Overview
On 4 July 2025, the Court of Appeal handed down a significant judgment addressing the enforceability of litigation funding agreements (LFAs) in collective proceedings before the Competition Appeal Tribunal (CAT) (Sony Interactive Entertainment Europe Ltd v. Alex Neill Class Representative Ltd [2025] EWCA Civ 841). The decision provides much-needed clarity following the UK Supreme Court’s ruling in PACCAR, which had cast doubt on the validity of many LFAs by categorising them as damages-based agreements (DBAs) and, therefore, unenforceable unless compliant with strict statutory requirements. The Court of Appeal’s judgment has important implications for funders, class representatives, and businesses facing collective actions in the UK, and we set out key themes to consider here.
Background: case law and legislative context
In R (PACCAR Inc) v. Competition Appeal Tribunal [2023] UKSC 28; [2023] 1 WLR 2594, the UK Supreme Court held that LFAs where funders’ fees were calculated as a percentage of damages awarded to the claimant(s), constituted DBAs under section 58AA of the Courts and Legal Services Act 1990 (CLSA). As a result, such LFAs were unenforceable unless they complied with the Damages-Based Agreements Regulations 2013 (the DBA Regulations), thus creating substantial uncertainty for ongoing and future claims.
The DBA Regulations impose strict limits on how DBAs should be structured, and they are particularly restrictive in the context of collective, class, or group litigation proceedings.
This ruling was particularly problematic in the context of collective actions before the CAT, which rely heavily on third-party funding due to the scale, complexity, and cost of such litigation.
For example, large-scale competition law claims, such as follow-on damages actions arising from cartel investigations or abuse of dominance claims, often involve tens of thousands of claimants and require significant financial backing to cover expert evidence, disclosure, and lengthy hearings. The viability of such claims was placed in jeopardy by the uncertainty over funding enforceability.
In response to PACCAR, funders and class representatives began restructuring LFAs. The most common adaptation was to move away from percentage-based entitlements and instead calculate the funder’s return as a multiple of its financial outlay or expenditure in the funded claim. To manage risk, these multiples were typically subject to a cap linked to the damages ultimately recovered by the claimants. However, defendants argued that such caps still tied the funder’s remuneration to damages in the claim and were, therefore, caught by the DBA Regulations. These challenges created ongoing uncertainty, prompting the need for appellate clarification.
The enforceability of these revised LFAs was examined by the Court of Appeal in Alex Neill. The examination included determining whether the funding arrangements that were restructured following the PACCAR decision were enforceable and were not caught by the DBA Regulations.
Key issues considered
In Alex Neill, the Court of Appeal considered three principal issues:
- Does capping a funder’s fee by reference to the proceeds of litigation (i.e., damages recovered) mean the fee is “determined by reference to the amount of the financial benefit obtained”, thereby making the LFA a DBA under section 58AA(3)(a)(ii) of the CLSA?
- If an LFA includes a provision for a percentage-based funder’s fee “only to the extent enforceable and permitted by applicable law”, does this render the agreement a DBA or otherwise impermissible?
- If an LFA is found to be unenforceable or unlawful in part, can the offending provisions be severed, leaving the remainder enforceable?
The Court also noted the legislative context. In 2024, the UK government introduced the Litigation Funding Agreements (Enforceability) Bill, which would have excluded LFAs from the DBA regime entirely. However, the Bill lapsed with the dissolution of parliament ahead of the general election. Further, in its report in June 2025, the Civil Justice Council recommended to the UK government that legislation be introduced to reverse the effect of the PACCAR ruling, applying both retrospectively and prospectively to restore certainty in litigation funding.
Analysis and findings
- Multiples of outlay and capping by proceeds: not a DBA
The Court of Appeal held that LFAs which calculate the funder’s fee as a multiple of its outlay, even if capped by the damages awarded, are not DBAs. The Court explained that this is because the funder’s primary contractual entitlement to payment is to a multiple of its investment in the claim, and not a share of damages. It said that the fact that payment is ultimately sourced from damages or is subject to the cap of the amount of damages awarded, does not mean that the fee is “determined by reference to” the financial benefit obtained, which would make it an unenforceable LFA. This is because, the Court observed, whether expressly stated or not, the funder’s fees will be logically capped by the amount recovered by the claimant(s). The Court emphasised that interpreting the CLSA otherwise would render almost all LFAs in collective proceedings unenforceable, an outcome the UK parliament could not have intended given the recognised need for third-party funding in such cases.
- Conditional percentage provisions: no effect unless law changes
Where LFAs include alternative provisions for a percentage-based funder’s fee, operative only if permitted by law, the Court found these provisions to be of no contractual effect under current law. As such, the Court determined that their inclusion does not render the LFA a DBA or unenforceable.
- Severance of unenforceable provisions
Although the issue of severance was rendered academic by the Court’s findings on enforceability, the judgment noted that, in principle, unenforceable provisions could be severed if their removal does not fundamentally alter the character of the contract. The Court declined to rule definitively on this point, leaving it open for future cases where it may be determinative.
- Public policy and practical implications
The Court confirmed that capping funders’ fees or including conditional percentage provisions did not create perverse incentives or an issue contrary to public policy. It found no evidence that such provisions would encourage speculative litigation or harm to consumers, especially given the CAT’s supervisory role and the safeguards built into the collective proceedings’ regime.
Implications for businesses and funders
- Certainty for litigation funding: The Court of Appeal’s judgment provides reassurance that LFAs structured to provide funders compensation based on multiples of their outlay, even with caps on compensation linked to damages, are enforceable and do not fall within the DBA Regulations.
- Continued access to funding: Class representatives in collective proceedings can continue to access third-party funding, which is essential for the viability of large-scale group litigation claims. Accordingly, companies involved in collective proceedings should anticipate that claimants will continue to have reliable access to third-party funding.
- Contract drafting: Parties should ensure that LFAs are carefully drafted to avoid funders’ primary entitlements to compensation being based on a percentage of damages. Parties should also consider including expressly severable provisions to preserve enforceability.
- Legislative watch: The UK government may yet legislate to clarify the status of LFAs, particularly if the Civil Justice Council’s latest recommendations are adopted.
Conclusion
The Court of Appeal’s decision in Alex Neill brings welcome clarity to the enforceability of LFAs in collective proceedings. Businesses, funders, and class representatives should monitor legislative and policy developments closely. Should you need any assistance in light of the judgment, do not hesitate to reach out to a member of the Reed Smith team.
Client Alert 2025-235
