The report recommends that the Government urgently implements legislation to reverse the UK Supreme Court’s July 2023 decision in PACCAR. This would enable third-party funders—who fund claims but are neither parties nor legal advisers—to be paid a damages-based return without their litigation funding agreements being regulated as damages-based agreements and potentially rendered unenforceable. It would also permit funders to earn a damages-based return in the rapidly growing sphere of opt-out collective proceedings, where damages-based agreements are currently prohibited.
The report additionally makes extensive further recommendations in relation to both litigation funding agreements and lawyer fee arrangements, including conditional fee agreements and damages-based agreements. If implemented, these recommendations would significantly reshape regulation and practice in both areas. They will be seen as a green light for the continued expansion of litigation funding in England; and would encourage a more permissive approach towards lawyer fees, particularly in cases involving commercial parties.
Recommendation to reverse PACCAR
In July 2023 a majority of the UK Supreme Court decided, by adopting an expansive interpretation of the relevant legislation, that a litigation funding agreement is regulated as a damages-based agreement if the funder’s return is determined by reference to the amount of damages recovered.
The decision ran contrary to the expectations and practices of most funders and litigation practitioners and, since damages-based returns were very common, it had widespread implications:
- First, it meant that litigation funding agreements with a damages-based return were unenforceable, and the funder would receive no return unless the agreement complied with The Damages-Based Agreements Regulations 2013. Litigation funding agreements were not generally designed to comply, since the 2013 Regulations are both restrictive in the types of arrangements they permit and widely regarded as defective and practicably unworkable (so much so that it was recommended in 2019 by legal funding experts Prof. Rachael Mulheron and Nicholas Bacon KC that they be replaced).
- Second, it meant that any such litigation funding agreement is unavailable in opt-out collective proceedings, i.e. claims in the Competition Appeal Tribunal where a representative acts on behalf of a defined class of UK persons unless they individually take steps to opt-out. Collective proceedings have become popular with claimant lawyers and litigation funders because they readily enable massive claims which, if successful, are likely to produce substantial damages. In several cases the class members number in the millions and the alleged damages in the billions.
The response to the PACCAR decision was a rapid re-negotiation of litigation funding arrangements, with funders typically agreeing to be paid a multiple of their investment in place of a share of damages. This produced the unintended effect of reducing the alignment of interests between funders and claimants, since it meant funders would no longer have a direct interest in the quantum of the damages recovered (albeit usually they would retain an interest in there being sufficient damages to cover their return).
The decision also led to a series of disputes about its wider implications, for example whether it prevented a litigation funding agreement from being capped by the total amount of damages. Those arguments were rejected at first instance by the Competition Appeal Tribunal (see for example Neill v Sony), but are due to be heard by the Court of Appeal in a conjoined appeal on June 10, 2025.
The previous UK Government had proposed legislation (the Litigation Funding Agreements (Enforceability) Bill 2024) which would have reversed PACCAR. But following the 2024 general election, the new Government decided to wait for the Council’s report before deciding how to proceed.
The Council describes the decision in PACCAR as an unintended consequence of the way the legislation in this area has evolved over several decades, arguing that it has the effect of wrongly conflating the regulation of third-party litigation funding with the regulation of lawyer fees. The Council identifies that distinction as important to enable funders and lawyers to be subject to different sets of rules (with the former potentially subject to less stringent restrictions), as is common in other jurisdictions and appears to have been the original intention of Parliament when restrictions on conditional lawyer fees were partially relaxed in 1990.
The Council’s recommendation is that the Government should now urgently introduce legislation to reverse the effect of PACCAR by taking litigation funding agreements entirely outside the regulatory ambit of damages-based agreements with both prospective and retrospective effect. If that recommendation is accepted, it would enable funders to revert to a model where they share a proportion of any damages recovered. The pre-PACCAR landscape suggests that funders consider this more commercially attractive, and it also better aligns their interests with those whom they fund.
Recommendations that would reshape third-party litigation funding and lawyer fee arrangements
The Council has also carried out a wide-ranging review of both third-party litigation funding and lawyer fee arrangements. Amongst its dozens of recommendations are the following key points:
- There should be a clear segregation between the regimes that regulate third-party litigation funding and lawyer fee arrangements (for the reasons explained above).
- In relation to third-party litigation funding there should be “light-touch” regulation:
- The regulatory regime would distinguish between funding for commercial parties, who would be subject to a “base-line” regime; and funding for consumers or in mass claims (collective proceedings, representative actions, and group litigation) where some limited additional rules would apply.
- In both cases the rules would be via statute only, rather than overseen by a regulatory body such as the FCA (although the Council recommends that this would be reviewed after five years). The rules would not impose a cap on funder returns and would include standard-form (but non-mandatory) litigation funding agreements. None of the recommendations would impact third-party funding of arbitration.
- The “base-line” regime would include capital adequacy requirements (which if met would displace security for costs against funders); conflict of interest provisions, including a codified requirement that funders do not control litigation; anti-money laundering requirements; and early-stage disclosure of the funder and its source of funds.
- The “enhanced” regime for consumer and mass claims would also include a regulatory “Consumer Duty” (based on the FCA’s Consumer Duty) and a requirement for funded parties to be provided with independent advice on the funding terms. In collective proceedings, it would require pre-action approval of the funding (including ensuring that the funder’s return is fair, just and reasonable); enhanced notice of the funder’s return to class members when deciding whether to opt-out; and a requirement that funders/lawyers certify that they did not approach the class representative (rather, the class representative approached them).
- In relation to lawyer fees, the Council recommends replacing entirely the existing, complex (and in some instances unworkable) regulation of conditional fee agreements and damages-based agreements with a single, simplified regime. In the case of damages-based agreements, it would largely mean implementing the 2019 Mulheron/Bacon recommendations (see above) as well as permitting damages-based agreements for collective proceedings and for defendants. Hybrid arrangements, where a part of the lawyer’s fee is guaranteed, would also be permitted. The Council recommends a revaluation of the current caps on lawyer returns; and it proposes that in the case of commercial (rather than consumer) parties, or in opt-out collective proceedings, there should be no caps.
If implemented, these recommendations would significantly reshape regulation and practice of both third-party litigation funding and lawyer fee arrangements. They would be likely to both facilitate the continued expansion of third-party litigation funding in England; and would encourage the adoption of conditional fee agreements or damages-based agreements, particularly when lawyers are acting for commercial parties.
The Council’s recommendations have been provided to the UK Government, and we now await its response.
