R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents)
[2023] UKSC 28
On 26 July 2023 The Supreme Court handed down its decision in PACCAR Inc and others v Competition Appeal Tribunal and others [2023] UKSC 28. This appeal was concerned with a matter of statutory interpretation in the context of litigation funding.
The Supreme Court allowed the appeal by a majority. Lord Sales gave the leading judgment, with which Lord Reed, Lord Leggatt and Lord Stephens agreed. Lady Rose gave a dissenting judgment.
Overview
The decision concerned funding agreements entered into by Yarcombe and Therium Ltd in connection with a class action in the Competition Appeals Tribunal. To enable them to obtain a collective proceedings order from the Competition Appeals Tribunal, the Respondents to the appeal needed to show that they had adequate funding arrangements in place to meet their own costs and adverse costs should they lose. The Respondents relied on litigation funding agreements with Yarcombe and Therium Ltd in an effort to meet these requirements.
Litigation funding involves the agreement of a third party (with no prior connection to the litigation) to finance all or part of the legal costs of certain litigation. Often the funder’s returns are calculated by reference to a percentage of any damages recovered should the funded litigant be successful. In particular, this appeal concerned whether each of the agreements under which this funding was provided, known as litigation funding agreements (‘LFAs’), constitute a ‘damages-based agreement’ (‘DBA’), a term given a specific definition by statute. In order to be lawful and enforceable a DBA has to satisfy certain conditions. The LFAs were entered into without satisfying those conditions, so the question whether they constitute DBAs was critical for their enforceability.
The Supreme Court held that the provision of litigation funding fell within the ‘financial services’ limb of the statutory definition of ‘claims management services’ which brought the LFAs within the category of agreements that should be classed as DBAs and as a result were unenforceable because they did not comply with the Damages Based Agreements Regulations 2013 (‘Regulations’) (link).
Considerations for members
As mentioned above, litigation funding involves the agreement of a third party (with no prior connection to the litigation) to finance all or part of the legal costs of certain litigation, often in return for a percentage of any damages recovered should the funded litigant be successful.
Often insolvency practitioners rely on litigation funders to enable a return to be made to the estate by either assigning an insolvency or office holder claim to the funder, or entering into a funding agreement to enable the practitioner to pursue a claim. The findings by the Supreme Court in this case, potentially impact insolvency practitioners, more so where they are or have entered into a funding agreement.
An Insolvency Practitioner’s power to assign a cause of action is contained in Insolvency Act 1986 (‘IA86’) –
· Administrator – Schedule 1, paragraph 2 of IA86 (Link)
· Liquidator – Schedule 4, paragraph 6 of IA86 (Link)
· Trustee in Bankruptcy – Schedule 5, paragraph 9 of IA86 (Link)
A cause of action is an asset to be realised for the benefit of the creditors and is “Property” within the meaning of s436(1) IA86. In addition office holder claims in Administration and Liquidation (but not bankruptcy) can also be assigned.
R3 is aware that some insolvency litigation funders take assignments of claims which involves a purchase agreement and not a funding agreement. These types of agreement are unlikely to be impacted by the findings in the Supreme Court because following assignment, the funder is the Claimant or Applicant. Generally, the need to fund (and enter into a funding agreement), rather than assign, arises in connection with office holder claims in bankruptcy. However, the decision whether to assign or fund a claim in an insolvency process will ultimately be a decision by the office holder based on the facts of the appointment and the options available to them.
Amongst other requirements, pursuant to the Regulations the only amount that a recipient of claims management services (or for that matter advocacy services or litigation services) can be required to pay to that service provider under the DBA is the “payment”, which is an amount determined by reference to the damages. The payment can never exceed 50% of the damages.
Therefore, subject to potential severability arguments that may exist, and the terms of those arrangements, the types of arrangement potentially affected include:
- A funding agreement which requires the payment to the funder on success of an amount equivalent to the funded claim costs and a percentage of the damages awarded.
- A funding agreement which requires the payment to the funder on success of an amount determined by reference to the damages awarded but that is not capped at 50% of those damages.
- A funding agreement which requires the payment to the funder on success of the greater of a multiple funded claim costs or a percentage of the damages awarded.
- A funding agreement which requires a payment to the funder on success on any basis but capped by reference to the amount of damages awarded.
- A funding agreement which requires the payment to the funder on success of a multiple of its investment but the multiple is dependent on the amount of the recovery.
In any case where there is a funding agreement in place (or contemplated) it may be prudent for Insolvency Practitioners to seek independent legal advice on the possible effect of the decision handed down by The Supreme Court. Insolvency Practitioners should also consider any potential impact on Litigation Funding Agreements entered previously. If existing LFAs could be interpreted to be DBAs (which will depend on the precise drafting of their terms) they will need to comply with the DBA Regulations or they will be unenforceable.