Third-party litigation funding – UK decision illustrates complexities of regulation

Supreme Court’s decision in R (on the application of PACCAR Inc and others)  v Competition Appeal Tribunal and others [2023] UKSC 28

The UK Supreme Court recently handed down an important judgment concerning the statutory interpretation of the legislative framework regulating litigation funding agreements¹.  The litigation funding agreements ("LFAs") at issue in the case were entered into to support opt-out collective litigation proceedings before the Competition Appeal Tribunal and the judgment stands to affect all LFAs that entitle funders to payments based on the level of damages recovered in the litigation.

The decision has been the subject of significant press attention and legal commentary. Its implications will be particularly acute, not only for competition litigation in England, but for collective proceedings more generally, given the surge in litigation funding in recent years to facilitate, in particular, multi-claimant actions in relation to ESG, data protection, and consumer-based claims.

The PACCAR decision is illustrative of the complexities faced by legislators in Ireland, as they consider regulating the introduction of third-party funding in this jurisdiction.

At present, the funding of litigation by third-parties remains largely prohibited in Ireland. However, the Law Reform Commission recently published a consultation paper (the "LRC Consultation") seeking views on how such funding might not only be legalised in Ireland but also the manner in which it might be regulated. The LRC Consultation is due to run until November 2023. See our previous updates here and here for further information.

UK Supreme Court decision

The question addressed by the UK Supreme Court was whether certain LFAs that entitled the funder to recover a percentage of any damages awarded constituted "damages-based agreements" ("DBAs") within the meaning of the Courts and Legal Services Act 1990. 

Sir Rupert Jackson, shortly after his appointment as a judge of the Court of Appeal in England and Wales in 2008, was tasked with reviewing civil litigation costs. Interestingly, he endorsed third-party funding in his reports and recommended self-regulation, seemingly without considering an LFA to be a DBA. The litigation funding industry in the UK has subsequently been allowed to grow with few constraints from legislators.

The issue in the PACCAR case arose in the context of applications for collective proceedings orders ("CPOs") by UK Trucks Claim Ltd and the Road Haulage Association under Section 47B of the Competition Act 1998 for breaches of competition law under the UK Competition Act 1998. As part of the application for CPOs, it was necessary for the plaintiffs to demonstrate that adequate funding arrangements were in place.  

The defendants in the case contended that the LFAs in question constituted DBAs within the meaning of Section 58AA(3) of the Courts and Legal Services Act 1990 and were unenforceable because they did not satisfy the specific regulatory requirements for DBAs.

The question turned on whether the funding constituted "claims management services".  

• If the funders were providing “claims management services”, then the LFAs in question were DBAs under the statutory definition and could only be enforceable if certain additional requirements set out in the Damages-Based Agreements Regulations 2013 (SI 2013/609) were satisfied.  It was common ground that the LFAs in this case did not satisfy these requirements.
• If the funders were not providing "claims management services", then the LFAs were not DBAs within the meaning of section 58AA of the Courts and Legal Services Act 1990, and were therefore valid and enforceable funding agreements.

The Competition Appeals Tribunal and the Divisional Court had found that for a service to come within the definition of "claims management services", that service had to be provided within the context of the management of the claim and that funders did not normally manage a claim.  The majority of the Supreme Court were of the opinion that Parliament had provided a deliberately wide definition of "claims management services" and that the term is not meant to be further restricted by the notion of "claims management".  

They therefore agreed with the truck manufacturers and found that the funders were providing "claims management services" and that the funding agreements were DBAs which, in the absence of satisfying the further requirements relating to DBAs, were unenforceable.

Position in Ireland

Moves are continuing toward the possible legalisation of third-party litigation funding in Ireland.  New legislation explicitly confirming that the restrictions on third-party funding do not apply to international commercial arbitration has recently been enacted (see here). In addition, the Kelly Report Implementation Plan, published in May 2022, envisaged that the first phase of reforms arising from the Kelly Report² would include legislation for a limited form of third-party litigation funding for certain insolvency proceedings. It is possible that this will be included in the Civil Reform Bill proposed in the Government's most recent legislative programme, although the draft of the bill is still awaited.

Separately, the enactment earlier this year of the Representative Actions for the Protection of the Collective Interests of Consumers Act 2023 has made provision for a form of consumer collective action in relation to infringements of EU consumer protection legislation and includes forward-looking provisions concerning third-party funding "insofar as permitted in accordance with law" (see here for further details). 

In a series of Irish Supreme Court decisions in 2017 and 2018³, it was made clear that the law as it stands creates difficulties for parties' access to justice and that urgent reform is needed. However, the legislature has been slow to intervene pending the publication of a long-awaited report of the Law Reform Commission on this issue, recognising this is an area that needs to be carefully regulated.

At EU-level, in September 2022, the European Parliament called on the European Commission to introduce regulations covering third-party litigation funding. The parliament’s committee on legal affairs adopted a report by German MEP Axel Voss on the issue, seeking harmonisation and the adoption of common minimum standards across the EU⁴.   

Discussion

In the PACCAR judgment, the Supreme Court in the UK was clear that, regardless of any policy considerations in favour of the funding arrangements at issue (as to which it did not express a view), such considerations did not justify departing from the conventional approach to statutory interpretation.  

Whilst the UK Supreme Court decision is not an analysis of the issue of the lawfulness of litigation funding in England per se, where LFAs provide for the remuneration of the funder based on a percentage of damages awarded, those LFAs are unenforceable. LFAs that provide for remuneration based on a multiple of the amount funded should still be valid, but arrangements of this kind tend to be less remunerative for funders, which will presumably make high-value, but speculative, claims less attractive.

The lessons to be learned from the UK will no doubt be keenly examined by the Law Reform Commission, who will be anxious to ensure that any relaxation of the prohibition on third-party funding is accompanied by an appropriate and effective regulatory framework to safeguard the administration of justice and in a way that will withstand the tests of time.

We will continue to monitor and provide updates on developments in this area. Should you require further information about the issues discussed in this article, please contact Commercial Litigation and Dispute Resolution partners Julie Murphy-O'Connor, Michael Byrne or your usual Matheson contact.