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Is third party funding dead?

Read this article on the implications of the recent high profile judgement on Paccar Inc -v- Road Haulage Association [2023]
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04/08/2023 · 4 minute read

The implications of Paccar Inc -v- Road Haulage Association [2023]

Litigation funding agreements (LFAs), also known as third party funding or litigation finance, are contracts whereby a third party agrees to finance all or part of the costs of pursing litigation in return for a fee payable from any recoverable damages. In a recent, high-profile judgment (Paccar Inc -v- Road Haulage Association), the UK Supreme Court has held that such LFAs are damages based agreements (DBAs) within the meaning of the relevant legislation. As a consequence, a failure to meet the legal requirements for DBAs will render those LFAs unlawful and unenforceable. 

As the majority of the Supreme Court observed in the judgment, litigation funding is “a substantial industry”. It is therefore unsurprising that the impact of this recent judgment, namely rendering legally unenforceable many if not all LFAs currently in use in the English Courts, has garnered significant attention.

Factual background 

The litigation concerned collective proceedings brought against truck manufacturers following a European Commission decision that five companies had infringed competition law. UK Trucks Claim Limited (UKTC) and the Road Haulage Association Ltd (RHA) sought applications to bring collective proceedings, for breaches of competition law, on behalf of individuals who had acquired trucks from the appellants (collectively DAF) and other manufacturers. It was alleged that prices paid for the trucks were inflated as a result of the infringement. 

In order to obtain collective proceedings orders UKTC and RHA had to evidence that they had adequate funding in place to meet their own costs and any adverse costs order that might be made. Both had LFAs in place, pursuant to which the funder’s maximum remuneration was to be calculated by reference to a percentage of the damages ultimately recovered in the litigation. The appellant truck manufacturers argued that the LFAs were DBAs and therefore unenforceable because they did not comply with the legal requirements for DBAs necessitated by statute. In contrast, UKTC and RHA - with whom the lower courts agreed - maintained that the LFAs were not DBAs and, as such, were lawful and effective funding agreements. The case went, by way of preliminary issue, to the Supreme Court.

Main issues 

The case turned upon complex issues of statutory interpretation. Historically, litigation funding agreements were viewed negatively in the eyes of the law and were regarded as being contrary to public policy. Subsequently, section 58 of the Courts and Legal Services Act 1990 introduced conditional fee arrangements under which lawyers were permitted, in certain circumstances, to charge success fees for their litigation and advocacy services. The 1990 Act was later amended in 2009 to introduce DBAs and make them enforceable, subject to the satisfaction of certain conditions. Litigation funding is now widely regarded as an important route for access to justice.

DBAs were defined in the relevant legislation as “an agreement between a person providing advocacy services, litigation services or claims management services and the recipient of those services”. LFAs do not provide a service as such, i.e. they do not provide advocacy or litigation services and were therefore regarded as passive agreements providing financial assistance and no more. As such, the PACCAR case turned upon whether those agreements provided “claims management services”, as defined within the legislation, and therefore fell within the definition of DBAs.

The Supreme Court, siding with the appellants, concluded that the words used to define ‘claims management services’ - given their natural and ordinary meaning - were sufficient to cover LFAs. The provision of financial assistance was enough and active management of a claim was not necessary nor implied in the definition of claims management services. 

Prior to this decision, the assumption had been made by many in the funding industry that the passive nature of litigation funding meant that they were not DBAs. The Supreme Court showed itself to be cognisant of this and of the likely, far-reaching implications of its decision. Lord Hale, in the majority decision, expressly referenced the observation of counsel for the respondent, namely that if LFAs were held to be DBAs that “most third party litigation funding agreements would…be unenforceable as the law currently stands.” It is this, and the subsequent uncertainty this decision has created, which is currently causing such consternation in the litigation funding industry. 

Implications of the judgment

This decision is important and one of which our clients should be aware. It is obviously of great consequence to litigants and those in the funding industry, and in the short term is likely to have most impact. Particularly where litigation is currently underway, there is now a question mark over the lawfulness of the LFAs in force. 

That said, and contrary to a number of recent dramatic headlines, we consider that this decision is unlikely to act as a major deterrent to the industry. Litigation funding is certainly not dead. We anticipate that funders will begin redrafting their contracts, if indeed they have not done so already, so that they comply with current legislative requirements. For now, however, and pending any redrafting, where clients are faced with litigation involving funding arrangements this decision may provide significant scope to challenge the lawfulness and enforceability of such arrangements. 

Finally, and given our conclusion that this decision will have the greatest impact in the short term, we consider it unlikely that it will have much if any impact upon D&O insurance generally. The risks posed by litigation funding to insureds remain significant and we do not anticipate that underwriters will revise their view of that risk because of this decision.

Meet the authors

Placeholder Image

Karen Cargill

Chief Client Officer, Management Liability and D&O Product Lead

Stephanie Manson

Stephanie Pestorich Manson

Head of Management Liability

  • United Kingdom

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