The aftermath of PACCAR – Court of Appeal to hear challenge to the enforceability of widely-used funding agreements

Shifting sands in the litigation funding industry

As a result of the decision of the Supreme Court in PACCAR in July 2023, the funding industry has been weathering a period of uncertainty. In PACCAR, the Supreme Court held that the most commonly used form of litigation funding agreement ("LFA"), one which provided that a funder’s return would be calculated by reference to a percentage of any damages awarded, was a ‘damages-based agreement’ ("DBA"). This decision ran counter to the previously held industry view that LFAs were not DBAs, and therefore did not need to comply with the mandatory conditions prescribed by the DBA Regulations 2013. The Supreme Court decision was significant because DBAs which improperly fail to comply with the Regulations are unenforceable, and because DBAs are prohibited from being used in opt-out collective actions in the Competition Appeal Tribunal.

In anticipation of Supreme Court's judgment in PACCAR many funders amended their existing LFAs to provide for their return to be calculated as a multiple of the sum invested in the proceedings. LFAs agreed since the PACCAR judgment have largely adopted this new form of multiples-based agreement which was considered to avoid the need for the LFA to comply with the complex and uncertain provisions of the DBA Regulations and be compliant with the restrictions on the funding of opt-out collective actions.

Revival of challenges to new form LFAs

During the course of 2024 three appeals from the Competition Appeal Tribunal sought to challenge the enforceability of the new form multiples-based LFAs, arguing that these should also be classified as DBAs (and therefore unenforceable in the context of opt-out collective proceedings). Amongst other things, the appellants argue that there is a nexus between any damages awarded and the returns paid to funders, including because the funder's fee cannot exceed the total damages awarded.

The Court of Appeal initially decided to stay the appeals from the CAT on the basis that it was widely anticipated that a change in the law was imminent given the significant impact of PACCAR and the uncertainty it created for the litigation funding industry.

However, legislative change has not materialised as quickly as predicted. The Government has indicated that it will not consider new legislation until the Civil Justice Council (“CJC”), which has been tasked with conducting a wide-ranging review of third-party litigation funding arrangements and the associated regulatory framework, completes its full report scheduled for summer 2025.

In the circumstances the Court of Appeal recently determined that it would proceed with a joint hearing of the three cases challenging the enforceability of multiples-based LFAs. The Court explained that there was now “nothing that suggests” legislative change was imminent and, consequently, there was no longer a “good reason” for the proceedings to be stayed. The appeals are expected to be heard sometime between May and July this year. Those hearings should give an indication of the Court’s view of these multiples-based agreements and the potential that a further category of LFA may be at risk of challenge.

Authored by Theresa Hudson and Patrick Still.