The UK Supreme Court has ruled that litigation funding agreements that receive a percentage of any damages recovered by the claimant are damages-based agreements, threatening the viability of the burgeoning collective claims market.

Agreements that do not comply with the relevant regulatory regime are unenforceable, the court ruled, in a majority decision issued by Lord Sales, a public lawyer by background. The decision in PACCAR Inc & Ors v Competition Appeal Tribunal & Ors overturns rulings by both the Competition Appeal Tribunal (CAT) and the Divisional Court that the agreements did not constitute DBAs. 

The case related to collective proceedings underpinned by litigation funding brought by two sets of claimants against truck manufacturers following a European Commission ruling they had been part of a cartel. 

Both claimant groups relied on funding agreements by which funders were due to be repaid from a share of the damages. Truck manufacturer DAF had contended this meant the agreements were DBAs. Funders had previously assumed such agreements did not have to comply with the statutory DBA regime.

Further reading: Profession counts cost of crucial UK Supreme Court litigation funding ruling

In a technical ruling, the court held that litigation funding agreements were "claims management services" – which include “the provision of financial services or assistance” – as defined by the Compensation Act 2006.

 Lord Sales acknowledged that the decision means that many UK litigation funding agreements may be unenforceable. 

The ruling will particularly affect funding agreements in opt-out collective proceedings in the CAT, as, according to a briefing from defendant firm Herbert Smith Freehills, “the statutory regime governing such cases provides that a DBA is unenforceable if it relates to opt-out collective proceedings”.

Most collective proceedings in the CAT invariably rely on litigation funding, as recent judgments in the Truck Cartel and FX Cartel illustrate.

In her dissent, Lady Stern said that financial assistance was only included in the term "claims management services" if given by someone providing those services within the ordinary meaning of that term.

She held litigation funding would not naturally fall within the scope of the term "claims management services", arguing while such services included providing financial assistance, it did not mean that all financial assistance constituted "claims management services" whenever it relates to a claim.

The consequences of the majority ruling, she said, mean “funders cannot enforce their agreement for the repayment of the millions of pounds they have spent”.

She quoted Leslie Perrin, chairman of Calunius Capital, who told the court that he believed holding funding agreements to be DBAs would likely invalidate the funding for the Merricks litigation against MasterCard and Visa. 

Perrin added: “It 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.”

Earlier this week, the Court of Appeal resurrected of a £2.7bn class action against six investment banks for alleged foreign exchange (FX) manipulation by allowing proceedings to go ahead on an ‘opt-out’ basis. Legal commentators agreed the ruling provided the UK’s collective action regime with a major boost, sending an important signal to the CAT on where it should set the threshold for opt-out cases, which are much easier to pursue than those approved on an opt-in basis.