Litigation Funding Waterfalls Are Compliant Post-PACCAR (UK)

In a previous client alert on a recent Civil Justice Council (“CJC”) report on litigation funding in England and Wales we discussed the issue of whether payment waterfalls providing funders with payment priority are compliant with the Damages-Based Agreements Regulations 2013 (“DBA Regulations”), the issue being a matter to be heard on appeal in June 2025. Funders will be pleased to hear that the answer is “yes”. The Court of Appeal has held that the DBA Regulations focuses on whether a funding agreement determines the amount of a funder’s fees by reference to the damages awarded to the successful litigant. The fact that a funder may receive its fees from the proceeds is not enough in itself for the arrangement to fall under the DBA Regulations.

Meanwhile, the CJC report, which recommended the reversal of the PACCAR decision, remains without official government comment at this time. Basic reform to remove third party funding entirely out from under the DBA Regulations seems unlikely to happen in the near term.

A Brief Summary of the Issues

In Sony Interactive Entertainment Europe Ltd & anr v Alex Neill Class Representative Ltd [2025] EWCA Civ 841 on 4 July 2025, the Court of Appeal answered three questions for several joined appeals:

“(1) If the amount payable to a funder or insurer under the [litigation funding agreements (“LFAs”)] is payable from and/or capped by the proceeds of a successful outcome, is the amount of the payment ‘to be determined by reference to the amount of the financial benefit obtained’ for the purposes of s.58AA(3)(a)(ii) of the CLSA? …

(2) If the LFAs provide that the funder or insurer is paid a percentage of the proceedings, ‘only to the extent enforceable and permitted by applicable law’ (or similar), is it a DBA, otherwise impermissible, or inappropriate for the purposes of certification? …

(3) If the LFA is unenforceable and/or unlawful, can any parts of it be severed?”

The judgment can be seen here.

A separate issue of whether “ratchet” arrangements increasing the funder’s fee (such as in the particular case in one of the appeals where the funder return would double if the proceedings continued beyond a date which was more than two years away but less than three years away) would comply with the DBA Regulations was originally pursued in one appeal and later dropped. It therefore technically remains an open question.

Question (1): Waterfalls Not Inherently Covered by the DBA Regulations

The first question concerns whether the fact that a funder in successful litigation is going to get paid from the proceeds is to be construed as something “determined by reference to the amount” of the proceeds. If it is, the mechanism is covered by the DBA Regulations and potentially unenforceable.

It was agreed by all parties to the appeal and the Court that if the payment was determined by reference to a multiple of what the funder invested in the case, such arrangements were, at first blush, out of the scope of the DBA Regulations.

Where the funder’s payment under the waterfall mechanism is payable from the available proceeds (in these cases, in circumstances where the funders fee is calculated as a multiple of funds invested by the funder as opposed to a percentage of the proceeds), it remained at issue whether such provisions in the LFAs are enough to be caught by the DBA Regulations. The Court of Appeal concluded they are not, and stated in its opinion “The fact that the source of the fee paid is the damages does not turn it into a DBA, nor does the fact that there is an upper limit or cap on the funder's fee recoverable by reference to the amount of damages recovered. The fee is still calculated or determined by reference to the amount of funding provided.”

The judgment by the Court of Appeal does not apply to the provisions of those funding agreements which provide for the funders fee to be calculated by reference to a percentage of the proceeds. Such provisions (absent government led legal reform) are still very likely to remain subject to challenge as a result of falling foul of the DBA Regulations.

Questions (2) and (3): Representative Action Certification Unaffected

In two other cases on appeal, the funder agreements had been redrafted post-PACCAR to provide for fees to be calculated as a percentage of the proceeds of the litigation, but only to the extent such provision is enforceable.

The defendants to the actions argued this was essentially gamesmanship by continuing to try to link payouts to the size of damages and thereby encouraging “the perverse incentive for lawyers and funders to focus on the largest cases […]” The Court of Appeal was emphatic that “there is simply no evidence to support the contention.” Rather, “there is no difference between catering in advance for the eventuality that the law might change, which is what has been done in the case of these two LFAs and the parties having in mind that if the law changed it might be necessary to enter into yet another amended LFA.” The class representative knows the alternatives in advance and the funder ensures a return either way.

Above all, the Court of Appeal noted that in these cases the Competition Appeal Tribunal retains an ultimate supervisory jurisdiction to endorse any payment to the funder proposed, and any concerns regarding improper motivation for funders and class representatives remained open to scrutiny at that stage.

Given the primary outcome on enforceability and appropriateness of the clauses, the issue of severance of such clauses was moot.

Take Away

As a result of this Court of Appeal decision, the DBA Regulations do not stop funding arrangements solely due to the fact that such arrangements:

1. provide for funders to be paid from the potential proceeds eventually recovered due to the damages in the case; or
2. calculate the funders fee based on a multiple of the funds it has invested in the case (as opposed to a fee calculated simply as percentage of the damages received).

The Court of Appeal’s decision provides welcome clarity in the litigation funding market, but it does not provide complete exemption of all litigation funders from the DBA Regulations. This will require legislative action as discussed in our prior alert, and is still pending.