The Court of Appeal confirms that a cap in a litigation funding agreement (LFA) does not make it a damages-based agreement (DBA)

In the Supreme Court decision of R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents) [2023] UKSC 28 (PACCAR), it was held that LFAs that entitle the litigation funder to a percentage of any damages recovered are DBAs and as such must comply with the relevant regulatory regime to be enforceable. In general, such agreements did not comply (and arguably could not comply) with the restrictive regulatory regime for DBAs. Consequently, the PACCAR decision rendered the majority of LFAs based on a recovery of the percentage of the damages, unenforceable.

The Decision

Now, in  Sony Interactive Entertainment Europe Ltd v Alex Neill Class Representative Ltd [2025] EWCA Civ 841 the Court of Appeal has considered various appeals from the Competition Appeal Tribunal (CAT), requiring it to decide whether an LFA that provides for the funder to receive a multiple of the amount it has paid (or committed to pay) is a DBA if it also caps that amount at the level of the damages received by the funded party. Upholding the decisions of the CAT[1] and dismissing the appeals unanimously, the Court of Appeal confirmed, in its judgment on 4 July, that a funder’s fee calculated by reference to a multiple does not amount to a DBA even with an implied or express cap by reference to the amount of the damages.

The Reasoning

In summary, the appellants argued that where there is an express or implied cap on the funder’s return by reference to the amount of the proceeds or the undistributed damages, the amount of the payment to the funder is “determined by reference to the amount of the financial benefit obtained” within the definition of a DBA in section 58AA(3)(a)(ii) of the Courts and Legal Services Act 1990^[2] (section 58AA), making the LFA a DBA which is unenforceable unless it complies with the DBA Regulations 2013.

Giving the leading decision of the court and dismissing this approach, Sir Julian Flaux stated that the effect of the appellants’ argument would produce “the absurd result that funding under LFAs in the CAT would become practically impossible save in those cases where the DBA Regulations could be complied with”^[3].

He stated that section 58AA should be interpreted so that the words “determined by reference to the amount of the financial benefit obtained” are focused on the primary contractual entitlement of the funder, and how that entitlement is funded. He confirmed that, in the present appeal cases, the funder’s contractual entitlement was to a multiple of its outlay in each case, not to a percentage of damages as in PACCAR.  The fact that the multiple might be subject to adjustment by reference to the proceeds did not alter the character of the entitlement or mean it was calculated by reference to the proceeds. 

The Court of Appeal also determined that the inclusion of provisions in some LFAs that allowed the funder's fee to be calculated as a percentage "to the extent enforceable or permissible by law" did not make them unenforceable. These provisions had no contractual effect unless and until the law changed. On this basis, the court thought it was not necessary to consider the complex and difficult questions about whether an LFA is severable.

Commentary

In dismissing the appeals, it is interesting that the Court of Appeal appears to have taken on board the logic that if they found for the appellants, that could undermine the whole funding sector, at least in the CAT. That is an outcome that the Supreme Court appeared not to consider in PACCAR.

It was a difficult decision for the Court of Appeal to look at, from a timing perspective, in circumstances in which the Civil Justice Council’s (CJC’s) recommendations - published in early June -  have, in our view, created an expectation that there will be changes in the law in relation to litigation funding in England & Wales and, indeed, in relation to the complex DBA regulations. That said, there is no certainty as to when such legislative changes might happen.

The decision will be a relief for funders and some funded claimants. Had it gone the other way, the pressure for quick government action in relation to funding might have increased.  Likely all stakeholders will hope that the government doesn’t see this decision as an excuse to postpone any legislation in relation to litigation funding, because although there are many views as to how the funding legislation and DBA regulations could be reformed, there appears to be consensus among stakeholders and from the CJC review that legislative change is required.

Overall, the decision means that all the issues that the government might need to address when considering regulating litigation funding in England & Wales have now been considered, either by the CJC or the courts. However, it remains to be seen whether the government will enact all or most of the CJC’s recommendations and whether it will follow the approach taken by the Court of Appeal.