UK courts and tribunals grapple with PACCAR impact on litigation funding

Following the Supreme Court’s 2023 decision in what is known as the PACCAR case, a litigation funding agreement that requires the funders’ fee to be paid by reference to a percentage of damages awarded is classed as a ‘damages-based agreement’ and is unenforceable in opt-out collective proceedings before the CAT under the Competition Act 1998 (215 pages/ 9.2 MB). An opt-out collective proceedings order allows a party to bring a claim on behalf of an entire unnamed group. All parties within this group as considered to be part of the action unless they have specifically opted out.

In other types of proceedings in England, a damages-based agreement is not completely prohibited, but must meet criteria set out in regulations to be enforceable.

In the aftermath of PACCAR, and in some instances in anticipation of it, many litigation funders reviewed their funding models to move towards arrangements in which their fees are calculated with reference to factors such as the funder’s outlay. This is a move away from more “traditional” methods where fees were calculated by reference to a percentage of the damages awarded.

A two-pronged market response to PACCAR has been reflected in some funding agreements providing for the funder’s fee to be calculated using either of two methods: the fee may be calculated using “PACCAR compliant” measures such as the costs paid out by the funder; or by using a more “traditional” percentage of damages approach. Such funding agreements tend to state that the latter approach will only apply if permitted by law. This reflects hope on the part of the funding market that the law will change to address the effects of PACCAR, including through the Digital Markets, Competition and Consumers Bill which is currently going through Parliament. The permissibility of such “either/or” wording in funding agreements has been the subject of debate.

One of the most recent cases before the CAT to consider post-PACCAR funding arrangement, is Mark McLaren v MOL (8 pages / 236 KB). The question before the tribunal was whether a litigation funding agreement between Mark McLaren Class Representative Limited and the funder, which took this type of “either/or” approach, constituted a damages-based agreement, and was therefore unenforceable.

The class representatives brought a class action on behalf of UK car buyers in February 2020. These buyers sought damages for alleged over-charging by several international shipping companies whom the European Commission found to have participated in a cartel – a method used to maintain high prices and restrict competition. The CAT granted a collective proceedings order on an opt-out basis, authorising Mark McLaren Class Representative Limited (McLaren) to act as class representative, in February 2022.

To fund the litigation, McLaren entered into a litigation funding agreement in 2020. The CAT later ruled on damages-based agreements in the PACCAR decision, meaning the previous funding agreement would potentially be considered unenforceable. McLaren and its funders changed the funding agreement in October 2023 in the hopes of being PACCAR-compliant.

The parties asked the CAT to decide if this revised litigation funding agreement was indeed PACCAR-compliant. If not, this would render the litigation funding agreement unenforceable, risking the CAT revoking McLaren’s permission to act as class representative.

McLaren argued that the revised arrangement did not constitute a “damages-based” agreement as the fee payable to the funder was calculated by reference to a fixed fee, not damages awarded. This fixed free would be determined by the “aggregate of reasonable costs” incurred by McLaren on things such as legal fees. The alternative basis for calculating the funder’s fee was by reference to a percentage of money awarded to the class representative. This sum included damages, settlement or interest awarded. However, this alternative calculation was contingent upon it being enforceable and permitted by law.

The parties asked the judge to consider the enforceability of these funding arrangements considering the CAT’s recent judgment in Alex Neill Class Representative Limited v Sony (5 pages / 296 KB). The agreements in both cases followed a similar structure containing alternative methods of fee calculation by reference to a percentage of damages, with the caveat that this must be enforceable and permitted by law.

The CAT considered the impact of the PACCAR judgment on funding agreements in collective proceedings and concluded that the litigation funding agreement in the McLaren case did not constitute a damages-based agreement. The CAT held that the funding arrangements were “materially similar” to those in the Sony case, where a similar conclusion had been reached, and were therefore not “damages-based” and were enforceable. The CAT stated that there was “no reason to depart from the reasoning in the Sony judgment,” where it had concluded that the alternative, damages-based, calculation did not currently have any legal effect given PACCAR.

Shortly after the McLaren judgment, the CAT handed down a further judgment in which it touched upon this issue. In this most recent judgment, the CAT certified the proceedings in Gormsen v Meta (33 pages / 550KB) as collective proceedings. During its consideration of certification, some issues arose as to the claimant’s funding arrangements. The CAT observed that the funding arrangements had been changed to “switch back to a damages-based funding arrangement, were the law to change to permit this,” something the CAT commented “would have the effect of aligning funder interests with class interests” and was therefore “obviously to be welcomed.”  The CAT did not consider the permissibility of such a clause further. The CAT simply concluded that the funding arrangements did not prevent it from making an order permitting the proceedings to continue, although it made clear that it was not “approving or endorsing or expressing any kind of approval of the terms on which these proceedings are funded.”

This means that courts have now “blessed” the post-PACCAR model of providing alternative bases for the calculation of the funder’s fee three times: once in Sony, once in a subsequent decision of the CAT, Commercial and Interregional Card Claims Limited v Mastercard (27 pages / 506 KB) earlier this year, and now in McLaren. The CAT’s comments in Gormsen may be viewed as providing further support for such a model, although not conclusive. In light of these recent developments, the model may well become the market standard.

However, the effectiveness of this form of agreement cannot be regarded as settled. The CAT granted permission to appeal the Sony decision to the Court of Appeal. The CAT recognised that post-PACCAR arguments are creating uncertainty and that a conclusive decision would be desirable from the Court of Appeal, possibly having heard multiple cases on the issues together.

The funding market, funded parties and those facing funded actions are likely to be watching with interest as the debate continues.

Co-written by Sara Esfandyari of Pinsent Masons.