The Civil Justice Council (CJC) has published a major final report on litigation funding that marks a partial but meaningful victory for the litigation funding industry. The 150 page report contained 58 recommendations, one of which was to potentially reverse the PACCAR decision in relation to the enforceability of litigation funding agreements.

What is PACCAR?

R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents) [2023] UKSC 28 is a landmark Supreme Court decision in relation to the validity of litigation funding agreements (LFAs), and is generally referred to as the PACCAR decision. It has significant implications for collective actions and the litigation funding industry in general.

The Road Haulage Association (RHA) brought collective proceedings on behalf of thousands of truck operators against several truck manufacturers, including PACCAR, for alleged competition law breaches (price-fixing). To finance this large-scale claim, the RHA used a litigation funding agreement that entitled the funder to a percentage of any damages recovered.

PACCAR challenged the litigation funding agreement’s enforceability, arguing it was a Damages-Based Agreement (DBA), a specific type of arrangement strictly regulated under the Legal Services Act 1990 and the Damages-Based Agreements Regulations 2013.

In July 2023, the UK Supreme Court held (4–1) that:

“A litigation funding agreement which entitles the funder to a percentage of the damages is a Damages-Based Agreement (DBA).”

This was a major shift. Before this ruling, the litigation funding industry operated under the widely held belief that legal funding agreements were not Damages Based Agreements, and therefore, not subject to the Damages-Based Agreements Regulations 2013.

Under UK law:

• Damages Based Agreements are only enforceable if they comply with very specific regulatory requirements.
• Legal Funding Agreements that do not meet those requirements are unenforceable, meaning funders may not be paid, even if the case succeeds.

The immediate implication of PACCAR was that many existing Legal Funding Agreements became unenforceable overnight, particularly in collective proceedings and group litigation, where funders often take a share of damages as their return.

Reversing PACCAR Litigation Funding Rules

The central recommendation within the CJC final report is that the Supreme Court’s 2023 decision in PACCAR should be reversed as soon as possible. That ruling found that many litigation funding agreements (LFAs), especially those offering a percentage of damages to funders, were technically damages-based agreements (DBAs), making them unenforceable if they didn’t meet strict statutory criteria.

The CJC has made it clear that the PACCAR litigation funding ruling undermines access to justice and should be undone. However, despite this strong stance, the Ministry of Justice has not yet signalled any concrete intention to act.

Regulation Beyond PACCAR

Beyond PACCAR, the report offers several proposals that are favourable to funders:

• Arbitration funding will not be subject to new statutory regulation. Arbitral centres will be allowed to decide their own rules.
• While the self-regulation model is set to end, funders are relieved that heavy FCA regulation will not be imposed immediately. Instead, a ‘light-touch’ statutory regime will be introduced, and only if that fails after five years will the FCA step in.

Differentiation Between Commercial and Consumer Cases

A particularly welcome development for commercial funders is the clear distinction made between:

• Commercial litigation: where parties are deemed sophisticated and can freely negotiate terms with funders.
• Consumer and collective proceedings: where stricter rules will apply to protect more vulnerable claimants.

This ensures commercial funders aren’t overly burdened by red tape meant for consumer protection.

Structure of the Proposed Regime

The CJC suggests that the Lord Chancellor should be responsible for introducing the new regulations via statutory instrument. Crucially, non-compliant LFAs would be unenforceable, but courts would have the discretion to uphold them in the interest of justice.

The new rules would address:

• Capital adequacy and anti-money laundering standards.
• Strong safeguards against funders controlling the litigation, especially regarding settlements.
• If a funder breaches these controls, they could be held liable for the funded party’s costs—a significant deterrent.

No Cap on Funders’ Returns

One of the most controversial issues was whether there should be a cap on funders’ returns in consumer and group actions. Funders have won this battle as the CJC agrees that caps are a “blunt instrument” that don’t reflect the differing risks of each case. Instead, judicial oversight will ensure that returns are “fair, just and reasonable.”

Disclosure Requirements

On disclosure, the funders did not get their way. While they argued that they should not have to reveal their involvement (just as defendants don’t need to disclose insurance details), the CJC disagreed.

Under the new regime:

• The fact of litigation funding,
• The identity of the funder, and
• The ultimate source of funding

… must be disclosed early on, though the full Litigation Funding Agreement does not need to be shared.

Portfolio Funding and Crowdfunding Concerns

In response to recent law firm collapses (like SSB Law and Pure Legal), the CJC says portfolio funding, where funders finance multiple cases under a single umbrella, should be regulated as a form of loan under the Financial Conduct Authority (FCA). This is to address risks tied to high-risk and unstable funding models.

For crowdfunding, the CJC also recommends regulation, especially where funders expect a financial return. In such cases, they should be subject to the same regime as traditional litigation funding. Even when no return is involved, safeguards are needed to prevent money laundering or the use of crowdfunding to pursue meritless litigation.

How can Annecto Legal assist?

Annecto Legal have over 12 years’ experience in arranging both litigation funding and insurance, and are therefore well placed to assist with the issues raised by the PACCAR Supreme Court decision. We can help by explaining elements of litigation funding agreements to clients in an impartial manner. Issues such as this highlight the benefits of arranging funding and insurance via a broker, who can then assist in settlement discussions, and other unforeseen issues that may arise during a dispute.

Alternative funding for commercial disputes is about finding the best way to manage the financial risks of litigation. Annecto Legal assists with commercial litigation funding and ATE insurance.

Clients can transfer the costs and risks of their case using commercial litigation funding and insurance and put themselves in a position of strength to negotiate the best settlement possible, or go to trial if necessary.

We deal with a variety of legal cases including assistance with insolvency litigation, breach of contract solicitors, professional negligence solicitors, fraud, banking litigation and can even help if you’re suing a solicitor or looking for commercial dispute resolution, including internation arbitration.