Litigation funding in limbo: PACCAR’s ripple effect and what comes next

One year ago, the Supreme Court's ruling in PACCAR Inc v Competition Appeal Tribunal [2023] UKSC 28 (“PACCAR”) sent shockwaves through the litigation funding industry, particularly third-party funders involved in collective actions.

The decision has highlighted substantial legal uncertainties surrounding litigation funding agreements (LFAs), and even challenges the fundamental assumptions underpinning this sector's business model and regulatory compliance. Here, we examine the debates concerning the future of third-party funding post-PACCAR and explore the gaps this decision has exposed in the sector’s existing legislative framework.

What is PACCAR and how did it happen?

The original case concerned the funding arrangements made by two prominent third-party litigation funders (‘the funders’)- to support a collective action before the Competition Appeal Tribunal (CAT).

To obtain a collective proceedings order (CPO), and therefore proceed, the Respondents - who were alleging breaches of competition law against various truck manufacturers - were required to demonstrate adequate funding to cover their legal costs, as well as potential adverse costs if they lost.

The Respondents relied on litigation funding arrangements (LFAs) provided by both funders to meet these funding requirements. These LFAs pledged financial support in exchange for a percentage of any damages recovered.

The key issue for the Supreme Court to determine was whether these LFAs, could be classified as Damages-Based Agreements (DBAs) under the Courts and Legal Services Act 1990 (‘the CLSA’).

This defines DBAs as “an agreement between a person providing advocacy services, litigation services, or claims management services and the recipient of those services”. Under the CLSA, the recipient pays the service provider should they obtain a “specified financial benefit”, the amount of which is “determined by reference to the amount of the financial benefit obtained”.

The Supreme Court ruled that, because the LFAs constituted "claims management services" - by virtue of s.58AA(7) of the CLSA and defined by s.419A of the Financial Services and Markets Act 2000 as “financial services or assistance”- they were indeed DBAs under s.58AA(3) of the CLSA and therefore required to comply with the Damages-Based Agreements Regulations 2013 (‘DBA Regs’).

Amongst other things, the DBA Regs include stringent requirements for the percentage of recoverable damages, as well as transparency in cost calculations. In this case, the LFAs provided by the funders did not meet these requirements and were therefore deemed unenforceable.

What are the implications of the PACCAR decision?

The Supreme Court’s ruling in PACCAR has wide-reaching implications for the litigation funding market, with stakeholders highlighting several points of concern.

1. There is now considerable uncertainty around the enforceability of LFAs that involve a share of damages, as well as those based on a multiple of the sum invested. This ambiguity extends to many existing and future funding agreements, many of which may now face legal challenges. Indeed, the market is already witnessing a growing number of appeals on such agreements. Previously on hold due to legislative considerations, these appeals are now expected to proceed to the Court of Appeal, and potentially even the Supreme Court.
2. The Government has decided to delay any legislative action until after the Civil Justice Council (CJC) completes its review of the litigation funding sector. The review process is expected to extend into summer 2025, with an additional six months needed for the Government to respond. As such, it is unlikely that any legislative changes will be forthcoming prior to 2026. This has been met with considerable frustration, prolonging a period of uncertainty for funders and claimants alike.
3. Access to justice is also an increasing concern, particularly as litigation funding plays a crucial role in enabling claimants with limited financial resources to pursue legal actions against well-funded defendants. With the enforceability of LFAs now in doubt, many funders may become more cautious in funding meritorious claims, or even withdraw from the market altogether.
4. In response to the challenges posed by PACCAR, the market is already shifting towards alternative funding models that sidestep the regulatory uncertainties associated with DBAs. Funders can, for example, invest directly in law firms rather than specific cases, thus avoiding technical issues concerning the validity of LFAs. These models present new challenges, however, as evaluating the financial performance of a law firm is fundamentally different from assessing the prospects of an individual case or portfolio of cases. Moreover, competition in this space is intensifying, with hedge funds and other investors - who often have more experience in assessing business viability - entering the market.
5. This ruling also coincides with a broader shift in the investment landscape, one marked by higher interest rates and more attractive, lower-risk investment opportunities elsewhere. As such, investors are increasingly hesitant to commit capital to litigation funding, which is consequently exacerbating availability of capital and access to justice issues.

Where do we go from here?

The PACCAR ruling has significantly disrupted the litigation funding market, highlighting an urgent need for legislative clarification to restore confidence and stability. In particular, the decision underscores the need for a nuanced regulatory framework that balances claimant protection with the needs of funders, while preserving the critical role of third-party funding in facilitating access to justice.

According to an article by the Law Society Gazette, the number of businesses and individuals denied justice due to the PACCAR ruling is challenging to quantify, although there has been a notable drop-off in cases filed in the CAT since the decision.

What is more, delays in legislative action are seen by many as a missed opportunity to address growing concerns over access to justice and the enforceability of LFAs. Many are arguing for the Government to intervene more rapidly by clarifying the status of LFAs and providing a stable framework for litigation funding.

In the meantime, funders and claimants alike would do well to review their LFAs carefully and, where necessary, explore alternative funding arrangements.