Have the tables turned in the litigation funding industry?

Have the tables turned in the litigation funding industry?

The principles of common law have long provided a solid foundation for legal systems worldwide, fostering consistency and predictability in resolving disputes. It is no wonder why England and the State of New York have become global hubs for dispute resolution.

Until now, investors in the litigation funding arena have echoed this thought. However, a recent decision by the UK Supreme Court in R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal and others([2023] UKSC 28) has raised questions about the the prospects for the litigation funding industry, particularly resulting from the court’s interference with private agreements and its potential consequences for the entire industry.

This case stems from the July 2016 decision of the European Commission (EC) which found five truck manufacturers—MAN, Volvo/Renault, Daimler, Iveco, and DAF—guilty of breaching the EU's antitrust rules for colluding on truck pricing.

After the European Commission’s decision, customers who had purchased trucks from these manufacturers across Europe sought legal action to claim financial compensation. In the UK, the Road Haulage Association Ltd and UK Trucks Claim Ltd sought collective proceedings orders from the Competition Appeal Tribunal to proceed to sue DAF and other truck manufacturers on behalf of the affected customers. To fund the legal proceedings, the Road Haulage Association and UK Trucks Claim secured third-party litigation funding. Under these agreements, the financiers were entitled to a percentage of the recovered damages in the event of a successful outcome.

DAF opposed the claim and argued that the litigation funding arrangements (LFAs) should be classified as ‘claims management services’ therefore making them fall under damages-based agreements (DBAs) and thus unenforceable as regulated on the Courts and Legal Services Act 1990 (CLSA 1990) and the Compensation Act 2006. The Competition Appeal Tribunal sided with the Road Haulage Association and UK Trucks Claim, stating that the agreements were not DBAs and, therefore, they were enforceable.

However, the Supreme Court, in line with the position of DAF and other truck manufacturers, held that the litigation funding arrangements linked to a damage recovery should be considered ‘claims management services’ as defined in the Compensation Act 2006, which means these agreements can be unenforceable if they do not comply with the applicable regulation related to DBAs. The underlying issue was that the LFA included a percentage of the recovery as the return to the funder qualifying as a DBA under section 58AA(3)(a)(i) and (ii) of the CLSA 1990. This is also linked to section 47C(8) of the Competition Act 1998 that stipulates that a DBA is unenforceable if it relates to opt-out proceedings like the one in question where consumers were allowed to ‘exit’ the claim.

Dubious use of the law for one party’s advantage

It is puzzling how the unenforceability issue arose in this case. It was not the customer affected by the cartel, the one who resorted to external funding to litigate who raised the issue because it was against the validity of the contract. On the contrary, it was DAF—who in breach of competition law colluded with other market participants—that challenged the litigation funding agreement to which it was not privy, because it provided ‘claims management services’; and therefore, failed to comply with the applicable requirements.

This ruling has raised some fundamental questions. How is DAF affected by the compensation method adopted by the parties, ie, a contract to which DAF is not privy? And probably, how can DAF, which breached the EU's antitrust rules and produced a damage, rely on a provision of the Competition Act specific to affected parties regarding class formation to challenge the claim (§47C (8) of the Competition Act 1998)?

Section 47C (8) of the Competition Act is meant to protect class formation and the defendants used these regulations to their advantage.

The Competition Appeal Tribunal was very assertive on this issue when it stated that ‘[i]t is important to bear in mind that the Tribunal’s concern in this regard is for the potential class members’ (para 52) and that ‘… the concern of the Tribunal when reviewing a LFA is (a) that the terms of the funding agreement do not impair the ability of the class representative to act fairly and adequately in the interests of the class members, and (b) that adequate funding has been arranged to pursue the litigation effectively in the interests of the class members. By contrast, the concern of the OEMs[Original Equipment Manufacturers], inevitably, is not to ensure the effective advance of the claims against them; indeed, it is in their interest to make the pursuit of those claims as burdensome as possible.’ (emphasis added, para 66).

In practice, the immediate threat for manufacturers is the potential liability for costs, ie, whether the class representative would be able to pay the other side’s costs if ordered to do so, but the Competition Appeal Tribunal ruled out that in this case there was not a real threat since the applicants obtained an after-the-event insurance policy to cover for this potential liability.

Civil Law v Common Law: the moral of this story

Any court’s intervention in private agreements raises concerns about the infringement on parties' freedom of contract. These concerns are always bigger when the intervention is sought strategically by the defendant—not a party to the agreement—who does not bear any direct obligation or liability resulting from the terms of the agreement being challenged. Strategic use of such challenges could potentially disrupt the litigation process and discourage parties from seeking external funding altogether.

While Common law principles have always been keen to respect contracts as long as they do not affect third parties, investors in the litigation funding industry have always been concerned about the discretional powers that a court in a Civil law jurisdiction could have to interpret and re-write private agreements. It seems that the tables have turned now.

In the aftermath of this ruling, the broader implications for the litigation funding industry in the UK are significant. With numerous third-party litigation funding agreements now at risk of being deemed unenforceable, access to justice for individuals and entities seeking legal remedies may be hindered. Although nobody has the crystal ball to predict outcomes, a Civil Law court would usually uphold superior constitutional consumer rights and access to justice vis-a-vis a law of inferior ranking which, in this case, ended up affecting the consumers with no clear damage to the plaintiff. Despite the multiple benefits of common law, we wonder whether Civil Law might now become a true contender in the litigation funding industry—only time will tell.

Guido Demarco is a Director at Stonward Litigation Funding.

Rodrigo Olivares-Caminal is the Chair in Banking and Finance Law at Queen Mary University of London.