Litigation funding and PACCAR: reverse, regulate and reform

The Civil Justice Council has published its final report on litigation funding, recommending that the government reverse the effect of the Supreme Court's decision in PACCAR Inc v Competition Appeal Tribunal, and introduce light-touch regulation of litigation funders ([2023] UKSC 28). While these are the headline points, there is much in the report for funders and practitioners alike to digest.

With the potential for sweeping reform, the Civil Justice Council (CJC) has published its final report on litigation funding (the report), recommending that the government reverse the effect of the Supreme Court's decision in PACCAR Inc v Competition Appeal Tribunal ([2023] UKSC 28; see News brief "The Supreme Court's decision in PACCAR: litigation funding stopped in its trucks?"). The 150-page report contains 58 recommendations and proposes a twin-track approach in implementation: an immediate legislative fix to reverse the effect of PACCAR, followed by the introduction of light-touch regulation of litigation funders. While these are the headline points, there is much in the report for funders and practitioners alike to digest.

LFAs and DBAs

In PACCAR, the Supreme Court held that certain litigation funding agreements (LFAs) constituted damages-based agreements (DBAs). This classification brought these LFAs under the Damages-Based Agreements Regulations 2013 (SI 2013/609) (2013 Regulations), rendering many existing LFAs unenforceable unless they were restructured. This was especially problematic for opt-out collective proceedings due to the Competition and Appeal Tribunal's (CAT) prohibition on DBAs.

In response, the government introduced the Litigation Funding Agreements (Enforceability) Bill (the Bill) in early 2024 to amend section 58AA of the Courts and Legal Services Act 1990 with the intention of reversing the effect of PACCAR (see News brief "Litigation funding: rewinding to the pre-PACCAR position"). However, the Bill was stalled during the wash-up procedure, with the new government preferring to wait for the CJC's review of litigation funding (see News brief "Fallen bills and election manifestos: a new start"). An interim report and consultation were published on 31 October 2024, with the final report issued on 2 June 2025.

Reversal of PACCAR

Respondents to the consultation expressed significant concern about the uncertainty created by the PACCAR ruling, with the majority of respondents advocating for the reversal of the effect of PACCAR. Respondents noted that many percentage-based LFAs, that is, where the funder's return is calculated by reference to a percentage of the damages recovered in the case, had to be renegotiated. Some respondents said that there was evidence that multiplier-based LFAs, that is, where the funder's return is calculated by reference to a multiple of the capital provided, led to less favourable financial outcomes for funded parties than percentage-based LFAs. Respondents also highlighted the clear legal distinction between DBAs, which are provided by legal representatives, and LFAs, which are provided by non-parties that are capable of supplying greater capital.

Although PACCAR does not explicitly render multiplier-based LFAs unenforceable outside of the CAT, at the time of writing, the chancellor of the High Court, Sir Julian Flaux, Deputy Head of Civil Justice, Lord Justice Birss, and Lord Justice Green are hearing arguments in the Court of Appeal regarding the validity and enforceability of this type of agreement in Commercial and Interregional Card Claims Ltd v Mastercard and others. This is a pivotal issue for litigation funding and puts the CJC's recommendations in sharp focus.

The report recommends that legislation be introduced, reversing the effect of PACCAR. The CJC recommends that the legislation should make clear that the provision of litigation funding is not a form of claims management service, which was the central issue in the PACCAR judgment (and, in the CJC's view, a product of overly inclusive drafting) and is distinct from funding provided to a party by their legal representative.

The report notes that, for clarity, the legislation should state that common law LFAs include those where the funder's return is calculated by reference to the funded party's damages, any settlement, or by a multiplier. The CJC recommends that the legislation should have retrospective and prospective effect to restore certainty and protect existing funded claims.

Light-touch regulation

Beyond reversing the effect of PACCAR, the CJC proposes a statutory regulatory regime for third-party funders. This would replace the current self-regulatory approach governed by the Association of Litigation Funders' Code of Conduct (the Code). Oversight of this regime would be exercised by the Lord Chancellor through the use of secondary legislation. The key drivers for this change are:

• There is no guarantee that a funder will be subject to or abide by the Code.
• Ensuring that capital adequacy requirements are met.
• The need for consumer protection.

The report also recommends establishing a standing committee on litigation funding. This body would collect market-wide data on conditional fee agreements (CFAs), DBAs, litigation funding and alternative funding models such as crowdfunding to provide an empirical basis for ongoing monitoring and future policy development and reform. Practitioners should note that the recommendations include an obligation that law firms, as well as funders and HM Courts & Tribunals Service, should provide it with this data.

The report does not propose Financial Conduct Authority (FCA) involvement at this stage although it suggests that this is reviewed after five years. It acknowledges that the nature of litigation funding means that FCA involvement may eventually be required. The report anticipates that the effectiveness of these arrangements will be monitored by the government, working in tandem with the standing committee on litigation funding.

Core obligations under the proposed regime would include:

• Case-specific capital adequacy requirements.
• Mandatory after-the-event (ATE) insurance with robust anti-avoidance endorsements where funding is provided to non-commercial, collective or group proceedings.
• Anti-money laundering compliance.
• Disclosure at the earliest opportunity of the fact of funding, the funder's identity and the ultimate source of the funding, but not, in general, the terms of the LFA.
• Conflict of interest controls to prevent or manage conflicts between a funder and those that it funds, and the means to resolve those conflicts.
• Codification of the requirement that litigation funders cannot interfere with litigation, so that any breach of this principle results in not only the LFA becoming unenforceable but the funder becoming liable for adverse costs and the funded party's costs.
• Standard LFA terms being developed and annexed to the 2013 Regulations, including provisions relating to the termination of LFAs.

An LFA would need to comply with these obligations in order to be enforceable.

The CJC recommends additional, although still light-touch, regulation for collective, consumer, representative or group litigation, which would include:

• A regulatory consumer duty, based on the FCA's consumer duty, with complaints referred to the Financial Ombudsman.
• The requirement that funded parties are provided with independent legal advice from King's Counsel before entering the LFA.
• Ex parte court approval of LFA terms at the outset of proceedings, with appropriate redactions for privilege or commercially sensitive material to allow the court to assess whether the funder's returns are fair, just and reasonable and, if needed, to take an inquisitorial role to protect both the funded party and absent class members.
• Certification by the funder and the funded party's legal representative that the claimant first sought funding and representation.
• Enhanced notice to class members about the funder's return during the opt-out period.

The report rejects the introduction of any caps on funder returns. It also states that formal litigation funding regulations should not apply to funding arbitration proceedings on the basis that no problems or risks have come to light previously. This leaves the onus on arbitral centres to determine how, and if, regulation should be implemented.

The report recommends that this regime be developed with reference to Principles 4 to 12 of the European Law Institute's Principles Governing the Third Party Funding of Litigation, as these principles are consistent with the light touch of the proposals, that is, aiming to enforce a statutory floor rather than a regulatory ceiling.

Simplifying the CFA and DBA regime

Practitioners will also be interested in the proposals made by the CJC regarding CFAs and DBAs. The report notes that, while the current CFA regime is working well, the DBA regime is not. Alterations to these regimes are needed to promote clarity and reduce satellite litigation. Two methods of achieving this are proposed:

• Maintaining the distinction between CFAs and DBAs in primary legislation and using a statutory instrument (SI) to detail the regulation of them.
• Replacing both CFAs and DBAs with a single regulatory regime in order to cover all the ways in which lawyers are renumerated, with a single SI to outline the exact requirements.

Template CFAs would also be provided and the report recommends an abrogation of the indemnity principle with a view to minimising the potential for technical, procedural challenges to any form of CFA, albeit with procedural protection for the paying party. It also recommends a review of the current caps on success fees for CFAs and, in the case of commercial parties, the entire removal of caps on the lawyer's return, whether under a CFA or DBA.

Concerns regarding the drafting of the 2013 Regulations date back a number of years, resulting in a set of reformed regulations proposed by Professor Mulheron and Nicholas Bacon KC in 2019, which were not actioned by the Ministry of Justice. The report recommends that the 2013 Regulations ought to be reformed as a matter of urgency and the basis of reform should be the Mulheron-Bacon proposals, with any necessary adjustments to reflect the other recommendations in the report. The CJC also recommends that the responsibility for CFAs, DBAs or any new regime should also shift from the Ministry of Justice to the Civil Procedure Rules Committee (CPRC).

The report further notes that there are good reasons to allow DBAs to support opt-out collective proceedings in the CAT, recommending that the prohibition on the use of DBAs in collective proceedings be removed and be aligned with the provisions under Civil Procedure Rule (CPR) 19.8 where DBAs are permitted.

Procedural changes

The report also contains the following proposals:

• There should be no presumption of security for costs to be ordered against a litigation funder or funded party. Security for costs should not be available where the funder has complied with regulatory requirements concerning capital adequacy and it has in place a suitable and adequate ATE insurance policy with effective anti-avoidance endorsements.
• The recoverability of funding costs should be available in exceptional circumstances, taking into account, for example, the defendant's conduct, the claimant's financial position and the necessity of funding in the case.
• CPR 19 should be revised to make it consistent with the CAT rules that apply to LFAs, including in terms of the approval of LFAs and settlements.
• Consideration should be given to the development of a pre-action protocol for mass claims that would apply in both civil proceedings and proceedings in the CAT.
• Costs budgeting and costs management should be mandatory for all funded collective proceedings, representative actions and group actions. In other funded claims, the fact that the claim is funded should be a factor to be considered in deciding whether to order costs budgeting under CPR Practice Direction 3D. Guidance should be developed jointly by the CPRC and the CAT Rule Committee.
• The current approach to the so-called Arkin cap should be codified, that is, where the court makes a decision concerning a litigation funder's liability for adverse costs of litigation on a case-by-case basis (Arkin v Borchard Lines Ltd and others [2005] EWCA Civ 655).

Prospect of new requirements

The immediate focus for many, and the headlines, will be on the recommendation to reverse the effect of the PACCAR decision, which the CJC urges should be as soon as possible. However, the CJC's report is wide-ranging in its recommendations and potential impact. It contains implications for funders and practitioners alike, with the prospect of new conduct requirements and court-approval processes, and legislation that provides a baseline set of regulatory requirements for funders and improved operation of CFAs and DBAs. Attention now turns to the government to see how it responds and the speed of any reform.

The report is available at www.judiciary.uk/wp-content/uploads/2025/06/CJC-Review-of-Litigation-Funding-Final-Report-2.pdf