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When does a Litigation Funding Agreement become a Damages-Based Agreement?

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(Estimated reading time: 3 minutes 39 seconds)

This was a central issue in the recent Court of Appeal case of Paccar Inc v Road Haulage Association Ltd [2021] EWCA Civ 299 (05 March 2021).

Litigation funding agreements (“LFA”) and damages-based agreements (“DBA”) are both forms of litigation funding. Both are ways to facilitate access to justice and both enable litigants to pursue their claims without having to bear the costs of so doing – at least until judgment is given in their favour. The “litigation risk” is transferred away from the litigant and onto the investor and the legal representatives.

The quid pro quo is that under both types of arrangements the “fruits” of the litigation are applied in giving the funder back its investment and a healthy return and allocating a sizeable proportion of the damages for the solicitors.

  • They are effective ways of putting the opponent on notice that not only have third parties reviewed the legal and factual merits of the claim but are also prepared to take on the risk of funding it.
  • Such arrangements are open to accusations by the opponent of champerty and self – interest. Any opportunity to attack such arrangements will be seized upon (Zuberi v Lexlaw Ltd[2021] EWCA Civ 16 is a case in point regarding DBAs).

So when could a litigation funding agreement potentially morph into a damages-based agreement and, if so, what are the consequences?

In the “Paccar” case the appellants argued that the funder was providing “claims management services” and, as such, it fell within the definition of a damages-based agreement. As a consequence, it was subject to the Damages Based Agreements Regulations 2013. Since the LFA didn’t comply with these regulations it was thus unenforceable and unlawful.

Much to the relief of the funder in particular and the funding community in general, the Court of Appeal came to a different view. The Competition Appeal Tribunal, whose decision was being appealed, stated:

“Litigation funders, by contrast, are engaged in the funding of a claim, not the management of the making of a claim. On that basis, since litigation funders are not engaged in providing “claims management services”, a LFA will not come within the definition of a DBA in section 58AA(3) CLSA.”

The Court of Appeal, applying the principles of statutory construction essentially came to the same view.

It also made reference to the fact that s58B of the Courts and Legal Services Act 1990 sets out scheme for regulation of LFAs. These provisions have not been brought into force but remain on the statute book and have not been repealed. This clearly points to Parliament making specific and distinct provision for the regulation of non-champertous litigation funding agreements (as opposed to damages -based agreements).

One of the conditions in the above dormant provisions which must be satisfied as to whether or not an agreement is a funding agreement, is that the funder agrees to fund in whole or in part the provision of advocacy or litigation services by someone other than the funder. I’d be very surprised if all LFAs do not contain such provision.

Why is the judgment in the “Paccour” case is so important for funders?

  • Were the Court of Appeal to have found that the LFAs were in substance DBAs, then because it would have breached the DBA Regulations (most probably because there was no cap on the amount the funder could recover from the damages) it would as a consequence be unenforceable and unlawful.
  • Since the provisions in the LFA in question would have been similar to the provisions in other LFAs, the result would have meant that the majority if not all extant LFAs would have become unenforceable and unlawful overnight.

So, in summary, the key to if an LFA is, in substance, a DBA is whether or not the “funder” is providing  “advocacy”, “litigation” or “claims management” services. The first two as regards a funder can ordinarily be discounted, but the third could be a problem – as demonstrated in Meadowside Building Developments v 12-18 Hill Street Management [2019] EWHC 2651 (TCC).

In this case the “funder” was also the provider of services, assisting the liquidator both in the adjudication of a construction claim and its subsequent enforcement. It was also intimated that the funder’s interest in damages may have exceeded fifty percent, thus in breach of the DBA regulations.

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