R (on the application of PACCAR Inc & Ors.) v. Competition Appeal Tribunal & Ors.
Decided by United Kingdom Supreme Court | (2023) UKSC 28
The UK Trucks Claim Ltd (UKTC) and the Road Haulage Association (RHA) (jointly, the Appellants) sought authorisation from the Competition Appeal Tribunal (the Tribunal) to initiate collective proceedings on behalf of individuals who had purchased trucks from the Appellants and other truck manufacturers collectively referred to as DAF. These proceedings aimed to secure compensation for damages resulting from an unlawful arrangement between DAF and other manufacturers, as established in a European Commission infringement decision dated 19 July 2016 (Case AT.39824 – Trucks). These violations allegedly resulted in inflated truck prices.
The pivotal issue at hand revolved around whether litigation funding agreements (LFAs) that permit funders to receive a portion of the awarded damages fall under the category of “damages-based agreements” (DBAs) as defined by the relevant legal regulations.
This determination hinges on whether litigation funding can be classified within the specific definition of “claims management services” stipulated in the applicable laws, which includes the “provision of financial services or assistance.” If the LFAs in question were considered DBAs under the pertinent laws, they would not be legally enforceable or valid due to their failure to meet the prescribed formal requirements.
On 26 July 2023, the UK Supreme Court issued its ruling, determining that LFAs involving funders receiving compensation based on the recovered damages could be considered DBAs. Consequently, litigation funding agreements cannot be enforced unless they comply with the regulatory prerequisites for DBAs. Furthermore, they cannot be employed to finance opt-out collective proceedings before the Competition Appeal Tribunal (CAT). This ruling extends its applicability not only to the LFAs in the PACCAR case but also to all LFAs involving funders being compensated based on the damages obtained.
Legal Analysis
Section 58AA of the Courts and Legal Services Act, 1990 (CLSA) outlines the requirements that a damages-based agreement must meet as set forth in Section 58AA (4), including adherence to the Damages-Based Agreements Regulations 2013 (DBA Regulations 2013).
Within the definition of DBA in Section 58AA(3), it encompasses agreements that provide “claims management services” if:
- the service provider receives payment when the recipient gains a specified financial benefit related to the services.
- the amount of payment depends on the financial benefit obtained.
For the definition of “claims management services”, Section 58AA(7) references Section 419A of the Financial Services and Markets Act, 2000 (FSMA), which replaced Sections 4(2) and (3) of the Compensation Act, 2006 (CA 2006). FSMA defines “claims management services” as encompassing “advice or other services regarding making a claim” with “other services” including the provision of “financial services or assistance”. Sections 4(2) and (3) of the CA 2006 featured similar language before their repeal.
During their deliberation, the Supreme Court also considered two crucial legal provisions. One was Section 58B of the CLSA, designed to enable litigation funding by exempting it from common law rules against champerty. The other provision was Section 47C (8) of the CA 1998, which deems damages-based agreements “unenforceable” in the context of “opt-out collective proceedings” before the CAT.
The central issue in the appeal centered around whether the definition of “claims management services” in Section 58AA (3) of the CLSA should encompass the provision of litigation funding. The Supreme Court determined that it should, and the majority provided several reasons to support this conclusion.
First, they observed that the language used in Sections 4(2) and (3) of the CA 2006, the precursor to the FSMA provision, was broad and not tied to any specific concept of active management. Additionally, there was no indication that these sections exclusively aimed to regulate “claims intermediaries” rather than the broader domain of claims management services.
The existence of Section 58B of the CLSA, which dealt with a different facet of litigation funding, did not provide a compelling reason to depart from the natural interpretation of Sections 4(2) and (3) of the CA 2006. Furthermore, the Explanatory Memorandum to the CA 2006 endorsed a broad interpretation of “claims management services” to encompass activities such as loans and financial assistance.
The term “claims management services” did not possess a widely accepted established meaning that could influence its legislative definition. Additionally, reports from the Jackson Review, which supported third-party funding, were considered irrelevant as they post-dated the introduction of Sections 4(2) and (3) of the CA 2006 by several years.
Neither Section 58AA of the CLSA nor the DBA Regulations 2013 offered guidance for interpreting Sections 4(2) and (3) of the CA 2006. Moreover, the majority rejected the argument that an LFA in opt-out collective proceedings, subject to CAT’s discretion and prior payment to class members, should not be considered a DBA. They concluded that, in substance, such an LFA retained the defining characteristics of a DBA as specified in the legislation.
Implications
The court established that litigation funders, by providing financial support, were offering “claims management services” as defined by specific legal provisions, even in cases where the funders played no active role in managing the actual claims. From the perspective of the majority, most litigation funding agreements, where funders receive a portion of the damages, are now categorized as DBAs under the law. Compliance with DBA Regulations is mandatory, and non-compliant agreements will not be legally enforceable. This ruling contradicts previous decisions from the CAT and the Divisional Court, both of which had ruled that these agreements were not DBAs. Lady Rose dissented, asserting that third-party litigation funding was never intended to fall under the definition of “claims management services.”
The immediate consequence of this ruling is that litigation funding agreements for claimants in cases before the CAT are no longer enforceable. Furthermore, such agreements are prohibited in opt-out collective competition proceedings. The broader implication is that, under current law, all litigation funding agreements where the funder’s compensation is contingent on the claimant’s recovery are classified as DBAs. Parties entering into such agreements must adhere to DBA Regulations or opt for alternative funding structures. Nevertheless, many existing agreements are now unenforceable. In ongoing cases, claimants and funders may need to reconfigure these agreements for compliance, and disputes may arise in other instances. The funding industry may seek government changes to exempt litigation funding agreements from the DBA Regulations or the CLSA definition, given the impact of this judgment. Calls for such exemptions are expected to grow following the PACCAR ruling.
Third-Party Funding under Indian Law
In India as of now there is no clear standpoint on third-party funding (TPF) agreements, though they are not barred under Indian Law. In Ram Coomar Coondoo v. Chunder Canto Mookerjee, 1876, the Privy Council permitted TPF based on promoting justice but emphasized the need for vigilance, asserting that agreements should not be manipulative or unjust. Third-party funding should aim to assist a just process, rather than be for illegitimate purposes such as fostering litigation for gambling or oppressing others, which would be contrary to public interest.
In 2018, the Supreme Court of India, in Bar Council of India v. AK. Balaji observed that while the funding of litigation by advocates is not explicitly denied, certain rules suggest that advocates cannot finance litigation on behalf of their clients. However, there is no such bar on third parties, excluding lawyers, funding litigation and seeking repayment after the case’s resolution. The court drew comparisons with the U.S. and the U.K., where lawyers can fund entire litigations and third-party funding agreements are not prohibited.
Drawing on the Privy Council’s decision and the Supreme Court’s observations, Indian courts may recognize TPF agreements, provided certain obligations are fulfilled. Specifically, the third party should not be an Advocate-on-Record and must refrain from participating or appearing in the litigation on behalf of any party. Additionally, adherence to the conditions outlined in the Indian Contract Act, 1872 is crucial for the validity of such contracts.
A report led by Retired Justice B.N. Srikrishna in 2017, which aimed to review the institutionalization of arbitration mechanisms in India, made favorable mention of Third-Party Funding (TPF).
And some states in India, including Gujarat, Madhya Pradesh, Andhra Pradesh, Orissa, Tamil Nadu, and Uttar Pradesh, have granted statutory recognition to third-party funding through amendments to Order 25, Rule 1 of the Code of Civil Procedure, 1908 (CPC). The Bombay High Court, in 1983, also amended Order 25, Rule 2 of the CPC, empowering courts to secure litigation costs by requiring third-party financiers to become parties to the suit and to deposit costs with the court.
In the case of Tomorrow Sales Agency Pvt. Ltd. v SBS Holdings Inc. and Others, the Delhi High Court determined that interim relief, specifically during the enforcement stage of an arbitral award concerning costs, is not permissible when sought against a third-party funder. The court said that the third-party funder’s role was confined to providing financial support to the claimants involved in the arbitration. However, it emphasised that the funder did not act as a signatory to the arbitration agreement nor did it participate as a party in the arbitration proceedings.
One aspect that awaits clarification is the extent to which foreign investment is permissible in the realm of third-party funding for disputes in India.
