Third-Party Litigation Funding after R (PACCAR) v Competition Appeal Tribunal [2023]

Introduction

Litigation funding refers to arrangements in which the costs of legal proceedings are financed by a third party rather than the claimant, reducing the financial risk of bringing a claim. A particularly important model is third-party litigation funding, in which an independent commercial funder, with no prior interest in the dispute, agrees to pay some or all of a claimant’s legal costs in exchange for a financial return if the claim succeeds, usually calculated as a share of the damages recovered. This model has become central to competition law claims, collective proceedings, and complex commercial litigation, where high costs and prolonged proceedings would otherwise deter claimants from pursuing meritorious claims.

The Supreme Court’s decision in R (PACCAR) v Competition Appeal Tribunal [2023] UKSC 28 significantly disrupted this market. The Court held that many litigation funding agreements (LFAs), which are contracts in which a third-party funder finances a claimant’s legal costs in return for a share of damages, fell within the statutory definition of damages-based agreements (DBAs). DBAs are contracts in which a lawyer or funder takes a percentage of damages recovered instead of charging upfront fees and are subject to formal requirements under the Damages-Based Agreements Regulations 2013. Because most LFAs did not comply with these regulations, they were rendered unenforceable.

This essay argues that PACCAR exposes the limits of judicial formalism in regulating modern litigation finance, generates commercial and operational uncertainty, and demonstrates the need for legislative intervention to balance certainty, access to justice, and commercial reality.

Litigation Funding Agreements versus Damages-Based Agreements

LFAs and DBAs are conceptually similar but legally distinct. An LFA is a commercial contract between a funder and a claimant, typically used in high-value or complex litigation. The funder bears the financial risk and recoups a share of any damages if the case succeeds. By contrast, a DBA is a statutory framework primarily designed for lawyer-client relationships. It allows lawyers to take a percentage of damages instead of charging upfront fees, with statutory safeguards such as caps on fees and formal agreement requirements.¹

In PACCAR, the Supreme Court adopted a literal interpretation of section 58AA of the Courts and Legal Services Act 1990, concluding that any arrangement in which a return is calculated by reference to damages falls within the DBA definition, even if the party receiving the payment is not a legal representative.² This interpretation drew widespread concern because it did not distinguish between the provision of legal services and commercial financing, highlighting the limits of strict statutory interpretation when applied to contemporary funding arrangements.

Legal Reasoning and Judicial Formalism

The central legal issue in PACCAR was whether third-party funders could be considered “representatives” under section 58AA.³ The Supreme Court focused on the mechanics of payment rather than the funders’ actual role, holding that because their return was linked to damages recovered, LFAs fell within the DBA regime.

This approach illustrates the limits of judicial formalism because it ignores the commercial reality of modern litigation funding, which functions as a financial investment rather than a legal service. Third-party funders provide upfront capital to cover legal costs, accept the risk of receiving nothing if the claim fails, and price that risk by linking their return to the outcome of the case. Funders do not provide legal advice, conduct litigation, or act as representatives for claimants; their role is limited to financing and portfolio risk management. By equating investment returns with lawyers’ fees, the Supreme Court applied DBA rules to a commercial financing context, disrupting an established market and highlighting why a purely textual interpretation can fail to reflect real-world practices.

Practical, Commercial, and Regulatory Implications of PACCAR

The practical effects of PACCAR were immediate and significant for funders, claimants, and corporate clients. Funders had to restructure agreements, replacing returns linked to damages with multiples of capital advanced. This change affected financial modelling, risk pricing, and their willingness to invest in litigation, particularly in collective and competition claims. Claimants and law firms faced operational disruption, with ongoing cases at risk and new claims harder to fund. Corporate clients, especially in financial services, energy, and infrastructure, had to reconsider legal strategies, potentially delaying claims or increasing settlement pressures. Extending DBA rules to funders added little meaningful protection for claimants, revealing a mismatch between statutory design and commercial realities.⁴

PACCAR also had broader implications for access to justice. Reduced funder appetite, particularly in collective actions, threatened small businesses and individuals reliant on third-party support to pursue claims against well-resourced defendants. Corporate clients using litigation funding for risk management in high-value disputes and international arbitration faced uncertainty in decision-making and risk allocation. These disruptions illustrate how judicial formalism, applied without regard to operational and commercial realities, can inadvertently restrict access to justice.

The Court of Appeal later mitigated some of these effects by clarifying that LFAs providing returns as multiples of capital advanced do not fall within the statutory DBA definition and are enforceable. In Sony Interactive Entertainment Europe Ltd v Alex Neill Class Representative Ltd [2025] EWCA Civ 841, the Court confirmed the validity of such agreements, restoring commercial confidence and providing clarity for future funding arrangements.⁵ Nonetheless, uncertainty persists for funding structures beyond those considered in Sony, highlighting gaps in the regulatory framework and prompting government intervention.

Hence, on 17 December 2025, the UK government announced its intention to legislate to confirm that third-party litigation funding agreements are not DBAs, restoring enforceability and market certainty.⁶ The proposed regulations aim to balance competing priorities: by clarifying the legal status of funding agreements, they increase transparency, provide funders with confidence to invest in meritorious claims, and protect claimants from unfair terms. At the same time, the approach is designed to be light-touch so that funding remains commercially viable and does not discourage investment in complex, high-value disputes.

Conclusion

PACCAR highlights the tension between rigid judicial formalism and the commercial realities of modern litigation funding. By classifying many third-party funding agreements as DBAs, the Supreme Court disrupted established funding models, created operational and commercial uncertainty, and risked limiting access to justice in high-value and collective claims. The Court of Appeal’s clarification and the government’s proposed legislation demonstrate that legal frameworks must be flexible and responsive, balancing certainty, fairness, and market viability. Ultimately, PACCAR underscores that the law must evolve alongside commercial innovation to ensure that litigation funding continues to support complex claims, sustain confidence in the civil justice system, and protect meaningful access to justice for all parties.

Footnotes

1. Courts and Legal Services Act 1990, s 58AA; Damages-Based Agreements Regulations 2013 (SI 2013/609).

2. R (PACCAR) v Competition Appeal Tribunal [2023] UKSC 28.

3. Clyde & Co, ‘The Supreme Court finds that litigation funding agreements are damages-based agreements’ (26 July 2023) https://www.clydeco.com/en/insights/2023/07/the-supreme-court-finds-that-litigation-funding-ag accessed 6 January 2026.

4.     RPLT, ‘The PACCAR case continues to shake up the third party litigation funding market in the UK’ (2024) https://www.rplt.it/en/the-paccar-case-continues-to-shake-up-the-third-party-litigation-funding-market-in-the-ukil-caso-paccar-continua-a-scuotere-il-mercato-del-third-party-litigation-funding-nel-regno-unito/?utm_source=chatgpt.com accessed 6 January 2026.

5.     Sony Interactive Entertainment Europe Ltd v Alex Neill Class Representative Ltd [2025] EWCA Civ 841.

6.     UK government, ‘Plans to legislate to clarify that third-party litigation funding agreements are not DBAs’ (17 December 2025) https://www.ft.com/content/50990c82-7338-4e3e-a813-cb5cae292f0f accessed 10 January 2026.

Bibliography 

Cases 
R (PACCAR) v Competition Appeal Tribunal [2023] UKSC 28 
Sony Interactive Entertainment Europe Ltd v Alex Neill Class Representative Ltd [2025] EWCA Civ 841 

Legislation 
Courts and Legal Services Act 1990 
Damages-Based Agreements Regulations 2013 (SI 2013/609) 

Secondary Sources 
Clyde & Co, ‘The Supreme Court finds that litigation funding agreements are damages-based agreements’ (26 July 2023) 
RPLT, ‘The PACCAR case continues to shake up the third party litigation funding market in the UK’ (2024) 
UK Government, ‘Plans to legislate to clarify that third-party litigation funding agreements are not DBAs’ (17 December 2025) 

Image Credits
Romain Dancre on Unsplash < https://unsplash.com/photos/person-in-orange-long-sleeve-shirt-writing-on-white-paper-doplSDELX7E>