PACCAR Supreme Court Judgment – Uncertainty for Litigation Funders

The recent PACCAR Supreme Court decision is anticipated to have a negative impact on litigation funders, threatening the foundations of the industry. With a 4 to 1 majority, the Court ruled that Litigation Funding Agreements (LFAs) that allow the funder to receive a portion of any damages recovered should be classified as Damages Based Agreements (DBAs). As a result, many of these agreements may become unenforceable.

R (on the application of PACCAR Inc) v The Competition Appeal Tribunal 

The case of R (on the application of PACCAR Inc and others)(appellants) v The Competition Appeal Tribunal and others (Respondents) [2023] UKSC 28 emerged from the increasing number of competition class actions presented before the Competition Appeal Tribunal (CAT). This specific case was initiated by heavy goods vehicle buyers who claimed they faced losses due to a cartel, which the European Commission identified as being run by major truck manufacturers.

The defendants introduced an argument to challenge the claim. The issue of defining the pertinent legal funding agreements arose during the request for Collective Proceedings Orders by UK Trucks Claim Ltd and the Road Haulage Association, as per Section 47B of the Competition Act 1998 (the “CA 1998”).

To secure a Collective Proceedings Order (“CPO”) from the CAT, applicants are required to demonstrate that they possess sufficient funding mechanisms. In this scenario, the applicants depended on legal funding agreements. Through these funding agreements, litigation funders pledged to finance the legal proceedings in exchange for a portion of any compensation won in the case.

It’s common for collective proceedings in the CAT to rely on third-party litigation funders to finance the legal costs and to buy insurance against potential losses should the claim be unsuccessful.

The defendants argued that since these funders’ agreements offer provision of financial services or assistance in litigation, they qualify as claims management services as per section 58AA of the Courts and Legal Services Act 1990.

Moreover, if the funders’ return is dependent on the damages acquired from the action, then these funding agreements can be viewed as Damages Based Agreements (DBAs). If a DBA doesn’t adhere to the provisions of the Damages-Based Agreements Regulations 2013 (the “DBA Regulations 2013”), it will be deemed unenforceable. Given that many funding agreements often don’t align with these regulations’, very few would be considered compliant.

The Supreme Court, with a vote of 4 to 1, ruled that agreements where payment is based on the damages won are, in fact, DBAs. If an agreement states that the funder’s payment is a portion of the damages won, and the amount they recover is based on the damages won, it is a DBA. If these agreements do not comply with the 2013 DBA Rules, they cannot be enforced.

Impacts of the PACCAR Supreme Court decision

The Supreme Court has ruled that most legal funding agreements, which allow funders to be paid based on the damages won, may no longer be valid. This holds true even if there are other conditions attached, as long as the payment is tied to the damages, they will ultimately be seen as DBAs.

One of the main impacts of this decision may be that claimants could potentially refuse to pay their funder the agreed portion of damages obtained in a successful case. In long-running cases, old expenses may not be easy to recover, leading to potential losses for funders.

In the future, litigation funders may avoid tying their payment entitlement to damages won. They could potentially adjust their current agreements to fit the DBA rules. This is likely to affect which legal cases they’ll choose to fund.

How can Annecto Legal assist?

Annecto Legal have over 10 years experience in arranging both litigation funding and insurance, and are therefore well placed to assist with the issues raised by the PACCAR Supreme Court decision. We can help by explaining elements of litigation funding agreements to clients in an impartial manner. Issues such as this highlight the benefits of arranging funding and insurance via a broker, who can then assist in settlement discussions, and other unforeseen issues that may arise during a dispute.

Alternative funding for commercial disputes is about finding the best way to manage the financial risks of litigation. Annecto Legal assists with commercial litigation funding and ATE insurance.

Clients can transfer the costs and risks of their case using commercial litigation funding and insurance and put themselves in a position of strength to negotiate the best settlement possible, or go to trial if necessary.

We deal with a variety of legal cases including assistance with insolvency litigation, breach of contract solicitors, professional negligence solicitors, fraud, banking litigation and can even help if you’re suing a solicitor or looking for commercial dispute resolution.