Despite government promises, the PACCAR ruling has not been legislated away. Henry King assesses the landscape
Three years on from R (PACCAR Inc) v Competition Appeal Tribunal [2023] UKSC 28, the promised legislative fix has still not arrived. What has arrived instead is case law which has done some of the work Parliament was supposed to do.
However, that is not the same thing. This article addresses where we are in 2026 in the litigation funding landscape.
The PACCAR problem
The point in PACCAR was a short one. The funders conceded that if their agreements were damages-based agreements (DBAs), then they did not comply with the Damages Based Agreement Regulations 2013 and were thus unenforceable. The argument centred exclusively on whether litigation funding was a ‘claims management service’ for the purpose of both section 58AA of the Courts and Legal Services Act 1990 and the 2023 regulations.
In July 2023, the Supreme Court held (with Lady Rose giving a powerful dissent) that a litigation funder did provide claims management services. The consequence was that any litigation funding agreement calculating the funder’s return as a percentage of recoveries was a DBA and – because essentially none of them had been drafted to comply with the 2013 regulations, not least the 50% cap – was unenforceable.
The story thereafter
The industry reaction was, to put it mildly, energetic. Ministers were lobbied.
In March 2024, the Litigation Funding Agreements (Enforceability) Bill 2024 had its first reading in the House of Lords. This would have provided that an agreement was not a DBA if, or to the extent that, it was an LFA. Progress was being made. However, a general election intervened and the bill (frankly) died. It has not (yet) been revived.
That same month, the Competition Appeal Tribunal expressly noted the significant disadvantage of the post-PACCAR approach in Gutmann v Apple [2024] CAT 18. One of the ways to align the interests of a funder with the interests of the class would be for the funder’s return to be in proportion to the return to the class, but an agreement to that effect is impermissible as a DBA.
Indeed, the modern approach of a return based upon multiples of the initial outlay “perversely” incentivises the funder to seek an award swiftly, potentially at an under-settlement, in order to obtain a swift return.
The new Labour government instead waited for the Civil Justice Council (CJC), whose review of litigation funding had been commissioned in April 2024. Thus, a full calendar year went past.
In May 2025, the Competition Appeal Tribunal again noted in the case of Merricks v Mastercard [2025] 28 that the simplest way to reflect the outcome of the case in the funder’s return would be a percentage of the damages recovered, but that this was precluded by PACCAR.
In this case, the action settled for £200m but by reason of the amended litigation funding agreement (LFA), the funder was entitled to at least £520m. In lieu of a damages-based award, the Competition Appeal Tribunal (CAT) adopted a return on investment to the funder of 1.5x, drawing upon decisions from Canada and Australia. This was subject to court approval due to it being an opt-out collective action.
In June 2025, the CJC working party reported with 58 recommendations. The first and most important was that legislation be introduced “as soon as possible” to make clear that litigation funding is not a form of DBA and is a distinct species of funding from that provided by a party’s own legal representatives. The CJC also recommended light-touch regulation, with enhanced protection for consumers and class members, and a review in five years.
In July 2025, the Court of Appeal handed down its decision in Sony Interactive v Alex Neill [2025] EWCA Civ 841. The court heard four conjoined appeals from the CAT concerning LFAs which had been re-papered after PACCAR. The revised agreements provided for a ‘funder’s fee’ calculated as a multiple of the capital deployed or committed, payable (with the deployed capital) out of the proceeds. It was argued that these were nevertheless damages based agreements.
The Court of Appeal dismissed the challenges. The critical question was how the funder’s contractual entitlement was calculated. Where the return is a multiple of deployed capital rather than a percentage of the award, the agreement is not a DBA and section 58AA is not engaged. The mechanics by which the fee is then paid – the waterfall, the order of distribution, the fact that in practice the money comes out of the damages – were not relevant to that characterisation.
On 17 December 2025, the Ministry of Justice announced in Parliament that it would legislate to reverse PACCAR and to introduce proportionate regulation of third-party funding. The familiar formula was deployed: legislation would follow “when parliamentary time allows”.
It did not. The King’s Speech of 13 May 2026 set out a substantial legislative programme: a Courts Modernisation Bill, a Competition Reform Bill, a Regulating for Growth Bill, an Enhancing Financial Services Bill. Yet, nothing whatsoever about litigation funding legislative change to PACCAR.
Regrettably, the position has not improved since. The change of prime minister in July 2026 and the arrival of a new Lord Chancellor have produced no progress – just the same promise of action when parliamentary time allows. That is perhaps unsurprising given the pressures on the current legislative timetable, but it is worth being clear that the silence long predates the reshuffle. Between December 2025 and May 2026 the government had a session in which to bring the measure forward and did not do so.
The realistic assessment for practitioners is that PACCAR is now (currently) a permanent feature of the landscape unless and until something changes, and that planning on any other basis is optimistic.
Where does this leave us?
The practical effect of PACCAR with the gloss/refinement ofSony is that the market has rebuilt itself around a drafting distinction. Funders who converted to a multiple model are, on current authority, probably safe. Those who did not probably are not.
It is, of course, a matter for a funder and commercial sensibility to what extent they enforce the strict contractual terms of the bargain.
What Sony did not decide
Three points remain (unfortunately) open.
First, severance. Where an LFA is a DBA but it is non-compliant, is the whole agreement unenforceable, or only the offending provisions? There are conflicting decisions. Lexlaw Ltd v Zuberi [2021] EWCA Civ 16suggests that severance is available. Diag Human SE v Volterra Fietta [2023] EWCA Civ 1107 points in the opposite direction (albeit in the context of conditional fee agreements).
The Court of Appeal in Sony expressly declined to resolve the tension. It will have to be resolved eventually and this author’s view is that Diag may well be preferred given the inherent difficulties that Lexlaw presented, as were considered thoroughly by Newey LJ. However, it will always be a matter of fact and degree.
Secondly, variations. A great many agreements have been amended more than once since July 2023 – some before PACCAR, some likely in ignorance of it, some in a considered attempt to cure it. Each variation is its own contract. Whether it was validly executed in accordance with an applicable variation clause, and whether it converted a compliant arrangement into a non-compliant one (or the reverse), are likely questions of ordinary contractual analysis with (potentially) very large consequences. It could no doubt be a great source of debate.
Thirdly, regulation. Nothing in Sony touches capital adequacy, funder conduct or the protection of consumers and class members. Those were matters for the CJC’s remaining 57 recommendations, and they remain unaddressed.
Conclusion
The problem posed by PACCAR has largely been addressed, but it is not a satisfactory fix. A judicial patch is not the same as a statutory repair.
Indeed, said patch does not deal with the problem of where recovery is considerably less than was originally considered to be likely, such that a split of the damages is the only viable option to see that the claimant(s) receives any part of their damages.
The scope for potential conflict and mis-alignment of interests between the funder and funded has been greatly enlarged post-PACCAR. The CAT has particularly noted the perverse incentive that this now places upon a funder’s shoulders, together with the excessive returns potentially available to funders as discussed in Merricks, should a funder insist on its contractual rights.
The government has said it will legislate but is yet to turn words into action. Until it does, practitioners should assume the current position will remain the position for the foreseeable future.
