Previously considered contrary to public policy, third-party funding today substantially facilitates access to justice. Many parties do not have the resources to pay for litigation or international arbitration, yet third-party funding has allowed numerous meritorious claims to succeed. Third-party funding is also often used in group litigation, where the pursuit of claims can be challenging due to the involvement of numerous claimants with relatively minor losses.
On 26 July 2023, the UK Supreme Court (“UKSC”) rendered the long-awaited decision R (on the application of PACCAR and others) v Competition Appeal Tribunal and others. The UKSC found that litigation funding agreements (“LFAs”) qualify as damages-based agreements (“DBAs”) and are therefore governed by the provisions of the Courts and Legal Services Act of 1990 (the “CLSA 1990”) and the Damages Based Regulations 2013 (the “DBA Regulations”). Henceforth, the enforceability of LFAs will be subject to specific conditions set out in Section 58AA(4) applicable to DBAs.
A LFA that does not meet the requirements of Section 58AA of the CLSA will be considered unenforceable. While the ruling is dry, the practical implications for international arbitrations being funded by UK-based third-party funders are not.
Practical Implications of the Decision for Third-Party Funding
The UKSC decision has significant implications for third-party funding, including the following:
- In its decision, the Court admitted that it is not “usual” for LFAs signed to date to meet the conditions provided for in Section 58AA of the CLSA 1990 applicable to DBAs. The Court emphasized that, by considering that LFAs are DBAs, “the likely consequence in practice [is] that most third-party litigation funding agreements [are] by virtue of that provision […] unenforceable as the law currently stands”.
- With most LFAs being unenforceable, funders will likely expedite the process of modifying existing agreements, either to align with the DBA requirements or to incorporate a payment method that is not linked to the damages recovered. For instance, third-party funders can still recover a multiple of the amount of funding provided.
- It is essential that parties reach an agreement on the amended version of the LFAs promptly, as funders are likely to suspend the payment of funds until a modified or new version of the LFA is agreed upon. If an agreement is not reached quickly, it may cause undue delay to litigation or arbitration.
- According to Section 47C(8) of the Competition Act 1998 (“CA 1998”) and as emphasized by the UKSC, “a damages-based agreement is unenforceable if it relates to opt-out collective proceedings even if it complies with the requirements set in section 58AA”. The UKSC decision creates uncertainty over LFAs providing for opt-out collective proceedings and is thus likely to create practical complexities in this respect. It is unclear whether – and how – funders will restructure their LFAs within opt-out collective proceedings to avoid their qualification as DBAs.
The long-term repercussions of this decision on the United Kingdom’s litigation funding sector, which has shown significant growth in the last decades, are yet to be revealed. It is possible that discussions regarding the fate of LFAs could gain momentum within the parliament in the forthcoming months and years, potentially leading to the enactment of additional laws aimed at mitigating the consequences of this decision.
Background of the Case Related to Third-Party Funding
At the heart of the matter addressed by the UKSC lay a compelling question: do LFAs, in which funders are entitled to a portion of awarded damages, fall under the category of DBAs? The answer to this question pivoted on whether litigation funding fits within the contours of the DBA definition set forth in the CLSA 1990 and the DBA Regulations.
The question arose in the context of requests for collective proceedings orders (“CPO”) by the UK Trucks Claim Ltd and the Road Haulage Association under Section 47B of the CA 1998. To secure a CPO from the Competition Appeal Tribunal, the applicants needed to demonstrate suitable financial arrangements in place. In this regard, they relied on previously signed LFAs. Pursuant to the agreements, litigation funders committed to finance the legal proceedings in return for a set percentage of any damages awarded in the case. The opposing parties argued in response to the CPO applications that LFAs fell under the definition of DBAs according to Section 58AA(3) of the CLSA 1990 and are, therefore, unenforceable.
The question carried major implications: if the LFAs indeed fall under the category of DBAs, they would be considered unenforceable and unlawful, as they would not comply with the formal requirements for such agreements as per the applicable regulations. On the contrary, if LFAs are not considered DBAs, they would not fall under the CLSA and as such would remain enforceable.
What Did the Court Decide?
In its decision dated 26 July 2023, the Court found that LFAs are considered DBAs. LFAs are agreements between litigation funders and claimants, allowing the funders to reclaim a portion of the proceeds obtained by claimants if the claim is successful. Section 58B(2) of the CLSA 1990 defines LFAs as: “agreement[s] under which
- a person (‘the funder’) agrees to fund (in whole or in part) the provision of advocacy or litigation services (by someone other than the funder) to another person (‘the litigant’); and
- the litigant agrees to pay a sum to the funder in specified circumstances.”
According to Section 58AA of the CLSA 1990, 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 that
(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”.
In its decision, the UKSC declared that determining whether LFAs constitute DBAs “depends on whether litigation funding falls within an express definition of ‘claims management services’ in the applicable legislation, which includes ‘the provision of financial services or assistance’”.
For the definition of “claims management services”, Section 58AA(7) refers to Section 419A of the Financial Services and Markets Act 2000. According to this provision, “claims management services” include “advice or other services in relation to the making of a claim”. The provision also states that “other services” include the provision of “financial services or assistance”.
The Court leaned on this definition and concluded that LFAs indeed fit within the scope of claim management services and, consequently, are DBAs.
Given their categorization as DBAs, LFAs will not be enforceable unless they comply with Section 58AA of the CLSA 1999 and the DBA Regulations.
In conclusion, the decision of R (on the application of PACCAR and others) v Competition Appeal Tribunal and others has altered the landscape of third-party litigation funding in international arbitration, at least for LFAs subject to English law. The Court’s determination that LFAs equate to DBAs means that many existing LFAs now stand on precarious legal ground.
 R (on the application of PACCAR and others) v Competition Appeal Tribunal and others  UKSC 28, para. 11: “The common law was historically hostile to arrangements for third parties to finance litigation between others. According to the doctrines of champerty and maintenance, such arrangements were generally regarded as unenforceable as being contrary to public policy according to the test identified in British Cash and Parcel Conveyors Ltd v Lamson Store Service Co Ltd  1 KB 1006”.
 R (on the application of PACCAR and others) v Competition Appeal Tribunal and others  UKSC 28, para. 12; see also Mastercard v Merricks  UKSC 51, para. 1: “the monetary amount of the consumer’s individual loss means that it will rarely, if ever, be wise [for a] consumer to litigate alone”.
 R (on the application of PACCAR and others) v Competition Appeal Tribunal and others  UKSC 28, para. 13.
 According to Section 58AA of the CLSA 1990, a DBA is an agreement in which the amount of payment is “determined by reference to the amount of the financial benefit obtained”.
 R (on the application of PACCAR and others) v Competition Appeal Tribunal and others  UKSC 28, para. 245.
 R (on the application of PACCAR and others) v Competition Appeal Tribunal and others  UKSC 28, para. 3; see also CLSA 1990, Section 58AA: “(1) A damages-based agreement which satisfies the conditions in subsection (4) is not unenforceable by reason only of its being a damages-based agreement.
(2) But (subject to subsection (9)) a damages-based agreement which does not satisfy those conditions is unenforceable […] (4) The agreement— (a) must be in writing; (aa) must not relate to proceedings which by virtue of section 58A(1) and (2) cannot be the subject of an enforceable conditional fee agreement or to proceedings of a description prescribed by the Lord Chancellor; (b) if regulations so provide, must not provide for a payment above a prescribed amount or for a payment above an amount calculated in a prescribed manner; (c) must comply with such other requirements as to its terms and conditions as are prescribed; and (d) must be made only after the person providing services under the agreement has complied with such requirements (if any) as may be prescribed as to the provision of information”.
 CLSA 1990, Section 58AA (emphasis added).
 R (on the application of PACCAR and others) v Competition Appeal Tribunal and others  UKSC 28, para. 3.
 FSMA, Section 419A; in the course of its judgment, the UKSC also examined the implications of (i) Section 58B of the CLSA 1990, introduced in 1999 to potentially allow litigation funding by granting an exemption from common law regulations against champerty, but which, unlike Section 58AA added later, was never enacted and (ii) Section 47C(8) of the CA 1998 which declares that agreements based on damages and tied to “opt-out collective proceedings” before the Competition Appeal Tribunal are not legally binding.