The Court of Appeal has decided to assess the legitimacy of Litigation Funding Agreements (LFAs) based on a multiple of the amount invested. Legislation that would have confirmed their legality was postponed last year.

Following the Supreme Court’s decision in PACCAR in July 2023, funding arrangements determining fees as a percentage of damages are categorized as Damages-Based Agreements (DBAs). For DBAs to be enforceable, they must adhere to the Damages-Based Agreements Regulations 2013, and they are prohibited in opt-out collective proceedings before the Competition Appeal Tribunal (CAT).

The Litigation Funding Agreements (Enforceability) Bill was presented in March 2024 with the aim of reinstating the pre-PACCAR status by revising the definition of Damages-Based Agreements in the Courts and Legal Services Act 1990, thereby clarifying that LFAs do not qualify as DBAs and are thus enforceable.

However, the Bill was withdrawn before the general election on 4 July 2024. The new Government has indicated that the Bill will not be reintroduced until the summer of 2025, when the Civil Justice Council is scheduled to publish its final report following its broader review of third-party litigation funding. Subsequently, the Government plans to adopt a more thorough approach to any potential legislation, which is expected to encompass the regulation of the funding sector.

In response to the PACCAR ruling, litigation funders have predominantly shifted to a model that relies solely on a multiple of the invested sum to circumvent classification as a DBA.

In Neill v Sony, for example, the amended LFA stipulated that the funder would receive the greater of (i) a multiple of its total funding obligation or (ii) a percentage of the total damages and costs recovered by the class representative, “only to the extent enforceable and permitted by applicable law.” The revised LFA included a severance clause indicating that the damages-based fee provision could be separated if necessary.

The CAT determined that this arrangement did not constitute a DBA, deemed the conditional language acceptable, and concluded that the severance clause could be applied without significantly altering the overall impact of the LFA.

Sony sought permission to appeal on the following grounds: 1. The clause’s enforceability, allowing damages-based payments to funders “to the extent permissible by law;” 2. The issue of severability; and 3. Since LFAs are naturally capped by the amount of damages recovered, they are effectively DBAs.

The CAT believed Sony had no real prospect of succeeding on appeal. However, it acknowledged the need for a definitive ruling from the Court of Appeal due to the ambiguity following the PACCAR decision and thus granted permission to appeal. The CAT anticipated that similar permissions would likely be granted in other comparable cases, suggesting that it would be efficient for these matters to be addressed collectively at the appellate level.

During a directions hearing held on 4 February 2025, High Court Chancellor Sir Julian Flaux and Lord Justice Green lifted the stay on several appeals from the Tribunal, in which the defendants are contesting the funders’ “multiple” funding approach.

The appeals had been previously stayed due to indications that the former government intended to legislate on the issues arising from the PACCAR decision. However, Flaux remarked that since the government transition, the court has received no information suggesting that such legislation is forthcoming. He emphasized that it is contrary to principle for cases to remain stayed without cause, and that there is currently no valid reason for such a stay.

The Court of Appeal plans to schedule a hearing lasting one or two days between late May and late July to address the “multiple” issue in several cases: Neill v Sony; Kent v Apple; Commercial and Interregional Card Claims II Ltd v Visa; Commercial and Interregional Card Claims I Ltd v Mastercard; and Gutmann v Apple.

The court has not specified a timeline for issuing its decision; however, the limited duration allocated for the hearing indicates that a ruling may be issued before the summer, contingent upon the scheduling of the case.

The Court of Appeal will examine the crucial question of whether funding determined by a multiple should still be considered as calculated in relation to a portion of the damages, thereby forming a damages-based agreement. Like Sony, the other defendants contend it should be viewed like this. The fact that LFAs are naturally capped by the amount of damages recovered means that such LFAs are actually DBAs.