In December, the UK government confirmed its intention to introduce legislation - with prospective effect - to reverse the impact of the Supreme Court’s 2023 decision in PACCAR and to place beyond doubt that litigation funding agreements (LFAs) are not damages‑based agreements (DBAs). This commitment marks a significant intervention in the litigation funding sector, aimed at restoring certainty following a period of substantial upheaval. Although the government has stated that it will bring forward these measures “when parliamentary time allows,” no formal timetable has yet been provided, leaving funders, lawyers and parties awaiting clarity on the legislative sequence.
The PACCAR decision
The Supreme Court’s ruling in PACCAR (July 2023) fundamentally reshaped the legal landscape for third‑party litigation funding. The judgment held that LFAs under which a funder’s return is calculated as a percentage of damages recovered fall within the statutory definition of a damages‑based agreement under section 58AA of the Courts and Legal Services Act 1990. This classification meant that such LFAs were subject to the Damages‑Based Agreements Regulations 2013, which impose strict requirements around form, content and enforceability.
Prior to PACCAR, funders had operated on the basis that LFAs were not DBAs because funders do not provide legal services. The Supreme Court, however, took the view that funders offering a share‑of‑proceeds model were providing “claims management services” and therefore fell within the relevant statutory definition of DBAs. The consequence was immediate and severe: a large proportion of existing LFAs became vulnerable to challenge and, in many cases, unenforceable, because they were not drafted in compliance with the DBA Regulations.
PACCAR had far‑reaching effects for funded litigation, including procedural delays, restructuring of agreements, and in some instances temporary withdrawal of funders from the market due to the legal uncertainty the ruling generated.
Government rationale for legislative intervention
In its statements to Parliament and accompanying commentary, the Ministry of Justice emphasised two primary considerations justifying intervention:
Access to justice: Litigation funding is a key mechanism enabling claimants to "access justice" and pursue claims against larger, better‑resourced defendants.
Competitiveness of England and Wales as a global litigation and arbitration hub: The legal services sector contributes more than £40 billion annually to the UK economy, and the jurisdiction’s reputation as a stable and sophisticated forum for complex commercial disputes is a key competitive asset. The government stressed that legal instability in the funding market could undermine the position of England and Wales as a leading venue for collective and commercial litigation and arbitration, harming both domestic and international confidence.
Prospective legislative measures
The government has confirmed that the forthcoming legislation will:
- Reverse the effect of the PACCAR judgment prospectively by clarifying in statute that LFAs are not DBAs when the funder’s remuneration is calculated as a share of recoveries. Notably, the government has indicated the legislation will operate prospectively, despite recommendations by certain stakeholders - including suggestions within the Civil Justice Council (CJC) review - that retrospective effect would help minimise uncertainty around existing agreements.
- Introduce a framework of “proportionate regulation” for third‑party litigation funding. This would supplement or replace the existing voluntary self‑regulation regime administered by the Association of Litigation Funders.
Relationship with the Civil Justice Council’s recommendations
The CJC published a comprehensive and widely consulted review of third‑party litigation funding in June 2025. Its two headline recommendations were: immediate legislative reversal of PACCAR confirming that LFAs are not DBAs and “light‑touch” regulation aimed at ensuring fairness, transparency, and accountability within the funding market. The government has accepted both recommendations but it is not yet clear whether any of the CJC's other 56 recommendations will be implemented or whether these will help shape the proposal for "proportionate regulation" of the funding market.
We now await the promised legislation as a crucial step towards restoring certainty and ensuring that the litigation funding landscape in England and Wales remains both accessible to all and internationally competitive.
