The PACCAR problem

When the Supreme Court handed down its PACCAR judgment, it did not merely inconvenience the litigation funding market; it structurally invalidated a large portion of the agreements on which that market had been built. The decision turned on whether a litigation funding agreement that entitles the funder to a share of any damages recovered constitutes a damages-based agreement under the Courts and Legal Services Act 1990. The Court held that it does. Because damages-based agreements in contentious proceedings must comply with the Damages-Based Agreements Regulations 2013, and because most litigation funding agreements were not drafted to satisfy those regulations, the ruling rendered a significant body of existing contracts unenforceable in their current form. Understanding what PACCAR actually decided, why the market misread the risk for so long, and what the operational consequences look like in practice is essential for anyone operating in or adjacent to the funded litigation space.

What the market usually gets wrong

The dominant misconception in the aftermath of PACCAR was that the decision was primarily a documentation problem. The instinctive reaction from many practitioners was that funders would simply redraft their agreements, replace percentage-of-recovery return structures with fixed multiples or internal-rate-of-return formulations, and carry on largely as before. That reaction, while understandable, underestimates the depth of the structural disruption the judgment created.

The error stems from treating PACCAR as a drafting ruling rather than a classification ruling. The Court was not saying that litigation funding agreements are inherently unenforceable. It was saying that a specific and widely used return mechanism, namely the funder receiving a defined proportion of the damages ultimately recovered, brings the agreement within the statutory definition of a damages-based agreement. Once that classification applies, the full regulatory framework for damages-based agreements follows automatically. That framework was designed for conditional fee arrangements between lawyers and clients, not for third-party capital providers operating at arm's length from the legal relationship. Applying it to funding agreements creates genuine structural tensions that cannot be resolved by changing a few defined terms.

The misconception also persists because the market had operated without serious regulatory challenge for a considerable period before PACCAR. The Association of Litigation Funders had developed a voluntary code of conduct, funders had grown comfortable with percentage-of-recovery structures, and the absence of enforcement action had been quietly treated as implicit regulatory tolerance. PACCAR exposed that comfort as misplaced. The absence of challenge is not the same as legal validity, and the market had conflated the two.

What actually changes at the operating layer

The practical consequences at the operating layer are more granular than most commentary has acknowledged. Three distinct categories of agreement were affected differently by the ruling, and treating them as a single problem produces confused responses.

First, existing agreements with percentage-of-recovery return structures that were already in force at the time of the judgment became immediately problematic. Funders holding these agreements faced the prospect that, if the funded claim succeeded, the agreement under which they expected to recover their return might be unenforceable. That is not a theoretical risk. It is a direct threat to the commercial viability of the investment. Funders and their legal advisers had to assess each live portfolio agreement individually, determine whether remediation was possible, and in many cases approach claimants to renegotiate terms. That process is expensive, time-consuming, and in some cases impossible if the claimant's interests and the funder's interests have diverged since the original agreement was signed.

Second, new agreements entered into after PACCAR had to be structured differently from the outset. The market moved relatively quickly towards fixed-multiple return structures, under which the funder receives a defined multiple of the capital deployed rather than a share of the damages recovered. This approach avoids the classification problem identified in PACCAR, but it introduces its own commercial complications. A fixed multiple is less sensitive to the actual outcome of the litigation than a percentage-of-recovery structure. In cases where the damages recovered are modest relative to the capital deployed, a fixed multiple may produce a better return for the funder than a percentage would have done. In cases where the damages are very large, the funder may receive significantly less than it would have under a percentage structure. Neither outcome is inherently wrong, but both require the parties to model their economics differently and to negotiate with a clearer understanding of the range of possible outcomes.

Third, group litigation and collective proceedings present a distinct set of complications. The opt-out collective proceedings regime under the Competition Act 1998 had become an increasingly important vehicle for funded litigation in the years before PACCAR. Many of the funding agreements underpinning collective proceedings were structured on percentage-of-recovery terms. The judgment therefore created uncertainty not only about the enforceability of those agreements but about the viability of the proceedings themselves, given that funding is a practical prerequisite for most collective actions of any scale. The Competition Appeal Tribunal and the appellate courts have had to work through the consequences of PACCAR in the collective proceedings context in ways that are still developing.

Commercial consequences for funders, law firms, and claimants

The commercial consequences of PACCAR radiate outward from the funding agreement itself into the broader ecosystem of funded litigation. For funders, the immediate consequence was portfolio uncertainty. A funder holding a book of live cases under percentage-of-recovery agreements faced the possibility that a material portion of its expected returns were contingent on agreements that might not be enforceable. That uncertainty affects the funder's own capital position, its ability to raise new funds from institutional investors, and its appetite to deploy capital into new cases while the legal position remained unsettled.

For law firms, the consequences were different but equally significant. Many funded cases are structured so that the law firm acts on a conditional fee arrangement or a discounted fee arrangement alongside the third-party funding. The economics of those arrangements are calibrated against the expected funding terms. If the funding agreement is restructured, the law firm's own fee arrangement may need to be revisited. More broadly, law firms that had positioned themselves as specialists in funded litigation found that their ability to offer clients a clear and reliable funding pathway had been temporarily disrupted. The reputational and commercial cost of that disruption should not be underestimated.

For claimants, particularly those in collective proceedings or group actions who had no realistic alternative to third-party funding, PACCAR created genuine access-to-justice concerns. A claimant who had agreed to fund a claim on the basis of a percentage-of-recovery arrangement and then found that arrangement potentially unenforceable was in a difficult position. The funder might seek to renegotiate on terms less favourable to the claimant. The claimant might find it difficult to obtain alternative funding on short notice. In the worst cases, the uncertainty created by PACCAR could cause funded cases to stall or collapse entirely, not because the underlying claim lacked merit but because the commercial infrastructure supporting it had been destabilised.

The legislative response has been part of the ongoing conversation. There have been calls for Parliament to intervene to restore the enforceability of litigation funding agreements by clarifying that they do not fall within the definition of damages-based agreements. The Litigation Funding Agreements (Enforceability) Bill was introduced with precisely that aim, though the legislative process has moved at a pace that has left the market in a prolonged state of uncertainty. The interaction between judicial interpretation and legislative correction is itself a significant feature of the PACCAR story, and one that illustrates the broader challenge of regulating a market that has grown faster than the statutory framework designed to contain it.

Where the market is likely to move next

The direction of travel for the litigation funding market in the wake of PACCAR points towards greater structural sophistication rather than retreat. The market will not contract simply because one return mechanism has been complicated. The underlying demand for third-party capital to support complex and expensive litigation remains strong, and the commercial logic of litigation funding as an asset class has not been undermined by the judgment. What PACCAR has done is force the market to operate with greater precision.

Fixed-multiple structures will become more common, and funders will develop more refined models for pricing those structures across different case types and risk profiles. The discipline of modelling outcomes under a fixed multiple rather than a percentage of recovery requires a more granular understanding of the likely range of damages, the probability of success at each stage of the litigation, and the timeline to resolution. That discipline is not unwelcome. Some of the looseness in pre-PACCAR funding agreements reflected a market that had not been required to price risk with sufficient rigour.

Regulatory clarity, whether through legislation or through further judicial guidance, will also reshape the market. If Parliament legislates to exclude litigation funding agreements from the definition of damages-based agreements, the market will be able to return to percentage-of-recovery structures with greater confidence. If it does not, the market will consolidate around fixed-multiple structures and the drafting conventions that have emerged in response to PACCAR will harden into standard practice. Either outcome is workable, but the prolonged uncertainty between those two endpoints is genuinely costly.

The collective proceedings context will continue to generate the most significant case law. The stakes in collective actions are high, the funding requirements are large, and the interaction between the funding agreement, the class representative's obligations, and the tribunal's oversight creates a more complex regulatory environment than individual commercial litigation. Practitioners and funders operating in that space should expect further judicial guidance on what PACCAR means for collective proceedings specifically, and should structure their agreements accordingly.

What this means in practice

For anyone making operational decisions in or around funded litigation, the PACCAR problem is not a background legal technicality. It is a live commercial risk that requires active management. Funders should audit their existing portfolios and ensure that any percentage-of-recovery agreements have been remediated or replaced. Law firms advising claimants on funding options should be in a position to explain the current state of the law clearly and to recommend agreement structures that are enforceable under the post-PACCAR framework. Claimants entering into new funding arrangements should ensure they understand the return structure their funder is proposing and why it has been structured in that way.

The broader lesson of PACCAR is that the litigation funding market, for all its sophistication, had allowed a significant structural vulnerability to persist because the absence of enforcement action had been mistaken for legal certainty. That mistake is now on the record. The market that emerges from the PACCAR adjustment will be better documented, more precisely priced, and more resilient as a result, but only if practitioners and funders engage with the substance of the judgment rather than treating it as a drafting inconvenience to be papered over.

For a broader orientation to how litigation finance operates as a commercial discipline, the litigation finance pillar sets out the foundational principles. Further analysis of how funding structures interact with case economics is available across the writing archive. If you are working through a specific funding question and want to discuss the operational dimensions, the contact page is the right starting point.

PACCAR is not the end of litigation funding in England and Wales. It is a correction that the market needed, even if the timing and mechanism were unwelcome. The firms and funders that treat it as an opportunity to build more rigorous commercial infrastructure will be better positioned than those that treat it as a problem to be minimised.