The decision means such funding agreements do not have to comply with the restrictive DBA regulatory regime in order to be enforceable
The Court of Appeal has upheld various decisions of the Competition Appeal Tribunal (CAT) which found that litigation funding agreements (LFAs) that were revised to take account of the Supreme Court's decision in Paccar (considered in our blog post here) were not damages-based agreements (DBAs) and therefore were not unenforceable on that basis: Sony Interactive Entertainment Europe Ltd v Alex Neill Class Representative Ltd [2025] EWCA Civ 841.
The decision confirms that LFAs in which the funder's fee is calculated as a multiple of the funding provided, rather than a percentage of damages, will not fall within the definition of a DBA – even if the fee is subject to an express or implied cap by reference to the amount of the proceeds of the litigation, or some subset of those proceeds.
The decision means that LFAs based on a multiple of outlay do not fall foul of Paccar and can continue to be used by claimants, including in opt-out collective proceedings in the CAT (where DBAs are prohibited). The decision will, however, be rendered academic if the government brings in legislation to reverse the effect of Paccar, as recommended in the Civil Justice Council's final report in its review of litigation funding (see our blog post here).
Background
The decision was handed down in five appeals which were heard together as they raised similar issues concerning the enforceability of LFAs entered into by class representatives in collective proceedings before the CAT.
In each case, the funder's fee under the LFA was originally calculated as a percentage of any proceeds recovered if the proceedings were successful. However, following Paccar the LFAs were revised so that the fee was calculated as a multiple of the funder's outlay (or committed outlay) in the proceedings – subject to an overall cap (whether expressly or by implication) at the level of the proceeds recovered.
A key element of the definition of a DBA under s.58AA of the Courts and Legal Services Act 1990 is that the amount of the service provider's payment is to be "determined by reference to the amount of the financial benefit obtained" by the client. The defendants in these cases argued, essentially, that if the funder's fee under a LFA is payable from and/or capped by the proceeds recovered in the action, it is therefore determined by reference to the amount of the financial benefit obtained for the purposes of s.58AA.
Some of the defendants also raised arguments that the LFAs were rendered unenforceable by provisions which provided for the payment of a percentage of proceeds recovered "only to the extent enforceable and permitted by applicable law" (or similar) – ie as an alternative in case the law changed to allow LFAs based on a percentage of damages.
The CAT found that the revised LFAs were not DBAs (see our blog post on the decision in the Sony case here and in the Mastercard case here). The defendants appealed.
Decision
The Court of Appeal unanimously dismissed the appeal. The Chancellor (Sir Julian Flaux) gave the leading decision, with which Green and Birss LJJ agreed.
It was significant that the defendants had accepted that a fee calculated as a multiple of the funder's outlay was not, itself, "determined by reference to the amount of the financial benefit obtained" within the meaning of section 58AA – a concession which the court described as "clearly correct".
The defendants argued instead that the existence of an express or implied cap by reference to the amount of the proceeds meant that the LFA fell within s.58AA. But, the court said, since the entire system of litigation funding is predicated on the funder's return being paid out of damages, it is difficult to see how an LFA could avoid having an implied cap even if there were no express one. So the defendants' submissions would be likely to mean that no LFA could avoid being a DBA. That would lead to 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 (which would not include opt-out collective actions, as DBAs are prohibited in that context.)
Further, since the defendants accepted that an LFA based on a multiple without a cap would be an enforceable LFA, the defendants' argument led to the "equally absurd result" that it is the cap, which protects the class from having to pay excessive amounts to the funder, that renders the LFA an unenforceable DBA.
Accordingly, the court should not adopt such an interpretation unless constrained to do so. The Court of Appeal held that it was not so constrained. 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. In these cases, the entitlement was calculated as a multiple and not a percentage. 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. That construction was also supported by the Explanatory Notes and Memoranda when the relevant legislation and regulations were introduced.
The fact that some of the LFAs contained provisions allowing the funder's fee to be calculated as a percentage "to the extent enforceable or permissible by law" also did not render them unenforceable. Those provisions simply had no contractual effect unless and until the law was changed.
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