In a move designed to restore certainty and competitiveness, the UK government has announced plans to reverse the decision of the Supreme Court in PACCAR and to introduce regulation of third-party litigation funding. This reform aims to reassure funders and funded claimants who have faced uncertainty, and to reinforce London's status as a global hub for dispute resolution. Below, we discuss what these developments mean for the future of arbitration in England and Wales.
Background: PACCAR and its Impact
In July 2023, the UK Supreme Court delivered a landmark judgment in PACCAR1, overturning decisions of the Competition Appeal Tribunal (CAT) and the Divisional Court. The Supreme Court held that third-party litigation funding agreements (LFAs) – including those used by UK Trucks Claim Limited (UKTC) and Road Haulage Association Limited (RHA) – are damages-based agreements (DBAs) under section 58AA(3) of the Courts and Legal Services Act 1990.2
This issue arises from the rather abstruse question of whether an LFA is also a DBA because, if it is, then an LFA must comply with certain formalities to be enforceable. Typically, an LFA involves a third-party funder who finances a claim in exchange for a share of the proceeds if the case succeeds. The funder provides no legal services. In contrast, a DBA is a form of contingency fee arrangement, typically an agreement between a claimant and a person or firm providing litigation services or a "claims management service", where the representative's fee is a percentage of any damages recovered. Under section 58AA of the Courts and Legal Services Act 1990, DBAs are strictly regulated and must meet specific statutory conditions to be enforceable. The Supreme Court held that LFAs fell within the definition of providing a "claims management service", and therefore were subject to the DBA regulatory regime (for more on this see Upheaval in the Litigation Funding Industry: UK Supreme Court Rules that many Litigation Funding Agreements are Unenforceable | White & Case LLP).
The impact of the Supreme Court's decision was far-reaching. It had profound consequences for the litigation funding industry. The Supreme Court held that the funders in PACCAR were providing "claims management services". This was the case where a funder's fee under the LFAs was based on and to be determined by reference to a percentage of the proceeds from a claim. In those cases, the LFAs were necessarily DBAs under section 58AA(3)3 and were consequently unenforceable unless they complied with the DBA rules. In contrast, where the funder's fee was structured as a multiple of the deployed costs, it would generally fall outside the DBA regime. As a result, PACCAR created significant uncertainty, rendering many existing LFAs vulnerable to invalidity if they did not meet the DBA rules.
Funders and funded claimants scrambled to renegotiate agreements and restructure funding arrangements where possible to avoid challenges. At the same time, leading voices in the funding industry warned that the uncertainty was undermining confidence in London as a forum for complex disputes. For example, Chrisopher Bogart, CEO of Burford Capital, observed that PACCAR was "causing a problem for the London market", with funders "allocating less of their capital in the UK" because of the decision's chilling effect. He further noted that "…regretfully the lingering uncertainty and the Government's silence have caused us to begin migrating some dispute resolution activity away from London".
The Former Government's Response and CJC Review
The PACCAR decision came out towards the last days of the Conservative government. Its response to PACCAR was twofold. First, it moved to legislate: the Litigation Funding Agreements (Enforceability) Bill 20244 was introduced to overturn the Supreme Court's decision. This bill sought to restore the pre-PACCAR status quo by explicitly clarifying that an agreement is not a DBA if, or to the extent that, it is an LFA, thereby carving LFAs out of the scope of section 58AA. Notably, the draft legislation was intended to apply retrospectively, containing a provision that it "is to be treated as always having had effect".5 However, this bill did not complete its passage through Parliament before the 2024 general election was called and was suspended after the change of government.
Second, the Conservative government commissioned the Civil Justice Council (CJC) to review litigation funding and the fallout from PACCAR. In its final report dated June 2025, the CJC recommended some measures to address the situation, including: (i) legislation to clarify that litigation funding is not a form of DBA; (ii) the introduction of a formal, independent, and "light-touch" regulatory scheme for litigation funding; (iii) regulation of LFAs and funding practices; and (iv) that litigation funding for arbitration should remain outside formal regulation, leaving oversight to arbitral institutions (and parties).6 These recommendations set the stage for what is now proposed.
The Present Government's Position on Reversing PACCAR
On 17 December 2025 the Labour Government announced its strategy. Justice Minister Sarah Sackman KC said that the Government "intends to take action to mitigate the impact of the 2023 Supreme Court Judgement in PACCAR and implement proportionate regulation of third-party litigation funding agreements (LFAs)." The Minister confirmed the government's "intention to accept the CJC's two primary recommendations" namely to "legislate to clarify that LFAs are not Damages Based Agreements, with prospective effect" and to "introduce proportionate regulation of LFAs." The Minister emphasized that "third-party litigation funding plays a vital role in ensuring access to justice" and noted that the Supreme Court's judgment in PACCAR "introduced significant uncertainty about whether LFAs remain valid and the regulatory regime that applies to them". That uncertainty, the Minister warned, "could be preventing significant numbers of claimants from accessing justice" and "risks undermining the competitiveness of England and Wales as a global hub for commercial litigation and arbitration, both which bring significant benefit to the UK economy".7
The government's announcement signals two major reforms:
- Clarifying that LFAs are not DBAs (Reversing PACCAR): The law will be amended to explicitly exclude LFAs from the scope of DBAs going forward. This will restore certainty by reassuring funders and funded claimants that LFAs can be used to fund cases without concern about compliance with DBA regulations. The legislation would re-establish the pre-PACCAR understanding that litigation funding is distinct from contingency fee agreements and not subject to the same statutory constraints.
- Introducing "proportionate regulation" of litigation funding: Historically, the litigation funding sector in England and Wales has been lately governed by voluntary self-regulation, primarily through the code of conduct of the Association of Litigation Funders.8 Critics have questioned whether self-regulation is sufficient, citing concerns about onerous terms, transparency, and conflicts of interest. The government will establish a framework for light-touch regulation of LFAs, aimed at improving transparency and fairness in the market. While details are not currently available, the reforms are expected to set baseline standards for funders and funding agreements. It is anticipated that Claimants will benefit from clearer disclosures and protections. The Minister's emphasis on "proportionate" regulation suggests an approach that addresses abusive practices without stifling legitimate funding activity.
The Minister indicated that the anticipated legislation will be introduced "when parliamentary time allows." Until then, we expect the uncertainty created by PACCAR persists in practice, fuelling satellite disputes in the courts.
Interim Judicial Clarification and Market Response
For now, courts and market participants are employing stop-gap measures to manage these risks. Funders have been proactively revising existing deals – for example, altering fee structures (such as charging a multiple of the invested sum instead of a percentage of the damages) – to try to sidestep challenges.
Judges have also shown a reluctance to allow what they consider to be unmeritorious challenges to LFAs. For instance, in four separate collective proceedings before the CAT9, defendant companies argued that the post-PACCAR revised LFAs were still DBAs. The CAT rejected those challenges in each case, finding that the revised LFAs were not DBAs and were therefore enforceable. In July 2025, the Court of Appeal unanimously dismissed the defendants' appeals from those decisions, confirming the validity of the revised LFAs.
Lord Justice Flaux, delivering the judgment, observed that the appellants' argument – that an LFA linking a funder's return to the amount funded (rather than to the proceeds) would nonetheless be a DBA because it includes an express or implied cap by reference to the claim proceeds – would lead to an "absurd result". In Lord Justice Flaux's words, it would render third-party funding "practically impossible save in those cases where the DBA Regulations could be complied with".10 In substance, the Court of Appeal recognized that an LFA entitling the funder to a multiple of the founder's cost is not a DBA, and will not become a DBA simply because it is ultimately capped by the proceeds recovered. Lord Justice Flaux emphasized that "the fact that the multiple recoverable by the funder may be subject to adjustment depending on the amount of damages recovered or at the discretion of the CAT does not alter the character of that primary contractual entitlement which is to a multiple of outlay".
The Court of Appeal also addressed other revised LFAs11 that included an alternative fee mechanism to be calculated based on a "percentage of damages" (applicable only "to the extent enforceable or permissible by law"). It made clear that this alternative "percentage provision" was simply "of no contractual effect" and that "the argument that the percentage provision is an unenforceable DBA, let alone an argument that (if severance were not possible) the presence of the percentage provisions renders the whole LFA an unenforceable DBA, is unsustainable".
Commenting on the decision, Buford Capital CEO Chrisopher Bogart noted that "the Court of Appeal's decision was significant not only for cabining the impact of PACCAR and ensuring the availability of at least some litigation financing in the UK, but also for its thorough analysis and acceptance of the kinds of economic terms that are necessary to unlock capital use in the English courts."12 Meanwhile, the Supreme Court has refused the appellants' applications for permission to appeal the Court of Appeal's judgment on the basis that the applications raised no arguable point of law.13
Given the proposed legislation will apply only prospectively, (and not retrospectively, as the previous Conservative government had proposed), the courts may well face further PACCAR-related challenges to existing LFAs, but they have signalled they will look at such applications robustly.
Implications for Arbitration
The government's intervention is motivated not only by domestic litigation concerns but also by the need to preserve the UK's reputation as a global hub for dispute resolution. London is a leading venue for international arbitration, where third-party funding is common – especially in large commercial and investor-state cases. The PACCAR decision raised concerns within the arbitration community as well. For example, in 2025, Burford Capital's Christopher Bogart revealed that his firm no longer chooses London as the default seat for new arbitrations due to the uncertainty caused by PACCAR.14 Whether Burford Capital's position has been followed by others is far from clear but the government's move to bring certainty and stop challenges to LFAs will reassure arbitration users that third-party funding remains viable in London-seated arbitrations.
Conclusion
The UK government's decisive response to PACCAR is a welcome step. By committing to reverse the Supreme Court's interpretation in PACCAR and to introduce proportionate regulation, the government is addressing both the immediate market uncertainty and the long-term need for clarity and confidence in third-party funding arrangements. This dual approach – restoring the enforceability of LFAs outside the DBA regime, while establishing a regulatory framework – should provide much-needed stability for claimants, funders, and the wider legal community. At the same time, the commitment to "light-touch" regulation aims to strike the right balance: protecting participants in the litigation funding market without stifling innovation or deterring responsible funding. Questions remain regarding the timing and precise scope of the new legislation, as well as its impact on pending LFAs, but the government's clear direction offers reassurance that a solution is on the way.
1 R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal [2023] UKSC 28.
2 Upheaval in the Litigation Funding Industry: UK Supreme Court Rules that many Litigation Funding Agreements are Unenforceable
3 For the purposes of section 53AA, according to section 53AA(3), a DBA is "an agreement between a person providing advocacy services, litigation services or claims management services and the recipient of those services which provides that – (i) the recipient is to make a payment to the person providing the services if the recipient obtains a specified financial benefit in connection with the matter in relation to which the services are provided, and (ii) the amount of that payment is to be determined by reference to the amount of the financial benefit obtained…"
4 Litigation Funding Agreements (Enforceability) Bill [HL] - Parliamentary Bills - UK Parliament.
5 Litigation funding agreements bill published.
6 Review of Litigation Funding – CJC Final Report.
7 Written statements - Written questions, answers and statements - UK Parliament.
8 Code of conduct for Litigation Funders, January 2018.
9 The Neil proceedings (1527/7/7/22 Alex Neill Class Representative Limited v Sony Interactive Entertainment Europe Limited; Sony Interactive Entertainment Network Europe Limited; and Sony Interactive Entertainment UK Limited | Competition Appeal Tribunal), the CICC proceedings (1441/7/7/22 Commercial and Interregional Card Claims I Limited ("CICC I") v Mastercard Incorporated & Others | Competition Appeal Tribunal), the Kent proceedings (1403/7/7/21 Dr. Rachael Kent v Apple Inc. and Apple Distribution International Ltd | Competition Appeal Tribunal), and the Gutmann proceedings (1468/7/7/22 Mr Justin Gutmann v Apple Inc., Apple Distribution International Limited, and Apple Retail UK Limited | Competition Appeal Tribunal).
10 Sony Limited v. Alex Neill Class Rep. Ltd. [2025] EWCA Civ. 841.
11 The CICC opt-in LFA and the Neil LFA.
12 UK appeal court rejects post-PACCAR challenge to funding agreements - Global Arbitration Review.
13 The Supreme Court's refusal of the applications for permission to appeal related to both the CICC and Gutmann proceedings.
14 Burford Capital moves arbitration cases due to PACCAR decision | Law.com International posted on the topic | LinkedIn.
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