LFAs deemed DBAs: uncertain times ahead for Litigation Funders following significant Supreme Court ruling

Last month, the handing down of the judgment in R (on the application of Paccar Inc and others) v Competition Appeal Tribunal and others [2023] UKSC 28 saw the Supreme Court allow an appeal, ruling that Litigation Funding Agreements (LFAs) are Damages-Based Agreements (DBAs) if they provide for a percentage return.

This decision overturned the Divisional Court’s well-established practice of LFAs not being DBAs; the repercussions are particularly significant to opt-out collective actions in the Competition Appeals Tribunal where DBAs are prohibited.

LFAs were previously found not to be DBAs because litigation funding did not amount to “claims management services”, to which the statutory DBA regime applies. The Supreme Court has now decided that “claims management services”, according to their natural meaning, includes litigation funding.

As a result of this decision, swathes of LFAs will be unenforceable, which is significant for the funding of disputes and the wider funding industry; a problem to be addressed by both litigation funders and claimant solicitor firms that rely on third party funding.

Many existing LFAs are now vulnerable to unenforceability challenges on the basis they are not compliant with the statutory regime for DBAs in s58AA of the Courts and Legal Services Act 1990 and the DBA Regulations 2013.

Compliant LFAs

In order to comply with the DBA regulations, an LFA needs to:

  • provide the reasons for setting the percentage return;
  • be limited to no more than 50%; and
  • involve giving credit for any costs paid or payable by the other side (i.e. a solicitor entering into a DBA gives credit for costs recovered and a litigation funder gives credit for costs paid or payable from the other side).

If an agreement has provision for payment of any other sums other than the percentage return, so for example it has a multiple – which means in the event of success the claimants will pay the funder whatever that multiple provides, then arguably that agreement is not a DBA, because the sum payable is not determined by the amount received.

It is common for LFAs to provide for the repayment of the investment plus a percentage return, which can be mathematically provided for in a formula. Similarly, there could be a multiple expressed as a percentage although that could be construed as an artificial way of saying that the payment is with reference to the amount received. In these circumstances there is scope for the agreement to be deemed a DBA, but there is a risk it could be challenged on grounds of non-compliance.

Put simply, LFAs that do not provide for a percentage return should not be caught by the outcome of this case.

Existing LFAs

In relation to existing cases, a re-drafting and re-negotiation of funding agreements seems to be the main way forward in view of this Appeal.

If an LFA contains a severance clause, it may be possible to sever out the percentage provision leaving just the multiple provision. Greater reliance may need to be placed on any severance provision in circumstances where the funded party will not agree to a renegotiated agreement, although in ongoing cases, the funded party is almost certainly going to want more funding for the continuation of the litigation, so it is in the interests of both parties that agreements are renegotiated.

Funders poised to enter into agreements, should ensure they either properly comply with the DBA regulations and section 58AA of the CLSA or alternatively, if preferred, they should make certain their agreement is clearly based solely on a multiple to avoid any scrutiny in a DBA context.

Careful consideration of Collective Proceedings Orders in the Competitions Appeals Tribunal will also now be required in light of this decision.

The Future

There is a very real risk of successful claimants seeking recovery of funds they have paid to their funder as consequence of this case.

In concluded matters, where successful claimants have paid a share to the funder based on a percentage and it now turns out that those agreements will have been unenforceable, there is a risk of those claimants seeking to recover sums paid to their funder. No doubt defences along the lines of limitation, change of position and unjust enrichment will be raised by funders.

These actions are an unfortunate ramification that would have been avoided altogether had the outcome of this case been different. There will likely be legislation to correct this somewhat ‘disruptive’ decision, but there has been no indication as to when or if it will be retrospective in effect. 

Anna Lockyer is a Senior Associate in the Costs and Litigation Funding Department at Clarion Solicitors. You can contact the team at civilandcommercialcosts@clarionsolicitors.com.

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