Success for RHA and relief for funding industry as Court of Appeal judges sitting as Divisional Court rule that litigation funding agreements are not subject to regulation as DBAs
March 5, 2021
In the context of a proposed competition group action brought by the Road Haulage Association (RHA) on behalf of thousands of truck operators, a three member panel of the Court of Appeal sitting as the Divisional Court of the Queen’s Bench Division has upheld an October 2019 decision of the Competition Appeal Tribunal (the Tribunal) and ruled that the RHA’s funding agreement with a third-party litigation funder was not a damages-based agreement (DBA) for purposes of section 58AA of the Court and Legal Services Act 1990 (CLSA) and therefore not subject to compliance with the statutory requirements for such agreements. The judgment will no doubt come as a huge relief to the funding industry which has for more than a decade provided funding on the basis that independent litigation funders need not comply with the requirements for DBAs. The funding industry will also welcome the Court’s remark that third-party litigation funding is now a substantial industry which “is widely acknowledged to play a valuable role in furthering access to justice”.
The RHA, which is the industry trade body dedicated to road haulage in the United Kingdom, is bringing a follow-on damages claim before the Tribunal after the major European truck manufacturing groups admitted their participation in cartel activity over a 14-year period from 1997 to 2011. The RHA is using the new Tribunal regime that allows class representatives to combine multiple individual claims in single collective proceedings where they raise common issues. The proposed opt-in proceedings, which already involves over 15,000 claimants, is valued at over £1 billion. To enable the RHA to bring the collective proceedings, the RHA entered into a litigation funding agreement with a third-party litigation funder covering the RHA’s costs of bringing the litigation. The Tribunal as part of its gatekeeper role for the collective proceedings regime held a preliminary hearing in June 2019 to decide on arguments raised by the defendant truck manufacturers to the effect that the RHA should not be authorised as class representative in light of various aspects of its funding and insurance arrangements. Those arguments included that the RHA’s litigation funding agreement constituted a DBA which did not comply with the requirements for DBAs. The Tribunal unanimously found in the RHA’s favour across the various issues raised but one of the truck manufacturers (DAF) sought to challenge the Tribunal’s decision on the DBA issue.
DAF was not certain whether there was a statutory right of appeal against the Tribunal’s judgment to the Court of Appeal – the RHA thought not – because the relevant statutory provision permits appeals only in respect of “decisions … as to the award of damages”. DAF therefore issued its appeal, while at the same time seeking judicial review of the Tribunal’s judgment. The Court of Appeal agreed with the RHA that there is no statutory right of appeal against decisions in collective proceedings on interim issues and particularly where the Tribunal’s decision would not have been determinative of the collective proceedings. In this case, even if the truck manufacturers had succeeded at first instance, it would have been possible for the RHA to amend its funding agreement so as to render it a compliant DBA. The substance of DAF’s challenge was therefore considered by way of judicial review by the Divisional Court.
DBAs, whose regulation was first introduced in 2009 through amendment to CLSA, are defined as agreements between a person providing advocacy services, litigation services, or claims management services and the recipient of those services where the amount to be paid to the service provider is determined by reference to the amount of financial benefit obtained. DAF’s argument on the substance was that litigation funding agreements fall within the definition of DBAs in section 58AA CLSA as they constitute claims management services. The phrase “claims management services” and its definition were imported wholesale by Parliament from the Compensation Act 2006 and therefore the definition needed to be construed by reference to that earlier Act.
Claims management services are at first blush broadly defined in the 2006 Act as “advice or other services in relation to the making of a claim”, while the Act further states that “a reference to the provision of services includes, in particular, a reference to… the provision of financial services or assistance.” Under the scheme of regulation for claims management companies, only those claims management services that the Secretary of State prescribes by order (so-called Scope Orders) would actually be subject to regulation and it was anticipated that regulation would be reserved for areas considered to be a particularly high risk to consumers.
DAF argued that Parliament intended a broad enabling power in the Compensation Act on the basis of which the Secretary of State could then determine which types of claims management activities would actually be subject to regulation pursuant to the Scope Order. DAF also argued that litigation funding agreements obviously fall within definition of claims management services within the broad enabling power as they constitute the provision of financial services or assistance in relation to the making of a claim.
The Divisional Court confirmed the purposive approach to statutory definition and that an important tool in the search for the purposive interpretation is the presumption against absurdity. The Court considered that the purpose of introducing statutory regulation of claims management services through the Compensation Act and its associated Scope Order – as detailed in the Explanatory Notes to the legislation and the Explanatory Memorandum to the Scope Order – was to enhance consumer protection in areas where the activities of “claims intermediaries” had been causing widespread public concern. Such claims intermediaries would proactively engage in “claims farming” and assist in the formation and bringing of the claims across areas such as personal injuries, housing, and financial services. The Court could not find any hint in any of the materials that regulation of non-champertous funding of litigation by professional third-party funders in return for a reasonable share of the client’s recoveries formed any part of the mischief at which the Compensation Act was aimed. Moreover, prior to the Compensation Act, Parliament had in 1999 introduced section 58B CLSA that was intended to regulate litigation funding. While this provision had not been brought into force, it was on the statute book when the Compensation Act was itself introduced and was thought to help maintain standards for litigation funding and to act as a deterrent against abusive practices.
The Divisional Court therefore agreed with the Tribunal and the submissions of the RHA that the extended definition of claims management services (also including the provision of financial services and assistance) is to be interpreted as applying in the context of the management of a claim. It is particularly relevant to have regard to the “potency of the term defined” when construing a composite phrase such as “claims management services” which had no established legal meaning at the time the Compensation Act was enacted. The result of the construction advanced by DAF would be “anomalous and unreasonable” as it would bring any form of financial assistance for the making of a claim within the ambit of the Compensation Act notwithstanding that pure litigation funding was not perceived to be a problem and, if its regulation was considered warranted, section 58B CLSA could be brought into force.
Following this successful outcome, the next step in the RHA’s proposed collective proceedings will be a hearing towards the end of April that will decide whether the claims are eligible for inclusion in collective proceedings. This element of the RHA’s application for a collective proceedings order (CPO) had been put on hold pending the judgment of the Supreme Court in the consumer collective proceedings against Mastercard. That judgment was handed down in December 2020 and set a relatively low bar for CPO applicants at the certification stage.
David Went is representing the RHA in the collective proceedings and appeared before the Court of Appeal/Divisional Court in Paccar Inc. and others v Road Haulage Association and others  EWCA Civ 299. He is instructed by Backhouse Jones.