Good news for litigation funding: LFAs are not DBAs

The Court of Appeal's judgment in PACCAR Inc and others v Road Haulage Association Ltd and another last week will be welcome news to litigation funders and those they fund.

The Court of Appeal agreed unanimously that a litigation funding agreement ("LFA") that provided remuneration to the funder at a fixed share of any damages recovered by the client does not comprise a 'damages-based agreement' ("DBA") so as to be unenforceable if it breached the rules governing DBAs. Had the Court of Appeal decided the opposite, it is very likely that most, if not all, LFAs in existence would be unenforceable.

Do funders provide "claims management services"?

The case concerns a preliminary issue first raised before the Competition Appeal Tribunal by the DAF defendants in the Trucks Litigation. They argued that LFAs comprise "claims management services" under section 4(2) of the Compensation Act 2006 (the "Compensation Act") as the definition of that phrase extends to "the provision of financial services or assistance".  

The phrase "claims management services" was imported into section 58AA of the Courts and Legal Services Act 1990 ("CLSA"), which states that: "a damages-based agreement is an agreement between a person providing advocacy services, litigation services or claims management services..." and causes such agreements to be unenforceable unless compliant with specific requirements, including that remuneration be fixed to a prescribed amount or percentage.  In the Trucks Litigation the LFA would fall foul of the prohibition on the use of DBAs in opt-out collective actions.

Citing earlier authorities, the Court of Appeal confirmed that any statutory provision must be construed in its full legal, social and historical context. With this in mind, the Court of Appeal observed that the Compensation Act was introduced to regulate unauthorised intermediaries providing services that posed a particularly high risk to consumers (such as selling insurance and loans and making referrals connected to legal claims). It was not introduced to regulate non-champertous LFAs offered by professional third party funders.

Furthermore, Section 58B of the CLSA in fact sets out a comprehensive regulatory scheme for LFAs, and permits the kind of LFA in issue. The fact that section is not yet in force does not render it redundant, but rather that the government has so far considered it unnecessary to regulate the litigation funding sector. As it is improbable that Parliament intended for two competing regimes for LFAs, the Court of Appeal held that the better conclusion is that LFAs do not fall within the scope of the Compensation Act.

The Court of Appeal also considered that the wording "financial services or assistance" in the Compensation Act should be conditioned by the phrase it seeks to define, ie "claims management". If due regard is given to the central concept of the management (as opposed to the pure funding) of claims, there can be no doubt that professional third party funders do not provide "claims management services" as that term is used under the Compensation Act.

The Court of Appeal therefore dismissed the DAF defendants' appeal and quelled any remaining doubt as to whether LFAs fall within, and must comply with, the DBA regime of Section 58AA of the CLSA: they do not.