The Court of Appeal (CoA) has recently handed down a hotly anticipated judgment concerning the enforceability of litigation funding agreements (LFAs) for competition law claims brought as collective proceedings. 

Those watching this space will be aware of the Supreme Court’s judgment in R (PACCAR Inc) v Competition Appeal Tribunal, which determined that LFAs in which the funder’s return is calculated as a percentage of the damages obtained in collective proceedings are considered to be damages-based agreements (DBAs) and are therefore unenforceable. They are considered to be DBAs because, under the relevant provisions of the Courts and Legal Services Act 1990 (CLSA), the funder was deemed to be offering “claims management services” and the amount to be paid to the funder is determined “by reference to the amount of financial benefit obtained”. 

The recent CoA judgment concerns the question of whether LFAs in which the funder’s return is calculated as a multiple of the funder’s expenditure on the proceedings are also DBAs. This judgment relates to very similar appeals that had been brought in seven collective proceedings claims. In all of the claims under appeal, the Competition Appeal Tribunal (Tribunal) had found at first instance that the LFAs in question were not DBAs and therefore were enforceable. 

Although the LFAs in each of the collective actions involved in the appeal were slightly different, the parties agreed that the three issues that the Court of Appeal needed to address were as follows.

1. If the amount payable to a funder or insurer under the LFAs is payable from and/or capped by the proceeds of a successful outcome, is the amount of the payment “to be determined by reference to the amount of the financial benefit obtained” for the purposes of s.58AA(3)(a)(ii) of the CLSA?
2. If the LFAs provide that the funder or insurer is paid a percentage of the proceedings, “only to the extent enforceable and permitted by applicable law” (or similar), is it a DBA, otherwise impermissible, or inappropriate for the purposes of certification? 
3. If the LFA is unenforceable and/or unlawful, can any parts of it be severed?

In respect of Issue 1, the appellants accepted that if the funder’s fee is calculated by reference to a multiple of its spend, then the fee is not “determined by reference to the amount of the financial benefit obtained”. The Tribunal agreed that this must be correct on the basis that the amount which the funder has invested in the proceedings is not a financial benefit obtained by the class representative, so the fact that the source of the fee was the damages awarded, did not turn an LFA that was not a DBA into a DBA.

Further, the Tribunal explained that this conclusion was not affected by any express or implied cap on the funder’s return by reference to the total damages awarded to the class representative or the amounts of undistributed proceeds left after distribution to the class members had taken place. If this did change the analysis, the Tribunal considered that it would be hard to see a situation in which any LFA could avoid being a DBA, and that would effectively make funding collective proceedings impossible. In addition, the Tribunal also confirmed that this conclusion was not affected by circumstances in which the multiple of damages recoverable by the funder could change based on the total damages recovered; the Tribunal considered that the contractual entitlement in such a scenario was still based on a multiple of the funder’s expenditure. In light of this, the CoA agreed with the Tribunal that LFAs in which the funder’s return is calculated as a multiple of the funder’s expenditure were not DBAs. 

In respect of Issue 2, which only arose in two of the collective actions involved in the appeal, the Tribunal concluded that the alternative provisions pursuant to which the funder could be paid by reference to a percentage of the damages but only to the extent permitted by law did not have any contractual effect unless and until the PACCAR judgment referred to above was reversed or amended. As such, they disagreed with the appellants’ arguments that the existence of such an alternative provision made the whole LFA a DBA and therefore unenforceable. 

Given the Tribunal found the LFAs were not DBAs and therefore were enforceable, they declined to rule in relation to Issue 3.

In summary, the CoA’s decision provides clarity and reassurance for litigation funders and class representatives involved in, or seeking to bring, collective proceedings, following the uncertainty created by the Supreme Court’s PACCAR judgment. Although the recent Tribunal judgment concerning the collective settlement in Merricks v Mastercard makes clear that funders’ returns will be scrutinised carefully by the Tribunal before they are approved, this judgment provides a clear steer as to how funders and class representatives may continue to structure their LFAs in such proceedings (at least pending any legislative intervention in relation to the determinations in the PACCAR judgment).