Clifford Chance

In June 2025, the Court of Appeal heard arguments on the enforceability of revised litigation funding arrangements, just a few days after the Civil Justice Council recommended legislation to reverse the Supreme Court's decision in PACCAR and introduce light-touch regulation in the funding sector.

Background

In July 2023, the Supreme Court handed down its landmark decision in PACCAR,^[1] holding that litigation funding agreements ("LFAs") typically used in UK collective proceedings (whereby funders are entitled to recover a percentage of damages recovered) were "damages-based agreements" ("DBAs"). In practice, the decision meant that most LFAs then in use were unenforceable as they did not comply with the Courts and Legal Services Act 1990 ("CLSA") and corresponding DBA regulations.

In March 2024, the previous Government introduced draft legislation that would have reversed the effect of PACCAR, but the draft bill was ultimately relegated into political limbo due to the 2024 General Election.

Earlier this month, the Civil Justice Council ("CJC") issued a report into litigation funding in England and Wales, recommending that PACCAR be reversed and that the Government introduce "light-touch regulation" for litigation funding. The Court of Appeal's deliberations are therefore taking place against the backdrop of the UK Government's own consideration of its response to the CJC's funding recommendations.

Funder workarounds blessed in the CAT

Many litigation funders developed workarounds in their LFAs by revising the calculation of their fees so that they were calculated by reference to either the greater or lesser of:

• a multiple of costs provided to the class representative subject to a cap (whether express or implied) by reference to the total damages or some part thereof ("Capped Multiple of Costs"); or
• a percentage of the damages but only to the extent enforceable and permitted by law ("Contingent Percentage of Proceeds").

In a series of decisions, the Competition Appeal Tribunal ("CAT") found such clauses were not DBAs in light of PACCAR and were therefore enforceable. In doing so, the CAT certified various collective proceedings that were mostly brought on an opt-out basis.  

The defendants in those proceedings challenged the CAT's decisions by bringing a seven-linked appeal.

The appeals

On 10 and 11 June 2025, the Court of Appeal heard the appeals in in Commercial and Interregional Card Claims Ltd v Mastercard and others.^[2]

The main issue on appeal was whether the CAT was correct to find that the revised LFAs containing the Capped Multiple of Costs clauses and Contingent Percentage of Proceeds clauses were not DBAs.^[3] This was an important issue because if they were DBAs, then they would be unenforceable in the CAT because of section 47C(8) of the Competition Act 1998 (UK). That would mean the claims did not have adequate funding in place to continue.

The appellants argued that the CAT had erred, and these clauses were clearly DBAs and were therefore unenforceable.

Much of the argument focused on the historical context of section 58AA of the CLSA and its consumer protection focus, its various "legislative surgeries" over the years, the reasoning of the Supreme Court in PACCAR, and Parliament's intention when outlawing DBAs in opt-out collective proceedings in the CAT.

Discussion

The key points arising out of the appeal were as follows:

• First, the Court and counsel acknowledged the CJC's recent report which recommended the Government urgently introduce legislation to reverse the effect of PACCAR. The Court referred to the Report as the "Elephant in the Room", which the appellant recognised but emphasised the role of the Court was to apply the law as it stood and not as it may or may not become.
• Second, it was common ground between the parties and the Court that if the Capped Multiple of Costs clause did not contain a cap on the recovery of the funder under the LFA, then the multiple of costs recovery (up to an uncapped level) would not amount to a DBA and would be enforceable in the CAT (because the funders' fee would not be determined by reference to the financial benefit i.e., damages). The Court quickly identified the "oddity" that that the provision of the cap, which was designed to protect the class representative and represented class by limiting the returns to the funder, was actually detrimental to the class representative and represented class insofar as it led to an issue of whether the clause was enforceable at all. The appellant accepted this proposition as having "superficial force" and which drove the CAT's decisions below but urged the Court to nevertheless apply the natural and ordinary meaning of the words of the relevant statute when construed in light of its purpose as enacted in 2009. Sir Julian Flaux, the Chancellor of the High Court, described the situation as "a right royal mess".
• Third, in relation to the Contingent Percentage of Proceeds clauses, which we identified in a previous blog post (link here) as an creative attempt to get around the ruling in PACCAR, the parties and Court accepted that without the contingent wording, the clause would amount to a DBA. The issue was therefore whether the contingent wording saved the clause from being a DBA. The appellant said no, and the respondent said yes. The respondent said the clause had no contractual effect while the appellant said that did not matter as it still provided for payment by reference to the financial benefit (damages) and was therefore caught by the statute. Further, the appellant argued the Court should not bless such clauses as they provided funders with the very incentives that Parliament sought to avoid by making DBAs unlawful in collective opt out proceedings in the CAT, although the Court did not seem convinced there was sufficient evidence of this. In fact, the Court suggested a much simpler explanation for the clause, which was that the objective intention of the parties in agreeing that clause was to avoid the necessity of entering into yet another revised LFA if the law was subsequently changed to reverse the effect of PACCAR. The respondent agreed.

What lies ahead?

The Court of Appeal is now faced with the unenviable task of seeking to navigate the apparent contradiction between the CLSA and DBA regulations (as interpreted by the UKSC in PACCAR) and the policy objectives that lay behind the creation of the opt-out collective proceedings regime in the CAT, which is heavily reliant on third party litigation funding.

The Court of Appeal has made clear that it must apply the law as it currently stands, despite indications that the law may be changed in the near future – the CJC Report recommended legislation be introduced to overturn PACCAR as soon as possible, and that such legislation have both retrospective and forward-looking effect (so it would apply to the LFAs which were the subject of the appeals). However, until that legislation is introduced and comes into effect, the Court of Appeal decision will have a significant impact on the outlook for opt-out collective actions in the CAT.

It remains to be seen whether the Court of Appeal will hand down its judgment before the summer vacation. Following the Court of Appeal's decision, attention is likely to swiftly turn to how the UK Government proposes to resolve the "right royal mess" (as Sir Julian Flaux described it). At the core of the issue for the Government lies the tension between the competing policy objectives of promoting access to justice through multi-party litigation and protecting businesses in the UK from unmeritorious claims funded by third parties.

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[1] R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal and others [2023] UKSC 28.

[2] The seven linked appeals were: (1) Alex Neill Class Representative Ltd (claimant/respondents) v Sony Interactive Entertainment Europe Ltd & anr (defendants/appellants) ; (2) Apple Inc. & Apple Distribution International Ltd (defendants/appellants) v Kent (class representative/respondent); (3) Visa Inc & ors (defendants/appellants) v Commercial & Interregional Card Claims II Ltd (applicant/respondent); (4) Commercial & Interregional Card Claims I Ltd (applicant/respondent) v Visa Inc & ors (defendants/appellants; (5) Commercial & Interregional Card Claims I Ltd (applicant/respondent) v Mastercard & ors (defendants/appellants); (6) Commercial & Interregional Card Claims II Ltd (applicant/respondent) v Mastercard & ors (defendants/appellants); (7) Gutmann (respondent) v Apple Inc & ors (appellants).

[3] For completeness, the Court of Appeal also considered one further issue relating to severability.