Shockwaves Sent Through Third-Party Litigation Funding Industry Where Does International Arbitration Fit In?
By Timothy St. John Ellam and Alison Bond
The United Kingdom Supreme Court’s decision in R (on application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents) [2023] UKSC 28 has sent shockwaves through the third-party litigation funding market in the United Kingdom and has created uncertainty about whether and how arbitrating parties relying on third-party funding are affected. With this uncertainty, arbitral parties should expect that third-party funders will likely seek to revise funding agreements to ensure that they are compliant.
The United Kingdom Supreme Court’s decision in R (on application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents) [2023] UKSC 28 has sent shockwaves through the third-party litigation funding market in the United Kingdom and created uncertainty with respect to whether and how arbitrating parties relying on third-party funding are affected.
In essence, the Supreme Court decided that litigation funding agreements (“LFAs”), under which the litigation funder is entitled to recover a percentage of the damages awarded, constitute unenforceable and unlawful damages-based agreements (“DBAs”) under the relevant statutory scheme. While the position with respect to third-party funding for litigation is clear, whether arbitrations are similarly affected is less clear. With this uncertainty, arbitral parties should expect that third-party funders will likely also seek to revise funding agreements to ensure that they are compliant.
Overview of the case
The appeal arose in the context of proceedings brought by UK Trucks Claim (“UKTC”) and DAF Trucks Deutschland GmbH (“DAF”) in the United Kingdom’s Competition Appeal Tribunal (the “CAT”).[1] DAF and UKTC sought an order from the CAT allowing them to bring collective proceedings on behalf of persons who acquired trucks from various truck manufacturers.[2] The European Commission found that an arrangement between certain truck manufacturers was an infringement of European competition law.[3] In follow-on CAT proceedings, UKTC and DAF alleged that the infringement resulted in prices for trucks being inflated and they sought compensation for losses caused by the unlawful arrangement.[4]
The issue to be determined by the Supreme Court was whether the LFAs entered into by UKTC and DAF were DBAs[5] according to section 58AA of the Courts and Legal Services Act 1990.[6] The appellant truck manufacturers argued that the LFAs entered into by UKTC and DAF were DBAs according to section 58AA which did not comply with the formality requirements and, therefore, were unenforceable.[7]
For UKTC and DAF to obtain an order from the CAT, they each must have adequate funding in place to meet their own costs and the costs of an adverse cost order.[8] A finding by the Supreme Court that the LFAs did not meet the formality requirements would mean the CAT did not have a proper basis on which it could make an order in favour of UKTC and DAF.[9]
The Supreme Court found that the funding agreements entered into by UKTC and DAF were DBAs that did not meet certain requirements and were, therefore, unenforceable.[10] Writing for the majority, Lord Sales recognized that the practical consequence of the Supreme Court’s decision was that the majority of third-party litigation funding agreements entered into, whereby the funder has a passive role in the litigation but is remunerated by receiving a share of the compensation, would be unenforceable.[11]
Significance of the decision for international arbitration
With the Supreme Court’s decision making the majority of third-party funding agreements unenforceable, third-party funders and claimants to litigation matters will undoubtedly seek to revise their agreements to ensure that they are compliant. What is less clear is the impact of the Supreme Court’s decision on arbitrations seated in England and Wales.
On its face, the legislative provision which resulted in the decision that UKTC’s and DAF’s third-party funding agreements are unenforceable appears to capture arbitration. The relevant provision includes third-party funding agreements relating to “advocacy services”, which are stated to include “any sort of proceedings for resolving disputes (and not just proceedings in a court), whether commenced or contemplated”.[12] It is difficult to see how third-party funding agreements for arbitrations would not be captured.
Notwithstanding this, with multiple agreements at play in international arbitration proceedings, including the underlying contract to the dispute, the arbitration agreement and the third-party funding agreement, the position is not clear-cut and guidance about this issue would be welcomed by arbitration practitioners. In the interim, many practitioners expect that third-party funders will err on the side of caution and make sure their funding agreements for arbitration matters are compliant with the applicable legislation. In the circumstances, there is likely no other choice but to do so.
[1] R (on application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents) [2023] UKSC 28 (“PACCAR”), para 4.
[5] Section 58AA of the Courts and Legal Services Act 1990 defines a DBA 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” (emphasis added).
[12] Section 58AA (7A) of the Courts and Legal Services Act 1990.
Timothy St. John Ellam, KC, FCIArb is a Partner in the Litigation group of McCarthy Tétrault in Calgary, Alberta and London, UK and is co-chair of the Firm’s international arbitration practice group. Mr. Ellam is a member of the Law Society of Alberta and The Law Society of England and Wales.
Alison Bond is a Partner in the Litigation group of McCarthy Tétrault in Toronto, Ontario and is a member of the firm’s international arbitration group. Ms. Bond is a member if the Law Society of Ontario and The Law Society of England and Wales.