UK Supreme Court deems litigation funding agreements 'unenforceable'

Where a professional funder finances a claim, it will typically obtain a share of any damages recovered, but not play any part in the active management of the claim. The central issue in this case, Paccar Inc & Ors, R (on the application of) v Competition Appeal Tribunal & Ors, is whether such an arrangement falls within the definition of a Damages Based Agreement (DBA). If it does, it would need to comply with the requirements of the DBA Regulations 2013. It was common ground that most funding agreements do not comply with those regulations and so would be unenforceable. 

Damage Based Agreements 

The statutory definition of a DBA is an agreement "between a person providing advocacy services, litigation services or claims management services and the recipient of those services" which provides for remuneration in the form of a share of the damages ultimately recovered by the recipient. At first instance, in the case of Paccar, the tribunal held that the funding agreements in question were not DBAs. The Court of Appeal agreed with that view, finding that a professional litigation funder does not provide "claims management services" (as referred to in the DBA Regulations 2013), since it plays no part in the management of the claim. 

However, the Supreme Court judgment in Paccar has now found, by a majority of that litigation funders do provide "claims management services". Which are defined (in section 4 of the Compensation Act 2006 for DBAs before 1 April 2019 and section 419A Financial Services and Markets Act for DBAs entered into after that date) as "advice or other services" and "other services" includes "financial services or assistance". The Supreme Court held that this definition was "cast very wide" and so "the provision of financial assistance becomes a claims management service, even if carried out separately": it does not have to be part of an overall service of managing a claim.

What now for litigation funding? 

This decision is likely to have a significant impact on the litigation funding industry, which has been entering into these type of agreement for over a decade. In effect, it renders almost all litigation funding agreements unenforceable. Funders may now try to renegotiate current agreements in order to make them comply with the DBA regulations. In order to prevent uncertainty for litigation funders (which, in turn, might potentially impact access to justice), the Department for Business and Trade has issued a brief statement saying that it is "aware of the Supreme Court decision in PACCAR and is looking at all available options to bring clarity to all interested parties". Further details are now awaited.