to 155!
Practitioners involved, or intending to be involved, in funded litigation should be looking carefully at their own agreements and those of the funders with an eye on compliance with the regulations that now are confirmed to apply in light of the decision.
