Deep Dive: Litigation funding and environmental claims – where has the Supreme Court left us?

25 Sep 2023

Cornerstone Climate

On 26 July 2023 the Supreme Court handed down its judgment in the case of R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents) [2023] UKSC 28. The ruling has huge implications for litigation funding generally, and for climate litigation specifically. Estelle Dehon KC and Alistair Cantor put them under the microscope.

 

The impacts of the climate and biodiversity crises are causing individuals and businesses loss, meaning that there has been a marked increase in mass tort and commercial claims, with the English courts rapidly emerging as a ‘hotspot’ for environmental litigation against multinationals. These claims rely on funding being available to support the case and de-risk potential claimants from bearing the very high costs of such litigation. The Supreme Court’s decision in PACCAR that certain types of litigation funding agreements (“LFAs”) may not be enforceable is thus potentially very impactful. There is a deep dive into the decision below, but in short, the difficulties presented by the judgment might be avoided by restructuring existing and prospective LFAs so they comply with the statutory requirements for Damages Based Agreements (“DBAs”).

This option will, however, not be available for ‘opt-out’ collective proceedings in the Competition Appeals Tribunal (“CAT”), where DBAs are not a permissible form of funding arrangement. This is already affecting the group litigation against six English water companies for allegedly underreporting pollution incidents and “unfairly overcharging” customers. It appears from other claims progressing before the CAT that litigants are still seeking a proven way to fund opt-out claims, but that the CAT is taking a pragmatic approach and has given more time for one of the litigants to determine how to redraft his LFA. Interestingly, preserving the UK’s standing as a forum for global litigation may spur the Government to enact change: the Department for Business and Trade issued a press release on 31 August in response to the PACCAR judgment announcing that the Department is aware of the decision “and is looking at all available options to bring clarity to all interested parties”. This is welcome, and we will update as more “clarity” emerges.

 

Setting the scene

The appeal arose out of proposed collective claims in the CAT following on from a European Commission decision that certain truck manufacturers had infringed European competition law.  UK Trucks Claim Ltd (“UKTC”) and the Road Haulage Association (“RHA”) sought permission from the CAT to bring collective proceedings on behalf of persons who had purchased trucks from the manufacturers, on the basis that higher prices had been paid as a result of the infringement. It was a requirement of obtaining such permission that UKTC and RHA had sufficient funding arrangements in place to meet their own costs and any adverse costs order that might be made against them. Both relied on LFAs in order to satisfy this condition. The defendant manufacturers challenged the lawfulness of doing so, asserting that: the LFAs in fact constituted Damages Based Agreements (“DBAs”) within the meaning of the Courts and Legal Services Act 1990 (“the 1990 Act”) and associated regulations; did not satisfy the statutory criteria for DBAs to be enforceable; and as a result were not enforceable, so could not satisfy the CAT’s requirement for adequate funding to be in place.

 

What is the fuss with DBAs?

DBAs are defined by s58AA(3) of the 1990 Act as:

“…an agreement between a person providing advocacy services, litigation services or claims management services and the recipient of those services which provides that—

(i) the recipient is to make a payment to the person providing the services if the recipient obtains a specified financial benefit in connection with the matter in relation to which the services are provided, and

(ii) the amount of that payment is to be determined by reference to the amount of the financial benefit obtained…”

The argument centred on whether the third-party funders who entered into the LFAs with UKTC and RHA were providing “claims management services”.  Section 58AA(7) of the 1990 Act defines this term by reference to earlier legislation: the Compensation Act 2006 (“CA 2006”); and the Financial Services and Markets Act 2000. These define “claims management services” in substantially the same terms. Section 4(2)(b) CA 2006 defines claims management services as “advice or other services in relation to the making of a claim”, with “other services” including “the provision of financial services or assistance”. It was common ground that if the LFAs were DBAs, they did not meet the statutory criteria and were unenforceable.

 

The Court’s Decision

The CAT held the LFAs did not involve the provision of claims management services, meaning the LFAs were not DBAs and were enforceable. After the Divisional Court dismissed the manufacturers’ appeal, they made a further appeal directly to the Supreme Court under the leapfrog procedure.

The Supreme Court allowed the appeal by a majority of 4 to 1. Giving the leading judgment, Lord Sales (with whom Lord Reed, Lord Leggatt and Lord Stephens agreed, Lady Rose dissenting) held that the LFAs did involve the provision of claims management services. The respondents had argued that “claims management services” should be interpreted as being limited to services in the context of management of a claim, in which respect their funders played no active role. However, the court ruled that the correct interpretation was far wider and capable of encompassing the LFAs in the instant case. Parliament had intended CA 2006 to provide a broad power to the state to regulate a rapidly developing field of services.  As such, it intended the definition of claims management services to be a wide one and not confined to the context contended for by the Respondents.

As such, the LFAs in the instant case were DBAs, did not satisfy the statutory criteria and were unenforceable. The judgment can be read in full here.

 

Comment

The implications of the judgment extend far beyond the collective actions concerned and amount to a hand grenade lobbed in the direction of the funding industry, obliterating its long-held assumption that LFAs did not constitute DBAs. Funders will be urgently reviewing their existing and prospective funding agreements to take account of the new legal landscape.  Where existing funding arrangements cannot be restructured to make them enforceable, we may see: losses in respect of funds already advanced under unenforceable agreements; the abandonment of ongoing claims; and applications for security for costs by defendants to actions affected.

In many cases, the difficulties presented by the judgment might be avoided by restructuring existing and prospective LFAs so they comply with the statutory requirements for DBAs.  However, as noted by Lady Rose in her dissenting judgment, the fact the statutory scheme for DBAs was never designed for, and so is ill-suited for, litigation funding may present substantial difficulties. Furthermore, this option will not be available for ‘opt-out’ collective proceedings in the CAT, where DBAs are not a permissible form of funding arrangement.

An alternative will be for funders to utilise clauses often included in LFAs where their pay out is not calculated as a percentage of sums awarded, but rather as a sum tied to capital invested and rising over time. This would potentially take any such LFA outside the scope of the DBA regime since the funder’s pay out would not be “determined by reference to the amount of the financial benefit obtained”. The difficulty with this course of action from the perspective of funders, and those seeking to enter into arrangements with them, is that the Supreme Court’s ruling did not address whether LFAs of this nature would indeed not constitute DBAs. It cannot be ruled out that defendants to collective proceedings will take the point that they do, meaning anyone taking this course of action would lack certainty as to the legal integrity of their funding arrangements.

As mentioned above, this decision has particular significance for the nascent UK climate litigation landscape, given the use of litigation funding generally, and specifically of opt-out collective proceedings in the CAT (for example those recently issued/to be issued against various UK water companies arising from alleged under-reporting of pollution incidents, as reported here), to advance environmental claims. Where environmental litigation cannot be lawfully resourced via third-party funding, there is a real risk huge numbers of small businesses and consumers’ rights to redress might be hobbled, and environmental breaches go unpunished, to the unfair advantage of large companies with deep pockets.

For now, the CAT appears to be taking a pragmatic approach to the issue: the claimant in the opt-out collective proceedings in Gutmann v Apple Inc has been given more time to discuss with his funder how to amend the LFA in light of PACCAR.

It is to be hoped Parliament will react to the decision to provide, at least, clarity on where third-party funders and litigants stand in relation to LFAs. Initial indications are that this may happen, given the fairly speedy press release by the Department for Business and Trade in response to the PACCAR. However, given Westminster’s increasing focus on 2024’s general election, and that what may be needed is primary legislation to address the impact of the decision, the legislature may not act as promptly as the situation demands.