Re-Examination of UK Litigation Funding Agreements Now Necessary While Winds Blow Fickle for UK Competition Opt-Out Class Litigation

In R (on the application of PACCAR Inc & Ors) v Competition Appeal Tribunal & Ors [2023] UKSC 28, the U.K. Supreme Court has declared litigation funding agreements based on a cut of damages to need to comply with the Damages-Based Agreements Regulations 2013, while the Court of Appeal in Evans & O’Higgins v Barclays [2023] EWCA Civ 876 expands the scope of likely competition opt out litigation approval.

Background

The case in question arose from a price-fixing dispute against truckmakers, resulting from a fine imposed by the European Commission in 2016.  The Road Haulage Association Ltd and special purpose vehicle UK Trucks Claim Ltd were involved in the claims seeking damages from truck manufacturers, including Volvo, Renault, Daimler AG, Iveco, and DAF.  They had entered into LFAs with funders including Therium for collective follow on damages actions constructed as both opt-in and opt-out proceedings before the Competition Appeal Tribunal (“CAT”).  Under the governing rules, they were required to demonstrate their financing in order to bring such collective actions.  The defendants challenged the LFAs as unenforceable DBAs and that the claimants were therefore not funded.  It was common ground the LFAs did not comply with the DBA Regulations, and therefore would be unenforceable if caught.

The issue and Supreme Court analysis

The issue in this appeal was whether the LFAs in question were subject to regulation as “claims management services” under section 58AA of the Courts and Legal Services Act 1990 (“CLSA”).  That section defines DBAs as “an agreement between a person providing advocacy services, litigation services or claims management services and the recipient of those services” where the consideration for the services is established by reference to a financial benefit the services recipient receives.  DBAs so caught must comply with the DBA Regulations in order to be enforceable under section 58AA.  The section expressly states that “claims management services” takes its meaning from section 419A of the Financial Services and Markets Act 2000 (“FSMA”).  That definition is as follows:

“(1) In this Act “claims management services” means advice or other services in relation to the making of a claim.

(2) In subsection (1) “other services” includes—

(a) financial services or assistance,

(b) legal representation,

(c) referring or introducing one person to another, and

(d) making inquiries,

but giving, or preparing to give, evidence (whether or not expert evidence) is not, by itself, a claims management service.”

The CAT and the Divisional Court had previously dismissed the challenge to the enforceability of the LFAs, finding that they were not DBAs.  A leapfrog appeal direct to the Supreme Court was the next step.

In essence, the judgment of Lord Sales concluded that LFAs are, on any ordinary understanding, “financial services or assistance” within section 419A FSMA, and so fall to be defined as “claims management services” and caught by section 58AA CLSA if otherwise conforming to the definition of DBAs therein.  His judgment is largely devoted to the question of whether the definition above is an unavoidable straightjacket, or if a more practically minded approach to interpreting “claims management” in the DBA context could avoid it; his answer was that this was not a matter of public policy but rather the application of statutory interpretation and the path through section 58AA CLSA to the FSMA definition leads to an inevitable conclusion here – and trivially would for such as an ordinary commercial bank giving a loan.  Lady Rose’s dissent is sympathetic to the public policy implications of the inevitable “retroactive” application of the DBA Regulations to commercial arrangements which may not have anticipated their effect, but is of course not legally relevant.

What agreements are caught by the ruling?

The essence of DBAs is that they involve, under section 58AA(3) CLSA:

“(i) the recipient is to make a payment to the person providing the services if the recipient obtains a specified financial benefit in connection with the matter in relation to which the services are provided, and

(ii) the amount of that payment is to be determined by reference to the amount of the financial benefit obtained;”

Accordingly, an LFA which requires payment to collect or charge on a multiple of the funding provided basis (i.e. similar to a bank charging interest, and irrespective of financial benefit to the claimant) would appear not to be caught by the analysis of this ruling, since it is not a payment “determined by reference to the amount of the financial benefit obtained.”  But the ruling has declared that any English law LFA under which payment to the funder is determined by the recipient’s financial benefit obtained must comply with the DBA Regulations or be unenforceable.  And it is likely that the majority of LFAs are so determined, as they are around the world in contingency risk litigation finance arrangements.

However, any UK LFAs which have severability provisions and mixed payment provisions may allow funders to remove or amend percentage collection agreements, thus extricating their LFAs from the DBA Regulations.  Indeed, previous case law has indicated that mixed payment agreements ought to only be considered DBAs to the extent of the payments linked to the service recipient’s financial benefit: see Zuberi v Lexlaw Ltd [2021] EWCA Civ 16.

Some other issues are not entirely clear from the judgment.

As these claimants were the direct parties to the LFAs, the question is not expressly answered whether an agreement between the lawyers for a party and a third party to pay sums to the law firm in exchange for payment related to the financial outcome of specific litigation for a law firm’s client could be caught by this ruling.  It certainly seems not, since the third party funder is not providing to the law firm any direct services for any of its own claims, rather than for its client’s claim.

Further, the precise scope of application to agreements to assign claims and claims proceeds is not determined.  There are complexities in English law about assignment of rights to make claims, although it is possible.  Generally, a full legal assignment is unlikely to be caught by the analysis of this ruling, however the consideration is formulated, since it would not involve provision of “advocacy services, litigation services or claims management services” but instead the total assignment of the right to pursue a claim to another party.  Equitable assignment of a claim is a grey area by comparison, where the claim to some extent remains with the assignor.  It is also possible to assign simply the proceeds of a claim.  The danger in formulation of an agreement to assign proceeds is manifest, but given the root requirement that a DBA be related to “advocacy services, litigation services or claims management services”, and that claims management services be “advice or other services in relation to the making of a claim” a basic agreement to assign a future revenue stream in exchange for extinguishment of a debt is an example of claims proceeds assignment which seems incapable of fitting within the rubric of a DBA, and therefore without the present controversy.

Generally, funders will need to scrutinize, and potentially renegotiate, their existing UK law LFAs.

Competition opt-out proceedings hurt and helped

As a matter of policy, under section 47C(8) of the Competition Act 1998, added by amendment in 2015, DBAs are unenforceable for opt-out collective competition litigation.  Therefore, by being classified as a DBA because of this ruling, the LFA for one of the claims in this case was rendered unenforceable regardless of compliance with the DBA Regulations; and that goes in general for any LFA supporting a competition action opt out claim with funder payment based upon claimant recovery.

Although the result in PACCAR is clearly a blow to the financing of opt-out class litigation in UK competition actions, the day before on 25 July 2023, the Court of Appeal handed down judgment in Evans & O’Higgins v Barclays [2023] EWCA Civ 876.  In this case, the Court overturned a 2022 decision of the CAT which had denied opt-out certification.

The general framework for this type of litigation had been set up in 2015 in Section 47B of the Competition Act, requiring the CAT to determine that a claim proceed as either opt-in or opt-out.  Rule 79(3) of the Competition Appeal Tribunal Rules 2015 set out a decision matrix, including “the strength of the claims” and “whether it is practicable for the proceedings to be brought as opt-in collective proceedings”.  The CAT’s Guide to Proceedings 2015 had previously indicated its “general preference for proceedings to be opt-in where practicable”.

In the previous case of Mastercard v Merricks, the Supreme Court had approved an opt out basis for consumer competition claims on policy grounds given the financial infeasibility of pursuit of individual claims.  In the case of Evans v Barclays, a claim regarding price fixing in foreign exchange trading – on behalf of what would be essentially businesses – had previously been rejected by the CAT for opt out proceedings given the class members were likely to be sophisticated litigants (even though the evidence was an opt in basis would still likely not attract sufficient volunteer claimants to be a viable collective action).  The Court of Appeal disagreed with the CAT’s view, deciding that the critical point of access to justice was relevant to the thousands of business claimants who, just as consumer claimants in other scenarios, might each have relatively small claims that were not economically viable to pursue individually but, in this case, had aggregate claims of £2.7 billion.

In this space of two days, therefore, the financing of opt out competition group litigation in the United Kingdom has become more difficult, but the scope of claims to which the courts are likely to be sympathetic, and thus make financially viable to support in any event, has appeared to grow wider.

How do you make an agreement comply with the DBA Regulations?

To ensure compliance with the DBA Regulations, your DBA itself should (under section 3):

• Clearly specify the relevant claim or proceedings.
• Outline when your payment and expenses are payable.
• Explain the agreed payment level.

The final point is an unusual burden compared with some other countries’ litigation funding regulations.  The contract itself must provide a written explanation, although brief, of the basis of calculation of the payment rate.

Payouts in a DBA must follow these rules (section 4):

• For claims other than employment matters, the client pays only the agreed payment minus costs and disbursements covered by another party's agreement or order, along with the representative’s incurred expenses.
• A cap on that net payment of:

• • • • 25% in personal injury claims.
      • 35% in employment matters.
      • 50% in all other matters.

A further critical point, perhaps unpalatable to some, is that the client liability in first instance proceedings can only be limited to sums “ultimately recovered” by a client, not ordered by a court.  A UK law DBA cannot say that 50% of an English law judgment goes to the service provider; rather, 50% of what the client ultimately receives can go to the service provider up to the value of the judgment if so received – and again by reference to net of costs and disbursements.

There are also special information transmission rules specific to DBAs in employment claims.

Given all the above, Lord Justice Jackson suggested in the terms of reference for the Civil Justice Council’s working party on DBAs that a minimum of six issues should be provided for in the written contract:

• A definition of claim success;
• How to calculate the representative’s payment;
• Who pays disbursements;
• Who is responsible for adverse costs;
• How to resolve settlement disputes between the representative and the client; and
• When either side can terminate the DBA.

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The outcome of PACCAR may have come as a surprise, given the statutory definition that has been strictly applied was not created with third party litigation financing directly in mind.  The public policy trend in England has been to support the financing of litigation, and this ruling will clearly be a retrograde step in the short term as litigation funders adjust to the certain application of the DBA Regulations to outcome-based remuneration for litigation financing in England.  Parliamentary scrutiny of the situation is expected, and perhaps amendment of the DBA Regulations or alternative regulatory intervention into LFAs in the future.