Recent Developments on Funding Arrangements in the UK

The Court of Appeal in England & Wales, in its powerful judgment in Sony Interactive v Neill and Ors [2025] EWCA Civ 841 (Sony v Neill) of 4 July 2025, unanimously dismissed a challenge to the validity of litigation funding agreements (LFAs) which provide for payment based on a multiple of the capital deployed or committed in the relevant proceedings.  Had the appeal succeeded, such agreements would have been rendered invalid, causing chaos for the litigation funding industry.  It remains to be seen whether the judgment will be appealed to the UK Supreme Court.  At the same time, the Civil Justice Council (CJC) of England & Wales published its much-anticipated report on litigation funding, which makes 58 recommendations and urges immediate reform.

Background - The UK Supreme Court’s Ruling in PACCAR

The UK Supreme Court’s seminal judgment in R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents) [2023] UKSC 28 (PACCAR) had found that LFAs that entitle the litigation funder to a percentage of any damages recovered constitute damages based agreement (DBA(s)) and that to be enforceable, a DBA must comply with the applicable statutory conditions, in particular the requirements of the Damages-Based Agreements Regulations 2013 (DBA Regulations 2013).  The decision rendered many existing third party funding agreements invalid.

The underlying facts of the PACCAR case were that the Defendants, UK Trucks Claim Ltd (UKTC) and the Road Haulage Association (RHA), made an application to the UK Competition Appeal Tribunal (CAT) for a collective proceedings order (CPO) in respect of breaches of competition law by the Claimants (Paccar Inc, DAF Trucks NV and DAF Trucks Deutschland GmbH) under section 49B of the UK Competition Act 1998.  The purpose of the CPO was to enable UKTC and the RHA to bring proceedings on behalf of claimants who had purchased trucks from the Claimants.  The European Commission had found that the arrangement that subsisted between the truck manufacturers to be in breach of European competition law.

UKTC and the RHA had to show that they had adequate funding arrangements in place to meet both their own costs and any adverse costs order if they were to obtain a CPO from the CAT.  The PACCAR claimants were many, more than 18,000, with the claim itself worth more than £2 billion.  The relevant parties obtained funding from third-party litigation funders and per the applicable LFAs, the funders’ maximum remuneration was calculated by reference to a percentage of the damages ultimately recovered in the litigation.

The truck manufacturers’ position before the CAT was that the LFAs constituted DBAs within the meaning of section 58AA of the Courts and Legal Services Act 1990, as amended (CLSA).  Section 58AA of the CLSA provides that a DBA will be unenforceable unless it complies with the requirements set out in Section 58AA(4), including the requirement that it complies with the provisions of the DBA Regulations 2013.  As such, they were unenforceable because they did not comply with the formality requirements made applicable by that provision.  If this were right, there would be no proper basis on which a CPO could be made by the CAT in favour of either UKTC or the RHA.

The CAT ruled that the LFAs were not DBAs and were therefore not struck out by the relevant provision.  A CPO could therefore be made.  The truck manufacturers sought review of this decision in two ways: (i) they took an appeal to the Court of Appeal and, (ii) challenged the CAT’s decision by way of judicial review.  The Court of Appeal decided that it had no jurisdiction to hear an appeal and the Divisional Court dismissed the judicial review claim.  The truck manufacturers appealed directly to the Supreme Court under the leap-frog procedure, with the Association of Litigation Funders of England & Wales intervening.

By a majority of 4 to 1, the UK Supreme Court (Lords Reed, Sales, Leggatt and Stephens, with Lady Rose dissenting) decided that the LFAs at issue were DBAs within the terms of section 58AA, CLSA, and would therefore be unenforceable unless they complied with (inter alia) the DBA Regulations 2013.

The decision had a huge impact on the litigation funding industry, commercial litigation and in particular claims in the CAT and other large group actions. The regulatory regime for DBAs requires, amongst other things, that the agreements specify the claim, the circumstances for payment of the representative’s fees and costs, and the reasons for setting the payment amount. The majority of LFAs were not compliant with these requirements, meaning that, post-PACCAR, many existing LFAs were rendered unenforceable unless they were restructured. 

Court of Appeal of England & Wales Rejects Post-PACCAR Challenge to Litigation Funding Agreements

This year, in  Sony v. Neill, the Court of Appeal considered various appeals from the CAT, requiring it to decide whether an LFA that provides for the funder to receive a multiple of the amount it has paid (or committed to pay) is a DBA if it also caps that amount at the level of the damages received by the funded party.

Facts and Issues in the Appeal

The case concerned conjoined appeals from the CAT in which the defendants had challenged the enforceability of the LFAs entered into by the claimant class representatives.  These LFAs had been amended as a consequence of the PACCAR decision.  The “funder’s fee” in the original LFAs in PACCAR and in the present cases was calculated as a percentage of the proceeds which the class representative would recover if the proceedings were successful.  In broad terms, the revised LFAs under consideration in Sony v. Neill provided that the funder’s fee is to be calculated as a multiple or multiples of the funder’s outlay (or its committed outlay) in the proceedings, although it is still paid out of the proceeds.  The revised LFAs also provided that the amount of the funder’s recovery is capped at the level of the proceeds recovered (or some possible subset thereof).  In each of the cases under appeal, the CAT found that the revised LFAs were not DBAs so that the LFAs are enforceable.  The unsuccessful defendants appealed in each case with the permission of the CAT.

The appeals raised three key issues in respect of the returns obtained by a funder (Sony v Neill at paragraph [5]):

• 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 section 58AA(3)(a)(ii) of the CLSA?
• 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?
• If the LFA is unenforceable and/or unlawful, can any parts of it be severed?

Decision

The Court of Appeal upheld the validity of LFAs that allow the funder to recover a multiple of its investment rather than a percentage of damages.  In a judgment given by Sir Julian Flaux C (with which Green and Birss LJJ agreed) which was handed down on 4 July 2025, the Court dismissed the appeal and held that the revised LFAs were not unenforceable.

• It rejected the appellants’ submissions that although the revised LFAs calculated the funders’ return by reference to a multiple of the amounts advanced by the funders, they were nevertheless DBAs because of express or implied caps on the level of recovery at the level of damages recovered, or because the return would be payable out of such proceeds. The fee is determined by reference not to the damages recovered but by reference to the amount of funding provided and the fact that the source of the fee paid is the damages does not turn it into a DBA, nor does the fact that there is an upper limit or cap on the funder’s fee recoverable by reference to the amount of damages recovered. The fee is still calculated or determined by reference to the amount of funding provided (Sony v Neill at paragraphs [115]-[123]).
• It rejected the appellants’ further submissions that conditional language providing for a percentage based recovery in the event that the law changed (i.e. to reverse PACCAR), but otherwise to be calculated by reference to a multiple of the amounts advanced by the funders, nevertheless rendered the revised LFAs into DBAs. The Court held that unless and until the law is changed either by the legislative reversal of PACCAR or in some other way, the percentage provision in the relevant LFAs is simply of no contractual effect – the argument that (if severance were not possible) the presence of the percentage provisions renders the whole LFA an unenforceable DBA, is unsustainable (Sony v Neill at paragraphs [124]-[128]).
• As a result of the first two points, the Court declined to decide the third point, which had become moot, as to whether the DBA was the LFA as a whole, or was properly to be located somewhere within the LFA, or alternatively whether it was possible to sever any language which otherwise had the effect of rendering an LFA into a DBA (Sony v Neill at paragraphs [129]).

Since PACCAR, the vast majority of LFAs now provide for payment based on a multiple of the capital deployed or committed.  Had the Sony v Neill appeal succeeded, such agreements would have been rendered invalid, causing chaos for the industry yet again.  The decision of the Court of Appeal should now provide clarity on the enforceability of revised litigation funding agreements for the majority of UK collective proceedings post-PACCAR.  It also aligns with the recommendations of the Civil Justice Council in its recent report on litigation funding discussed below, which included the reversal of PACCAR.

The Civil Justice Council Publishes Its Final Report Recommending Sweeping Reforms

On 2 June 2025, the CJC published its much-anticipated report on litigation funding which urges immediate reform following the PACCAR ruling.  The CJC is a statutory advisory public body tasked with reviewing the civil justice system and making recommendations on its development, and its Final Report is meant to respond to the previous government’s request for advice concerning litigation funding.  This request came about in light of the PACCAR decision and the state of flux that the litigation funding industry was in following that.

Overview of the Recommendations

The Final Report makes 58 recommendations in total including the following which are discussed in further detail below: 

• the reversal of the effect of the Supreme Court’s judgment in PACCAR; 
• establishing statutory “light-touch” regulation, with enhanced regulation where the funded party is a consumer or in collective proceedings, representative actions, or group litigation; 
• courts to be given discretion to award funding costs from a losing defendant in “exceptional circumstances”; and 
• third-party funding of arbitration not to be subject to the formal regulation.

The CJC’s initial recommendation concerned PACCAR.  It recommends that the effect of the PACCAR decision be reversed by legislation, which should be both retrospective and prospective in effect, and make clear that there is a categorical difference between (i) contingency fee funding, i.e., funding provided to a party to a dispute by their legal representative (through a CFA or DBA) and (ii) litigation funding, i.e., funding provided by an individual or a business who is not a party’s legal representative (litigation funders) for the purposes of dispute resolution.  The report emphasises that the two are separate and should be subject to separate regulatory regimes.  The legislation to be introduced should make clear that litigation funding is not a form of DBA and that it is a distinct form of funding from that provided by a party’s legal representative, and should also make clear that the provision of litigation funding is not a form of claims management service.

The CJC also recommends that the current self-regulatory approach be replaced.  That should be done by replacing section 58B of the CLSA (the section that makes provision for LFAs) with "a formal, comprehensive regulatory scheme" that covers all forms of litigation funding.  The CJC emphasises that such regulation will be "light-touch".  The CJC recommends that the minimum, base-line, set of regulatory requirements should include provision for: case-specific capital adequacy requirements; codification of the requirement that litigation funders should not control funded litigation; conflict of interest provisions; the application of anti-money laundering requirements; and, disclosure at the earliest opportunity of the fact of funding, the name of the funder, and the ultimate source of the funding.  Additional, but again still light-touch, regulatory requirements should apply to litigation funding provided to consumers and where it is provided to parties engaged in collective proceedings, representative actions or group litigation.  The CJC said the new regulatory regime should avoid imposing “statutory caps or mandatory minima” in respect of funders’ returns, and that standard terms for LFAs should be developed and annexed to the Regulations.

As to the recoverability of funding costs, the CJC recommended that litigation funding costs should be brought within the scope of the court’s wide discretion to make costs orders where it is just and proper to do so.  This would allow judges to assess whether these costs should be recovered, taking into account factors such as the defendant’s conduct, the claimant’s financial position, and the necessity of litigation funding in that case.  By being able to treat funding costs as recoverable, the courts would be able to ensure a fairer allocation of financial burdens of disputes, consistent with the general principle that costs should follow the event.  According to the CJC, this is likely to promote access to justice for claimants who would not otherwise be able to seek rights-vindication before the courts and is also likely to promote earlier settlement, saving court time.

Finally,  the CJC noted that litigation funding of arbitration proceedings should not be subject to the proposed formal regulation and it should remain a matter for arbitral centres to determine whether and, if so, how any such regulation should be implemented. 

The Likely Impact of the Recommendations

The Final Report will now be considered by the Lord Chancellor.  Despite the CJC presenting its proposed regulatory regime as “light touch”, its numerous recommendations would, if implemented, mean important changes to the litigation funding landscape in the UK which would reconcile access to justice and consumer protection with the commercial realities of the litigation funding market.  Overall, in light of the Sony v Neill decision and the Final Report the key issues that might need to be addressed when considering regulating litigation funding in England & Wales have now been considered, either by the CJC or the courts.  It remains to be seen whether legislation will follow to implement the CJC’s recommendations and whether such legislation will be in line with the approach taken by the Court of Appeal.