Independence Day – Court of Appeal unanimously upholds revised litigation funding agreements

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In a judgment handed down on 4 July 2025, the Court of Appeal held that a litigation funding agreement (LFA) where the funder’s return is capped at the amount of damages recovered is enforceable.

This claimant and funder-friendly decision brings a degree of certainty to the interpretation and enforceability of LFAs in the wake of PACCAR, while we await anticipated legislation to formally reverse the PACCAR decision.

Before reviewing the latest Court of Appeal decision, here is a recap of the story so far.

Previously, on PACCAR:

• July 2023 – where it all began – in a shock decision handed down before the summer recess, the UK Supreme Court decided that a litigation funding agreement under which a funder would receive a percentage of damages recovered was a Damages Based Agreement (DBA) within the meaning of the legislation, and so unenforceable (a) in opt-out proceedings in the Competition Appeal Tribunal (CAT) generally; and (b) in other proceedings unless it complied with the DBA Regulations (which most did not). For more, see our article – Supreme Court makes waves in litigation funding
• November 2023 – satellite litigation ensued as parties and funders battled over the enforceability of existing LFAs. Read more – Fracas post-PACCAR
• December 2023 – the then-Government tabled first attempts at limited legislative reform to minimise the effect of PACCAR in CAT cases. Separately, the CAT held that a revised LFA, amended in an attempt to work around the PACCAR decision, was enforceable. Read more – Funding and games – Court approves funding agreement
• Further similar CAT decisions followed between November 2023 and March 2024, confirming that revised LFAs were enforceable. These are appealed to the Court of Appeal.
• March 2024 – the then-Government introduced a broader Litigation Funding Agreements (Enforceability) Bill which took a more holistic approach to reforming the law and reversing the effect of the PACCAR decision. Read more – This vehicle is reversing – government seeks to reverse PACCAR
• April 2024 – the Court of Appeal stayed the various LFA appeals in light of the Bill, which (if passed) would render them academic. The Lord Chancellor also requested wider ranging advice from the Civil Justice Council (CJC) on broader questions relating to litigation funding and its regulation.
• August 2024 – following a general election and change of government, the new government announced that it would delay legislating in this area until the CJC issued its final report. Read more – PACCAR bill delayed until 2025
• November 2024 – the CJC issued an interim report and opened a consultation on reform of litigation funding. Read more – CJC issues interim report and opens consultation
• February 2025 – the Court of Appeal confirmed it was lifting the stay on 5 appeals from the CAT concerning the enforceability of LFAs – Court deliberation of multiple approach back on the timetable
• June 2025 – the CJC issued its final report – Litigation funding overhaul in the UK: CJC’s final report explained
• July 2025 – the Court of Appeal handed down judgment on the enforceability of LFAs in the 5 CAT appeals.

The CAT appeals

The Court of Appeal decision concerns similar issues raised in 5 separate appeals from the CAT, heard together. All appeals concerned the enforceability of LFAs between class representatives and funders in collective actions arising out of consumer issues; all LFAs concerned had been amended in light of the PACCAR decision in an attempt to render them enforceable. The Court of Appeal judgment covers 2 key issues (with a decision on a third rendered unnecessary):  

Issue 1 – is a funder’s fee which is capped at the amount of damages recovered, “determined by reference to the financial benefit obtained”? 

In the original (pre-PACCAR) LFAs, the funder’s fee was calculated as a percentage of the proceeds which the class representative would recover if the proceedings were successful – it was based on the outcome. The PACCAR decision though found that this common method of calculating the return meant they would constitute DBA because the amount of the funders fee was “determined by reference to the amount of the financial benefit obtained” (within the meaning of s.58AA of the Courts and Legal Services Act). 

In the revised LFAs, the funder’s fee is to be calculated instead as a multiple of the amount of funding provided – it was based on the input. However, the revised LFAs also provide that the funder’s fee is capped at the amount of proceeds recovered.

The appellants argued that the operation of this cap mechanism meant that the funder’s fee would still be “determined by reference to the amount of the financial benefit obtained” and so the revised LFAs remained unenforceable DBAs.

In its unanimous judgment, the Court of Appeal held that if the primary means for calculating the funder’s fee is a multiple of their funding, that is not a DBA and the addition of a cap does not change the position.

The Court noted:

“since the entire system of litigation funding is predicated upon the return which a funder makes being paid out of damages… it is difficult to envisage in what scenarios, as a matter of practical reality, there would not be an implied cap even if there was no express one.”

The appellants’ argument would therefore produce an absurd result that: (a) funding under LFAs in the CAT would become practically impossible; and (b) an uncapped LFA could in principle be enforceable, but a capped one (which protects the class and its representative from having to pay excessive amounts) would by definition be unenforceable. In its judgment, the words “determined by reference to the amount of the financial benefit obtained” should therefore be focused on the primary means of calculating the funder’s fee (which in this case was input based) not any secondary adjustment mechanism (the cap).

Issue 2 – only to the extent enforceable by law

A secondary issue arising on one of the appeals was whether an LFA could validly contain alternative bases for determining the funder’s fee, to be the greater of: (a) a multiple of funding provided; or (b) only to the extent enforceable and permitted by law – a percentage of the proceeds.

This drafting was apparently intended to render the revised LFA enforceable in the immediate aftermath of the PACCAR decision, while preserving the potential for the funder instead to receive a percentage of damages in the event that PACCAR was later reversed.    

The Court of Appeal was clear that this form of drafting is permissible – the alternative percentage provision is simply of no contractual effect unless and until the law is changed in some way to reverse PACCAR. The inclusion of such wording does not therefore render a LFA an unenforceable DBA – which would be precisely the opposite of what the parties had intended the drafting to do.

Issue 3 – severability

Since these first two issues disposed of the appeals, the court declined to make obiter dicta on a third issue which arose in one appeal, namely whether parts could be severed from an unenforceable LFA.

What next?

Now that the CJC has reported and recommended the legislative reversal of PACCAR as soon as possible, we hope to see a bill starting its passage through parliament shortly. Nonetheless, that is not an overnight process, and in the meantime this decision brings welcome certainty about the status of the various drafting workarounds that have been instituted in an attempt to save LFAs in the wake of the Supreme Court’s PACCAR decision. 

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