Agreements with third-party litigation funders are not damages-based agreements (DBAs), three Court of Appeal judges – albeit sitting in the Divisional Court – have decided.
The court upheld the decision of the Competition Appeal Tribunal in the trucks cartel litigation – but it gave permission to leapfrog an appeal to the Supreme Court.
Giving the ruling of the court, Lord Justice Henderson observed: “Third party litigation funding is now a substantial industry which, although driven by commercial motives, is widely acknowledged to play a valuable role in furthering access to justice.”
It was acknowledged that, to uphold the appeal, would invalidate almost all existing litigation funding agreements (LFAs). The Association of Litigation Funders intervened in the case.
There are two applications for a collective proceedings order in the truck cartels case, by UK Trucks Claim Ltd and the Road Haulage Association.
The applications were adjourned back in 2019 pending the Supreme Court ruling in Merricks v Mastercard, which it delivered last December. A hearing is now scheduled for next month.
But the tribunal dealt with a preliminary issue over whether, as a result of their funding arrangements, either or both groups should not be authorised to act as a class representative.
One of the defendants, DAF, sought to appeal the decision that the LFAs were not in fact unenforceable DBAs.
On a procedural point, the Court of Appeal decided that there was no jurisdiction to appeal the DBA issue, but DAF had also sought judicial review just in case, permission for which the court granted. Itt then sat as the Divisional Court.
A DBA is defined by statute as an agreement between a person providing “advocacy services, litigation services or claims management services”.
The definition of claims management services was imported from section 4 of the Compensation Act 2006 and includes “the provision of financial services or assistance”.
The question was whether an LFA which provides for the funder to be paid by a share of damages, but not to play any part in the active management or prosecution of the claim, was a DBA by this definition.
If it was, then it would be unenforceable because it failed to comply with the conditions of the DBA Regulations.
The Compensation Act was aimed at claims management companies, operating particularly in personal injury and financial services, and Henderson LJ said there was no suggestion at the time that it intended to apply to third-party litigation funding.
Further, the Access to Justice Act 1999 had introduced section 58B of the Courts and Legal Services Act 1990 to allow for the regulation of LFAs, but the government had not brought it into force.
Henderson LJ said: “The natural inference to draw, in my opinion, is not that the legislation was a dead letter, but rather that immediate regulation of the third-party litigation funding sector was not considered necessary, and the continuing presence of section 58B on the statute book (albeit not in force) might meanwhile be expected to help maintain standards and act as a deterrent against abusive practices.”
As a result, while on a “literal, acontextual, reading”, the words ‘the provision of financial services or assistance’ could be read as covering third-party funding, in context they did not.
“It is in my view most improbable that Parliament would have intended by a sidewind to bring LFAs which were potentially liable to regulation under section 58B within the ambit of the scheme for the regulation of claims management services introduced by the 2006 Act,” the judge said.
“There would then have been two potentially competing regimes for the regulation of the same kinds of litigation funding services, and if that was indeed Parliament’s intention, one would then expect section 58B to have been repealed or modified to the necessary extent so as to make it clear that the new regime under the 2006 Act was to prevail.”
The judge concluded that the construction contended for by DAF was “both anomalous and unreasonable” – it could also cover a bank lending money to a customer to fund litigation.
He said: “A degree of legislative ‘overkill’ is sometimes the price to be paid for countering abuse, but if that were the position in the present case, it is inconceivable that the Explanatory Notes [to the Compensation Act] would have said nothing on the subject.
“If, however, the phrase ‘claims management services’ is interpreted with due regard to the central concept of the management (as opposed to the pure funding) of claims, the problem disappears.”
PJ Kirby QC, the barrister at Hardwick who represented the Road Haulage Association, said litigation funders could “breathe a sigh of relief” following the ruling.
“Had the decision gone the other way, it would have had a devastating blow on the third-party litigation funding industry and would have impeded access to justice, in particular in large consumer group actions or in competition claims.”
He added though that the Divisional Court granted the certificate for a leapfrog appeal to the Supreme Court, but it still has to give permission.
“An appeal to the Court of Appeal would have been a bit odd as three members of the Court of Appeal had already dealt with the matter,” he observed.