In the landmark ruling of PACCAR Inc. and Others v. Competition Appeal Tribunal and Others (PACCAR),Footnote ¹ the United Kingdom Supreme Court (UKSC) has introduced a significant shift in the regulatory landscape governing third-party funding (TPF) in all proceedings. The UKSC addressed the question whether litigation funding agreements (LFAs), through which funders receive a percentage of the damages recovered, constitute damages-based agreements (DBAs). The UKSC considered this question by reference to an express definition of DBAs under Section 58AA(3) of the Courts and Legal Services Act 1990 (CLSA 1990) and Section 419A of the Financial Services and Markets Act 2000 (FSMA). This determination is significant because it changes the classification of LFAs to DBAs, subjecting the non-regulated LFAs to DBA regulations. The UKSC examined whether LFAs encompass “claims management services,”Footnote ² including the “provision of financial services or assistance.”Footnote ³ If these LFAs qualify as DBAs, they are unenforceable due to the statutory prohibition of DBAs for opt-out collective proceedings.Footnote ⁴ The UKSC held that the LFAs in question are DBAs, rendering them unenforceable. This decision may invalidate many LFAs that were presumed not to qualify as DBAs when adopted; it has the potential to impact funding agreements for international arbitration cases and cases before the courts of other jurisdictions where English law is applicable.

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The proceedings originated from the application of two class representatives to the Competition Appeal Tribunal (CAT) seeking permission to bring collective proceedings for breaches of Section 47B of the Competition Act. A certified class representative can bring collective proceedings before CAT for claims covered by Section 47B of the Competition Act, which can be permitted upon meeting certain statutory requirements.Footnote ⁵ These current proceedings were initiated as “follow-on” proceedings, where claimants pursue damages resulting from a violation already established by a regulator.Footnote ⁶ Here, claimants are seeking damages resulting from a decision of the European Commission on July 19, 2016, in which it was held that truck manufacturing groups infringed the EU Competition Law.Footnote ⁷ To secure a collective proceeding order from CAT, applicants had to demonstrate sufficient funding arrangements to cover their costs and any potential adverse cost orders.Footnote ⁸ Thus, the class representatives secured LFAs to cover these costs. The LFAs in question stipulate the funder's compensation as a percentage of damages, termed damages-based funding, different from investment-based funding, which yields multiples of the advanced amount.Footnote ⁹ The contentious issue lies in whether these LFAs are DBAs pursuant to CLSA 1990 Section 58AA.Footnote ¹⁰ If these LFAs are considered DBAs, CAT may not authorize the proceedings because DBAs are prohibited for opt-out collective proceedings.Footnote ¹¹

Initially, CAT addressed the issue as a preliminary matter, later becoming the subject of an appeal. In its determination, it referred to DBA definition under CLSA 1990 Section 58AA, which defines DBAs as:

CAT acknowledge that the key issue is the meaning of “claims management services,”Footnote ¹³ which is defined under FSMA Section 419A as “advice or other services in relation to the making of a claim.” Other services here include: “(a) financial services or assistance, (b) legal representation, (c) referring or introducing one person to another, and (d) making inquiries . . .” (emphasis added).Footnote ¹⁴ CAT concluded that these LFAs are not DBAs within the meaning of CLSA 1990 Section 58AA because providing “financial services or assistance” “in relation to the making of a claim” “is to be interpreted as applying in the context of the management of a claim,” not funding of a claim.Footnote ¹⁵ Thus, the LFAs in question were lawful and enforceable. The case was then appealed to the Court of Appeal, acting as a Divisional Court, and subsequently to the UKSC.

The Divisional Court agreed with CAT. It examined the legal, social, and historical context of Section 4 of the 2006 Act that defines DBAs.Footnote ¹⁶ The Divisional Court examined Section 4 of the 2006 Act because prior to the incorporation of Section 58AA into CLSA 1990, the 2006 Act provided a definition of DBAs, which was later incorporated under Section 58AA upon its introduction.Footnote ¹⁷ The Divisional Court accepted CAT's determination and the submission of the parties that the critical issue was the meaning of “claims management services.” The appellants argue that funders are providers of “claims management service” because they provide “financial services or assistance.”Footnote ¹⁸ The Divisional Court held that these LFAs do not constitute DBAs because they do not form any part of the mischief that Section 4 of the 2006 Act was intended to remedy.Footnote ¹⁹ In reaching this conclusion, the Divisional Court referred to the Explanatory Notes that accompanied the 2006 Act and the Explanatory Memorandum for the Scope Order, noting that the introduction of this Section aimed to bolster consumer protection in domains where the actions of “claims intermediaries” had sparked extensive public concern.Footnote ²⁰

The UKSC disagreed with the Divisional Court and determined that these LFAs are DBAs and are therefore unenforceable under Section 58AA. Lord Sales, supported by Lords Reed, Leggatt, and Stephens, first identified the principles for interpreting the 2006 Act. He stressed that interpreting words based on their natural meaning may not be sufficient, since the purpose of an Act of Parliament is also relevant to its interpretation. Lord Sales then examined the context within which Part 2 of the 2006 Act was introduced. He observed that it was introduced in the context of a progressive expansion of litigant financial support to enhance access to justice due to reduced legal aid. This resulted in the introduction of CLSA 1990 Sections 58, 58A, and 58B, which allowed conditional fee agreements (CFA), permitted the recoverability of costs and provided pending regulations on LFAs.Footnote ²¹ The regulation on LFAs was to come into force upon a date designated by the relevant minister, yet no date has been specified. In considering the purpose of Part 2 of the 2006 Act, Lord Sales highlighted that the Explanatory Notes stressed that the regulation applies exclusively to claims management services designated by the Secretary of State for targeted consumer protection. Lord Sales further observed that there is no need to identify implied limitations on the definition's terms given that its broad language does not suggest such limitations.

Applying these principles, Lord Sales argued that the phrase “claims management service” lacks a well-established legal or commonly accepted meaning. Lord Sales stressed that CFAs and similar arrangements revolve around offering legal advice and representation on credit, so it is understandable that Parliament would want to encompass within the regulatory framework of Part 2 a range of credit provision methods, including TPF.Footnote ²² Interestingly, Lord Sales further noted that it is not unreasonable that the regulatory authority granted by Section 4 also encompasses standard lending by reputable banks when provided for making a claim. He further argued that Section 58B has restrictively allowed such funding only when the funder's compensation is investment-based, as stipulated by Section 58B(3)(e).Footnote ²³

The appeal produced an elaborate dissent by Lady Rose. She agreed with the lower courts that the LFAs in question are not DBAs. She argued that the purposive approach to construction, the presumption against absurdity, and the potency of the term defined should be the driving principles for interpreting the 2006 Act. In considering the purpose of Part 2 of the 2006 Act, she argued that the purposive construction does not strongly favor any specific interpretation. However, considering the “state of affairs” at the time, which allowed and encouraged TPF, it can be understood that litigation funding is not included within the definition of DBA. She asserted that it is expected that the Parliament would consider the “state of affairs” at the time. Further, the presumption against absurdity requires a narrower construction of the term “claims management services” because it cannot be argued that the Parliament meant to include a bank lending money within the meaning of the term. She further acknowledged that the potency of the term remains intact despite the unclear boundary of the term, as most English words exhibit ambiguous or vague boundaries.Footnote ²⁴ She stressed that while these LFAs are not subject to Section 58B, this does not imply their inclusion under Section 58AA because that provision remains inoperative. Thus, this leaves TPF unregulated.

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Until the decision of PACCAR, TPF had been receiving acceptance and endorsement by the judiciary and the government in the UK.Footnote ²⁵ While this decision concerns opt-out collective proceedings before CAT, it affects all TPF agreements the return of which is damages-based, including potentially English seated arbitration and international arbitration proceedings where the funding agreement is subject to English law. This ruling renders many LFAs unenforceable pursuant to Section 58AA. Internationally, this decision raises concerns regarding the suitability of UK law for funding agreements and the UK as a seat of arbitration. While the decision may favorably curb the proliferation of class action cases and safeguard against unethical practices in collective proceedings, it overlooks the importance of accessing justice amidst dwindling public legal aid and the lack of funding avenues for opt-out collective proceedings. It is expected that the government and the relevant authorities will reverse the “damaging effect” of this decision.Footnote ²⁶

The UKSC's decision in PACCAR has significant implications. It renders the vast majority of funding agreements since the inception of litigation funding in violation of Section 58AA and non-compliant with the Damages-Based Agreement Regulations 2013 (DBA Regulations 2013).Footnote ²⁷ This decision might allow for claims against funders to reclaim payments made for resolved cases, under the now-unenforceable agreements. As a corrective measure, funders can restructure and renegotiate their current LFAs by relying on investment-based rather than damages-based LFAs to escape the application of DBA regulations—a view endorsed by CAT in a subsequent decision.Footnote ²⁸ Another more complex approach would be to restructure LFAs so that they comply with DBA regulations. Yet, subjecting LFA to DBA Regulations 2013 would render LFAs less appealing in large collective proceedings given that DBA Regulations 2013 set some limitations on the amount paid to representatives.Footnote ²⁹

From the perspectives of international law and arbitration, the situation is unclear, and judicial guidance is needed. In instances where an English court adjudicates a case governed by foreign law, the court will most likely resort to expert witnesses, potentially incorporating foreign legal stances on LFAs into its decision making. Yet, if foreign law is silent on the issue, English law under PACCAR could dictate the court's determination. Conversely, a non-English court applying English law will most likely invoke PACCAR as a basis for its decision. Similarly, PACCAR may arguably apply to arbitration funding agreements subject to English law where the dispute is tried in an English-seated arbitration given that Section 58AA covers “any sort of proceedings for resolving disputes.”Footnote ³⁰ As a potential remedy to escape the ramification of PACCAR in arbitration, parties may amend the governing law of the funding agreement to escape the application of English law.

However, there is a risk that some funded parties may refuse to renegotiate their funding agreement, leaving the advanced amounts potentially unrecoverable. Even with such a restructuring, it is still arguably possible for opposing parties to assert that such agreements are DBAs as they are dependent on the damages obtained even if the calculation method is investment-based, given that TPF is a non-recourse financing.Footnote ³¹ This is a more viable argument in cases where compensation is capped or structured based on the amount of the damages awarded.

The UKSC's decision is criticized as TPF has been accepted and endorsed as a distinct mechanism from DBA. Sir Rupert Jackson in his reports on the Review of Civil Litigation Costs endorsed TPF as a mechanism quite distinct from DBA.Footnote ³² The literature agrees, Neil Andrews described DBAs as an agreement where “a legal representative can agree with the client that professional remuneration will be waived unless the case is won.”Footnote ³³ Thus, it is established that DBAs are typically concluded with attorneys while LFAs are concluded with non-attorney funders. For all these reasons, PACCAR raises questions about the suitability of UK law for funding agreements and its role as a venue for commercial litigation and arbitration. This decision introduces uncertainty into the legal landscape, leading parties to favor jurisdictions with clearer regulatory frameworks and more consistent judicial interpretations concerning funding agreements.

At the same time, this decision may decrease the proliferation of class action cases and safeguard against unethical practices in funded collective proceedings. The majority in this decision may have been concerned that the proliferation of such litigation brings the risk of both procedural abuse and extravagant claims for inflaming damages as well as an increase in frivolous claims. While not explicitly expressed, the decision in PACCAR may have aimed to address the increasing prevalence of class action cases. In 2022, UK competition class-action values soared to over £26 billion following the Merricks v. Mastercard Inc. ruling,Footnote ³⁴ up significantly from £4 billion in 2021.Footnote ³⁵ This is more than a sixfold rise in a single year. In Merricks v. Mastercard Inc.,Footnote ³⁶ Lord Sales and Lord Leggatt JJSC, who both sat in PACCAR,Footnote ³⁷ have expressed reservations about the prevalence of class action cases in their dissent.Footnote ³⁸ The court in this case lowered the standard for bringing opt-out collective proceedings,Footnote ³⁹ which led to an increase in the number of opt-out collective proceedings. Lords Sales and Leggatt JJSC emphasized their view by citing an American judgment which asserted that: “The realistic alternative to a class action is not 17 m individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30.”Footnote ⁴⁰ Responding to the surge in class action cases, other governments have taken similar steps, as seen in Australia in 2020,Footnote ⁴¹ where licensing requirements on funders were introduced, which was reversed in 2022.Footnote ⁴² Criticism mounts against this approach, which restricts access to justice in opt-out collective proceedings. A more sensible approach would involve implementing targeted regulations to address the rise in class action cases.

Furthermore, this decision jeopardizes the already insufficiently funded public's access to justice. CAT faces a void in viable funding arrangements for these proceedings, an essential requirement for obtaining permission to proceed as a collective proceeding. Given that costs in opt-out collective proceedings can be millions of pounds and require years to be resolved,Footnote ⁴³ it is foreseeable that well-endowed multinational corporations will wield an unjust advantage over small corporations and consumers due to lack of funding. This deficiency persists even if an LFA had conformed to the regulations governing DBAs, as they would remain unenforceable in opt-out collective proceedings due to the statutory prohibition of DBAs for such proceedings.

The government has reacted to this decision. Justice Secretary Alex Chalk has announced his intention to rectify the “damaging effects” of the UKSC ruling during the “earliest legislative opportunity.”Footnote ⁴⁴ This undertaken was materialized on March 19, 2024 when the government introduced the Litigation Funding Agreements Bill. This legislation was meant to amend CLSA 1990 Section 58AA and clarify that LFAs are not DBAs, applying these changes retroactively.Footnote ⁴⁵ However, the bill has lapsed due to the call for a snap general election by the UK government which led to the prorogation of Parliament.Footnote ⁴⁶ The new government will decide whether to reintroduce the bill. This action followed earlier proposed amendments to the Digital Markets, Competition, and Consumers Bill to allow DBAs for opt-out claims in CAT. These amendments were rejected due to the introduction of Litigation Funding Agreements Bill, which has also been dropped.Footnote ⁴⁷ The Department for Business and Trade has released a statement that it is considering all available options to clarify the situation.Footnote ⁴⁸

In conclusion, the full scope of PACCAR's national and international implications has yet to unfold. Particularly intriguing is the potential impact of any government regulations. This remains to be seen.