The Supreme court have upheld an appeal made under the "leap frog procedure" ruling that Litigation Funding Agreements ("LFA") constitute Damages Based Agreements ("DBA") per section 58AA of the Courts and Legal Services Act 1990.
In terms of the 1990 Act, certain conditions need to be satisfied for a DBA to be enforceable. A Damages Based Agreement is defined as an agreement between a person providing either advocacy, litigation or claims management services. For a DBA to be enforceable, it must comply with these requirements, including the requirement that the amount paid out is a fixed percentage of the damages received, or is a fixed amount. The Court of Appeal decided that LFAs did not fall within the definition of DBA in terms of the 1990 Act, and therefore did not need to comply with these requirements.
The Appellants, manufacturers of trucks including PACCAR Inc and DAF, maintained the positon that the LFAs in place did in fact constitute DBAs in terms of the Act. The Supreme Court were invited to decide whether the LFAs involved the provision of "claims management services" which is defined in the Financial Services and Markets Act 2000. The respondents were the parties who had entered into LFAs in order to fund an application to the Competition Appeal Tribunal to allow them to bring proceeds on behalf of those who had acquired trucks from the appellants. The agreement was that a third party litigation funder would pay for the cost of the action, in exchange for a percentage of the damages received in the event of success. The respondents asserted that because the LFA providers had no role in the management of the claims, and provided no "claims management services", they were not DBAs and did not have to comply with statute.
The Supreme Court upheld the appeal, with Lady Rose dissenting.
Lord Sales provided some context to the statute in his judgement:
"The statutory purpose of Part 2 of the 2006 Act was to provide a broad power to allow the Secretary of State to decide what targeted regulatory response might be required from time to time as information emerged about what was then a new and developing field of service provision to encourage or facilitate litigation, where the business structures were opaque and poorly understood at the time of enactment.”
He continued that Parliament used wide language deliberately, and that the words should be "given their natural meaning". It was determined that the Respondents case sought to involve the "illegitimate addition or substitution of words in the definition" of claims management services. The reason for the broad terms, was so that the Secretary of State could "tailor its use according to need as more information became available and problems were identified". It was held that it was not for the court to limit or qualify the wide language used when defining "claims management services", and the appeal was therefore allowed.
Lady Rose, had the decision been solely up to her, would have found in favour of the respondents.
Litigation funders will need to ensure that their agreements do comply with the requirments set out in the 1990 Act, or they may be unenforceable. It could be incredibly costly for funders to not take action on the back of this decision and to face being unable to recover costs when litigation they have funded has been successful. In the judgement, Mr Leslie Perrin, Chairman of Calunius, was quoted, summarising the likely outcomes:
“… if the proposed LFAs with [UK Trucks Claim] were found to be DBAs, that finding would invalidate most if not all LFAs that have been agreed since litigation funding began. For example, it would invalidate the Merricks LFA (so far as I understand its terms from the judgments of the CAT) and would be likely to mean that no [collective proceedings order] could ever be pursued, given the reliance that has been placed on litigation funding in the development of this aspect of the work of the CAT. At the least, it would require a radical review not only of these LFAs but of the entire litigation funding sector as it has developed in the United Kingdom."
If you would like any further information, please contact Kirsty Waughman.