The Court of Appeal has rejected a series of challenges brought by defendants in a number of collective proceedings in the Competition Appeal Tribunal, in which those defendants sought to challenge the enforceability of “litigation funding arrangements”. Whilst the decision may mark the end of a tough period for litigation funders, and provide funders and litigants alike with more certainty, it is also likely to undermine momentum for changes to legislation to place litigation funding on a firmer footing.
Background
Litigation Funding Agreements (LFAs) are in effect a form of third party-funded “no win no fee” agreement, under which an independent third-party will finance all or some of the costs of bringing court proceedings in return for a fee from the recovered proceeds. If the funded party is successful, part of their monetary award will go to the funder. If unsuccessful, they typically will not be required to pay fees, although this can vary on agreement.
As we previously discussed here, the Supreme Court in PACCAR found that a funded party who is required to share a percentage of any damages award with their funder is party to an agreement which qualifies as a Damages Based Agreement (DBA) for the purposes of the Damages-Based Agreement Regulations 2013, and the agreement will only be enforceable if it complies with those Regulations. A DBA is an agreement where payment is made if the recipient of funding achieves a financial benefit and makes a payment to the provider of “services” based on the amount of financial benefit obtained. Until PACCAR, it was assumed that the relevant “services” for the purposes of that requirement were legal services, and not merely funding services.
The effect of the Supreme Court’s decision, given that LFAs had not previously been understood to be capable of qualifying as DBAs, was to cast doubt on agreements underlying a number of active and proposed claims, in particular collective claims before the Competition Appeal Tribunal. A large number of LFAs were suddenly rendered unenforceable.
The “workaround”
The Supreme Court’s decision led quickly to calls for Parliament to intervene and amend the relevant legislation, and the government at the time went so far as to introduce the Litigation Funding Agreements (Enforceability) Bill. However, that bill fell when Parliament was dissolved for the 2024 General Election. While pressure for legislative change has been maintained, including by the Civil Justice Council in a very recent 2025 report, claimants and funders developed a workaround of calculating the funder’s fee not as a percentage but as a multiple of its outlays, still paid out of the damages award and still capped by the level of damages recovered.
A number of defendants in collective proceedings – Sony, Apple, Mastercard and Visa – argued that these are still DBAs and therefore unenforceable.
The Court of Appeal decision
The Competition Appeal Tribunal rejected that challenge and its judgment has now been upheld by the Court of Appeal. The Court considered that the fact that the fee payable was – explicitly or implicitly – capped by reference to the damages awarded did not mean that the payment due under the LFA was “based on the amount of financial benefit obtained” and therefore a DBA. Sir Julian Flaux, giving the court’s judgment, noted that such a conclusion would produce an absurd result since all litigation funding proceeds on the basis that a successful claimant will achieve more in damages than it has to pay to its funders. It would have the effect of making every LFA a DBA.
The Court also rejected arguments that “backup” clauses in the agreements (under which they would revert to being percentage-based in the event that Parliament reversed PACCAR) rendered them DBAs.
Key takeaways and next steps
The Court of Appeal’s decision clarifies that not all LFAs are DBAs and it is still possible to obtain funding by agreeing to be paid out of the damages received without the need to comply with the requirements of the Damages-Based Agreement Regulations 2013, provided that the fee paid to the funder is calculated by reference to the funding rather than to the damages. This allows funders to maintain a priority position in the queue for payment, particularly in class actions.
The upside for those considering funding – or looking for funding to bring – collective proceedings is that there is an option to secure that funding which does not cross the line that the Supreme Court laid out in PACCAR. The downside is that by providing such an option the Court of Appeal may have just removed the momentum for Parliament to change the law, and funders, claimants and defendants may find themselves stuck with a messy compromise position for longer than might otherwise have been the case.
If you would like to discuss how this judgment affects your organisation, please contact Jamie Dunne, Craig Watt, Fiona Chute or your usual Brodies contact.
