In PACCAR Inc & Ors v Competition Appeal Tribunal & Ors, four out of five justices declared that these types of agreements fall under the statutory definition of damages-based agreements (DBAs).

Since the conditions for DBAs were not met when these agreements were entered, they were therefore declared unenforceable. This verdict was related to collective proceedings against truck manufacturers in light of a European Commission decision.

The Commission decided that five companies had formed a cartel. Litigation funding agreements supported these proceedings. Under these agreements, the funder’s remuneration is calculated as a percentage of the damages ultimately recovered.

DAF, the truck manufacturer, contended that such agreements constitute DBAs. The Competition Appeal Tribunal and the Divisional Court on judicial review dismissed this argument.

However, the case was leapfrogged to the Supreme Court on appeal. Lord Sales, in the leading judgement, stated: “Litigation funding falls within the express definition of ‘claims management services’ - which includes ‘the provision of financial services or assistance’ – in the Compensation Act 2006.”

Lord Reed, Lord Leggatt, and Lord Stephens concurred with Lord Sales.

Lady Rose, dissenting, agreed with the Divisional Court and the Competition Appeal Tribunal.

She stated: “The provision of financial assistance is included in the term ‘claims management services’ only if it is given by someone who is providing claims management services within the ordinary meaning of that term.”

The ruling’s impact on litigation funders is expected to be substantial.

Glenn Newberry, head of costs and litigation funding at Eversheds Sutherland, said: “The decision will send shockwaves through the funding industry and may lead to number of smaller operators going out of business.”

Alice Darling, senior associate at Clifford Chance, added: “The decision ‘has rendered many funding agreements currently in place unenforceable.’”

However, funders expressed confidence in the industry’s resilience.

The International Legal Finance Association and the Association of Litigation Funders of England and Wales stated jointly: “We are disappointed by this decision as it runs contrary to the accepted understanding that financing agreements are not damages based agreements.”

Steven Friel, chief executive of litigation funder Woodsford, commented: “Our business, and UK litigation finding generally, are now sufficiently mature that this decision, while frustrating, will not stop the access to justice momentum that we have created.”