Shock decision from the Supreme Court means litigation funding agreements are unenforceable

Daniel Jenkins, Partner and NexaConnex Lead

Estimated read time: 1 Minute

Shock decision from the Supreme Court means litigation funding agreements are unenforceable

Following a surprise decision from the Supreme Court, delivered on 26 July, litigation funders face having to redraft the terms of their agreements with clients.

A majority decision in the case of PACCAR Inc & Ors v Competition Appeal Tribunal & Ors means that current contracts are unenforceable because they do not satisfy the statutory conditions for damages-based agreements (DBAs).

Background: what is litigation funding?

Litigation funding involves a third party (with no prior connection to the litigation) financing all or part of the legal costs of certain litigation, in return for a percentage of any damages recovered if the funded litigant be successful.

This case considered whether the agreements to provide this funding, known as litigation funding agreements (“LFAs”), constituted “damages-based agreements” (“DBA”), a term which has a specific legal meaning.

In order to be lawful and enforceable a DBA has to satisfy certain conditions. The LFAs in this case had been entered into without satisfying those conditions, so the question of whether they constituted DBAs as this was critical for whether or not they were enforceable..

Facts of the case

The case involved collective litigation against truck manufacturers following a European Commission decision that five companies had operated a cartel.

The proceedings were supported by litigation funding agreements under which the funder’s remuneration was calculated by reference to a share of the damages ultimately recovered.

Truck manufacturer DAF argued that such agreements were DBAs but, this was rejected by the Competition Appeal Tribunal and the Divisional Court on judicial review; DAF’s appeal was leapfrogged to the Supreme Court, where the argument has now been successful.

Conclusion

Consequently, the litigation funding industry now faces the prospect of being unable to enforce current agreements which do not satisfy the necessary conditions for DBAs.

Although the case has sent shockwaves through the funding industry, it is expected to respond quickly to ensure its documentation is enforceable going forward.

Litigation funding may be the only way some claimants can bring claims and ultimately access  justice following cuts to legal aid over recent years, so it is to be hoped that uncertainty in the market resulting from this ruling can be resolved speedily.

How can we help you?

If you have litigation funding and are concerned about how today’s ruling impacts you, contacts us today.