By Samuel Arksey

On 26 July 2023, the UK Supreme Court handed down its ruling in R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal and others [2023] UKSC 28. The decision turned on a statutory definition that most practitioners had never considered. The consequences were immediate and, for domestic funders, severe.

The court held that litigation funding agreements (‘LFAs’) calculating the funder’s return as a percentage of damages fell within the definition of “claims management services” under section 58AA of the Courts and Legal Services Act 1990. That made them damages-based agreements (‘DBAs’). Most LFAs were not drafted to comply with the DBA Regulations 2013 – requirements described in the litigation as nearly impossible for a standard LFA to satisfy. They were, therefore, unenforceable. In the Competition Appeal Tribunal, the position was worse: section 47C(8) of the Competition Act 1998 prohibits DBAs outright in opt-out collective proceedings, creating an immediate legality vacuum for large consumer class actions.

UK-domiciled funders reportedly saw anticipated activity fall by more than 75% in the second half of 2023. The “catastrophe” narrative took hold quickly. What followed, however, was not collapse. It was consolidation, by funders who were never exposed to the problem in the first place.

Why the crisis was a UK problem, not a global one

PACCAR was a product of overly inclusive drafting within a specific UK legislative context. International markets were barely touched.

In Australia, the market had already survived its own version of this argument. The managed investment scheme (‘MIS’) classification dispute, which threatened to impose similar constraints, was resolved when the Full Federal Court unanimously held in 2022 that litigation funding schemes are not MIS under the Corporations Act 2001. By the time PACCAR landed, Australian capital was operating in a period of relative regulatory clarity.

In the United States, the structure of funding has always been built around the non-recourse nature of the investment rather than any statutory definition analogous to section 58AA. There was no domestic equivalent of the “claims management services” trap. US funders, including large publicly traded platforms like Burford Capital and Omni Bridgeway, had already tested multiplier-based models extensively. PACCAR changed nothing for them.

New Zealand maintained a low-regulation environment built around case-by-case court approval of funding arrangements. There was nothing to re-classify.

The table below summarises the different starting points:

Jurisdiction	Classification	Regulatory mechanism	PACCAR impact
United Kingdom	Damages-Based Agreement (if percentage-based)	DBA Regulations 2013 / CLSA 1990 s.58AA	High: most percentage-based LFAs unenforceable; CAT opt-out proceedings suspended.
Australia	Financial product (historical MIS classification reversed 2022)	Corporations Act 2001 / ASIC oversight	Minimal: Federal Court reversed the MIS classification before PACCAR landed.
New Zealand	Evolving common law, low statutory overlay	Law Commission recommendations (pending)	Low: not bound but monitors UK developments.
United States	Non-recourse investment / uncorrelated asset class	State-level champerty rules / self-regulation	None: UK statutory definitions have no extraterritorial reach.

The pattern is consistent. Where markets had already worked through equivalent regulatory questions (or had avoided them entirely by operating under different legal frameworks), PACCAR created opportunity rather than crisis. UK instability was a point of entry.

The retrospectivity deadlock

The government’s initial response was the Litigation Funding Agreements (Enforceability) Bill, introduced in March 2024. Its objective was straightforward: restore the pre-PACCAR position by clarifying that LFAs are not DBAs and make that clarification retrospective, so as to protect funders from clawback claims on closed cases.

The Bill died in the “wash-up” ahead of the 2024 general election. The incoming Labour government declined to revive it immediately, choosing instead to await the Civil Justice Council’s full review of litigation funding – a decision criticised by Neil Purslow of the International Legal Finance Association as unnecessary and harmful to access to justice.

The retrospectivity question proved genuinely difficult. Several constitutional objections were raised during Lords debates:

• Rule of law: Walker v Innospec Limited and Others [2017] UKSC 47 restates the general principle that legislative changes apply prospectively, because people should be able to rely on the law as it stood when they acted. Retrospectively validating agreements that were unenforceable at the time of judgment cuts against that principle.
• ECHR Article 7: Article 7 requires that the legal consequences of conduct are knowable in advance. There was a credible argument that retrospective validation would undermine challenges to existing LFAs that parties might legitimately have brought based on the law as the Supreme Court declared it.
• Property rights: Lord Marks of Henley-on-Thames raised the concern that retrospectivity could interfere with accrued rights under agreements that had been recognised as unenforceable.

By October 2025, the parliamentary debate had reached a settled position. Government ministers indicated that retrospective legislation was highly unlikely, and that the focus would be a light-touch prospective regime rather than an attempt to rewrite history.

How the market adapted without waiting for Parliament

While the legislative process stalled, the courts and the funding industry moved faster.

The key structural shift was from percentage-based to multiplier-based LFAs. If a funder’s return is calculated as a multiple of invested capital rather than a share of damages, the fee is not “determined by reference to the amount of the financial benefit obtained” under section 58AA. It does not satisfy the DBA definition. The source of the payment may be damages, but the calculation is not.

On 4 July 2025, the Court of Appeal confirmed this in Sony Interactive Entertainment Europe Ltd v Alex Neill Class Representative Ltd [2025] EWCA Civ 841, a set of conjoined appeals from the CAT. The court held that:

• Multipliers based on capital outlay are not DBAs, even if the recovery is capped by the level of damages obtained.
• The source of the fee does not determine the classification – the calculation does.
• Contractual caps on multiplier returns do not bring the agreement within the DBA definition, because the primary entitlement remains tied to the funding provided.

The decision did not resolve every question; severability of mixed LFAs was left open. However, it provided sufficient certainty for the market to continue. Eleven group claims were filed in the CAT post-PACCAR, all with third-party funding. The catastrophe predicted did not materialise.

Who stepped into the vacuum

While domestic boutique funders were renegotiating agreements and managing investor uncertainty, international institutional capital was consolidating.

The most significant transaction was the June 2025 takeover of Therium Capital Management’s global litigation portfolio by Fortress Investment Group, an alternative asset manager with approximately $53 billion under management. Fortress assumed operational control of over forty active disputes. Therium had been known for a claimant-friendly approach and flexible drawdown terms. Fortress brought weekly reporting requirements, granular spend audits, and rigorous performance metrics. The cultural shift was as significant as the ownership change.

The broader trend reflects a structural change in who funds litigation. US hedge funds have been treating litigation funding as a separate business in itself – a source of absolute, uncorrelated returns in turbulent markets. AM Best analysts have noted this shift explicitly, describing litigation funding as spilling over from specialist US firms into other markets, including the UK.

For these new entrants, PACCAR-induced uncertainty was a pricing variable, not a barrier. They had the capital to absorb the transition period, the institutional infrastructure to adopt multiplier-based structures quickly, and no legacy portfolio of percentage-based agreements to worry about.

The table below shows how the market profile changed:

Metric	Pre-PACCAR (domestic focus)	Post-PACCAR (institutional focus)
Primary fee structure	Percentage of damages	Multiple of invested capital
Regulatory status	Self-regulated under ALF Code	Anticipated light-touch statutory regime
Typical funder profile	Boutique specialist TPF firms	Large credit houses and hedge funds (e.g. Fortress)
Risk appetite	Medium – flexible drawdown terms	Low – strict risk-adjusted return hurdles
Capital source	Specialist investment funds	Institutional alternative capital

The term “social inflation” – rising litigation costs driven by claimant-friendly awards and increased case volumes – has become standard in the insurance and reinsurance sectors. Certain industries have responded by framing third-party funding as legal system abuse. That framing has some political traction, but it has not slowed capital flows. For institutional investors, the litigation finance asset class has become more attractive as it has attracted more scrutiny, not less.

The CJC recommendations

The Civil Justice Council published its final report in June 2025. It proposed a twin-track approach: immediate legislation to reverse PACCAR, with both retrospective and prospective effect, followed by a comprehensive regulatory framework.

Regulatory component	Recommendation
PACCAR reversal	Legislation to clarify that TPF is not a claims management service and is distinct from DBAs, applying both retrospectively and prospectively.
Regulation type	Light-touch statutory regime overseen by the Lord Chancellor.
Capital adequacy	Case-specific capital requirements certified by funder and legal representative.
Control prohibition	Codified bar on funders controlling or interfering with the litigation.
Consumer protection	Independent legal advice for funded consumers; court approval of returns in collective proceedings.
Conflict of interest	Detailed provisions for identifying and managing conflicts between funders, lawyers, and litigants.

Critically, the CJC rejected caps on litigation funder returns for commercial litigation. Caps would reduce the commercial incentive for funders to take on high-risk claims – which is precisely the category of claim that access to justice depends on funding to reach court at all. International funders welcomed the recommendation. It preserved the profit potential of the UK market within a more structured framework.

The recommendation for retrospective application of the PACCAR reversal puts the CJC at odds with the position emerging from Parliament. As of early 2026 that tension has not been resolved. A prospective-only legislative fix remains the more constitutionally defensible path, but it leaves closed-case clawback risk unaddressed.

Where things stand

The UK litigation funding market has changed structurally, not temporarily. The domestic boutique sector that characterised the market before 2023 has contracted. The space it occupied is now held by institutional international capital operating under multiplier structures, with lower risk tolerance and higher reporting demands.

That is not a worse market. It is a different one. Multiplier-based agreements are arguably more transparent for claimants – a fixed capital multiple is easier to model than a variable percentage of an uncertain damages award. The regulatory framework that is coming will impose capital adequacy requirements and conflict of interest rules that will professionalise the sector further.

PACCAR did not kill litigation funding in the UK. It changed the identity of the funders and the structure of their deals. The market had anticipated this for funders operating on multiples of capital committed rather than percentages of damages – a structural preference that pre-dated the Supreme Court’s ruling. For those who were already there, July 2023 was confirmation, not disruption.

The global market is projected to approach $50 billion by 2035. The UK’s post-PACCAR turbulence was a local adjustment within a much larger, long-running capital allocation trend. The fundamentals – access to justice, corporate litigation as an asset class, uncorrelated returns – did not change. The funders did.

Sources

1. Litigation funding and PACCAR: reverse, regulate and reform – Charles Russell Speechlys (2025)
2. Supreme Court holds LFAs unenforceable in landmark ruling – Fountain Court Chambers (2023)
3. Review of Litigation Funding: Final Report – Civil Justice Council (June 2025)
4. The future of litigation funding post PACCAR – Bates Wells
5. UK PACCAR Reversal 2026: New Strategy for Class Action Defense – Lawyer Monthly (January 2026)
6. Civil Justice Council Review of Litigation Funding – Hansard (29 October 2025)
7. Litigation funding: legislation to reverse PACCAR remains in limbo – Clifford Chance (November 2024)
8. Fortress Investment Group Takes Over Therium’s Litigation Portfolio – VRI Times (June 2025)
9. Litigation funding post-PACCAR: clarity provided by the Court of Appeal – Macfarlanes (2025)
10. Litigation Funding Agreements (Enforceability) Bill [HL] – UK Parliament Research Briefing LLN-2024-0017
11. PACCAR reversal: Government confirms intention to introduce new legislation – Mishcon de Reya
12. Litigation Funding: Civil Justice Council Recommends New Regulatory Regime – Cleary Gottlieb (2025)
13. Litigation Funding Agreements: Developments Since PACCAR – Cooley
14. A time of change in the global litigation funding market – Minter Ellison (NZ)
15. Litigation Funding 2023 – Woodsford / LexGTDT
16. Full Federal Court judgment on MIS classification – ASX filing (2022)
17. In Turbulent Markets, Hedge Fund Managers Turn to Litigation Funding – HF Law Report
18. Alternative Litigation Finance and the Work-Product Doctrine – Wake Forest Law Review (2025)
19. Litigation Funding Impacted by UK General Election – DAC Beachcroft
20. UK Civil Justice Council publishes its final report on litigation funding – Osborne Clarke
21. It’s always a fight: US and UK funders on a busy year – Legal Business
22. The aftermath of PACCAR – Hogan Lovells
23. Third-Party Litigation Funding in England and Wales Post-PACCAR – K&L Gates (January 2025)
24. Bench Walk, PACCAR Judgment & Litigation Finance – InPractise / Burford Capital
25. Nowhere near drawing line under legal system abuse – AM Best / Insurance Times
26. Litigation Funding Agreements (Enforceability) Bill [HL] – Parliament (large print version)
27. Government publishes bill to reverse impact of PACCAR – Practical Law / Westlaw
28. LFA Bill Fact Sheet – GOV.UK
29. Retrospectivity & Access to Justice in the LFA Bill – Bingham Centre for the Rule of Law (2024)
30. UK Government Confirms Plans to Legislate to Reverse PACCAR – Akin Gump
31. Court of Appeal dismisses post-PACCAR challenge to funding arrangements – 4 New Square (July 2025)
32. Court of Appeal rejects post-PACCAR challenge to LFAs – Essex Court Chambers (July 2025)
33. Litigation Funding Waterfalls Are Compliant Post-PACCAR (UK) – Crowell & Moring (2025)
34. Nowhere near drawing line under legal system abuse –AM Best / Global Reinsurance
35. Litigation Funding Reforms: Clarity for UK Funders and Litigants Post-PACCAR – Crowell & Moring (2025)