Post-PACCAR funding structures that actually work

When the Supreme Court handed down its PACCAR decision, it did not destroy litigation funding in England and Wales; it forced the market to grow up. The immediate reaction from many commentators was alarm, and that alarm was understandable. Litigation funding agreements structured as damages-based agreements were rendered unenforceable in one ruling, and a significant portion of the market's deployed capital sat behind contracts that suddenly needed reexamination. But alarm is not analysis. The more useful question, and the one that practitioners and funders have been working through ever since, is which structures have emerged from that reexamination and why some of them are genuinely more robust than the arrangements they replaced.

This essay sets out the operating logic of the post-PACCAR landscape. It is written for practitioners, operators, and commercial decision-makers who need to understand not just what changed legally but what that change means for how funding agreements are drafted, how returns are structured, and how risk is allocated across the lifecycle of a funded claim. The thesis is straightforward: the market's response to PACCAR has produced a cleaner, more commercially legible set of structures, and those structures reward parties who understand the distinction between a return tied to damages and a return tied to the value of a claim.

What the market usually gets wrong

The dominant misconception about PACCAR is that it was primarily a problem for funders. It was not. It was a problem for any party whose funding agreement failed to distinguish clearly between a damages-based agreement, as defined by the Courts and Legal Services Act 1990 and the relevant regulations, and a contractual arrangement that simply happened to calculate its return by reference to the damages recovered.

That distinction sounds technical, and in practice it is. But the failure to draw it correctly before PACCAR was not a drafting oversight confined to a handful of careless agreements. It reflected a broader assumption that had settled into the market over years of relatively unchallenged operation: that funders could structure their returns however they wished provided the agreement was clearly labelled as a litigation funding agreement rather than a DBA. The Supreme Court corrected that assumption with considerable force. If the funder's return is calculated as a share of the damages recovered, the agreement is a DBA regardless of what it calls itself, and if it does not comply with DBA regulations, it is unenforceable.

The consequence of that misconception persisting is significant. Practitioners who continue to treat PACCAR as a narrow technical ruling, rather than as a prompt to rethink how funder returns are expressed, are exposing their clients and their funders to enforceability risk on agreements that look superficially compliant but are not. The market has moved, but it has not moved uniformly, and the gap between well-structured and poorly-structured agreements is wider now than it was before the judgment.

What actually changes when you look at the operating layer

At the operating level, PACCAR created three distinct pressures that have shaped the structures now in use.

The first pressure is definitional. Funders and their counsel have had to become precise about how a return is expressed. A return calculated as a multiple of the capital deployed, sometimes called a multiple on invested capital or MOIC structure, does not calculate the funder's return as a share of the damages recovered. It calculates it by reference to the capital the funder put in. That distinction is meaningful under the relevant statutory framework, and it is the reason MOIC-based structures have become more prominent since PACCAR. They are not a workaround; they are a structurally different approach to expressing the funder's economic interest in the outcome.

The second pressure is documentary. Agreements now need to be drafted with greater precision about what triggers the funder's return, how that return is calculated at each stage of a settlement or judgment, and what happens in partial recovery scenarios. Pre-PACCAR agreements often handled these questions loosely, relying on the broad commercial understanding of the parties rather than precise contractual mechanics. That looseness is no longer defensible. The drafting burden has increased, and with it the importance of instructing counsel who understand both the litigation finance market and the statutory framework within which it operates.

The third pressure is relational. The renegotiation of existing agreements after PACCAR required funders and funded parties to have direct conversations about the economic terms of their arrangements in a way that many had avoided. Those conversations were sometimes uncomfortable, but they produced a more explicit shared understanding of how returns would work. That explicitness is, on balance, a positive development. Disputes about funder returns are less likely when the contractual mechanics are clear and both parties have actively engaged with them.

For a broader view of how these structural questions sit within the litigation finance market, the litigation finance pillar sets out the operating context in more detail.

Commercial consequences

The commercial consequences of PACCAR flow in several directions simultaneously, and it is worth tracing each of them.

For law firms operating on conditional fee agreements alongside third-party funding, PACCAR sharpened the need to ensure that the funding agreement and the CFA are properly coordinated. The interaction between a funder's return and a firm's success fee can produce outcomes that neither party anticipated if the agreements are not drafted with each other in mind. Firms that have invested in understanding that interaction are better placed to advise clients on the true economics of a funded matter.

For funders, the shift towards MOIC-based structures has implications for how they model returns across a portfolio. A return expressed as a multiple of deployed capital behaves differently from a return expressed as a percentage of damages when claim values shift during litigation. Funders who have built their portfolio models around damages-linked returns have had to revisit those models, and some have found that the recalibration produces a more conservative but more defensible return profile.

For defendants and their insurers, the post-PACCAR landscape has introduced a new line of argument in adverse costs and security for costs applications. If a funding agreement is potentially unenforceable, the question of whether the funder will actually meet an adverse costs order becomes more acute. Courts have begun to engage with this question more directly, and the quality of the funding agreement has become a material factor in how those applications are decided.

For commercial operators who are considering funded litigation as a route to recovering losses, the practical consequence is that the due diligence required before entering a funding arrangement has increased. Understanding whether a proposed agreement is structured in a way that is likely to be enforceable is not a question that can be answered by reading the agreement in isolation. It requires an understanding of the statutory framework and the case law that has developed since PACCAR, and it requires advice from practitioners who are current on both.

The about page sets out the background and approach that informs the analysis in these essays, including the commercial litigation context in which these questions most frequently arise.

Where the market is likely to move next

The legislative response to PACCAR has been slow and, at the time of writing, incomplete. The Litigation Funding Agreements (Enforceability) Bill, which was introduced to reverse the effect of PACCAR by amending the definition of a DBA, has had a complicated parliamentary history. The practical consequence of that delay is that the market cannot rely on legislative correction to resolve the uncertainty that PACCAR created. It has had to resolve that uncertainty through structural innovation, and the structures that have emerged are likely to persist even if legislation eventually arrives.

That persistence matters because it reflects a genuine improvement in market practice rather than a temporary workaround. MOIC-based structures, more precisely drafted agreements, and greater transparency about how returns are calculated are all developments that serve the interests of funded parties as well as funders. They make the economics of a funding arrangement more legible, they reduce the scope for disputes about how returns are calculated, and they create a clearer framework for resolving the partial recovery scenarios that generate the most complex disputes in practice.

The area where the market is likely to see continued development is the treatment of portfolio funding arrangements. Portfolio funding, where a funder provides capital across a portfolio of matters rather than on a single claim, raises distinct questions about how PACCAR applies when returns are calculated across a portfolio rather than on a claim-by-claim basis. The analysis is not straightforward, and the market has not yet converged on a settled approach. Practitioners and funders who are operating in this space should expect continued uncertainty and should structure their agreements accordingly.

There is also likely to be continued judicial engagement with the question of what constitutes a damages-based agreement in the context of funded group litigation. The collective proceedings regime in the Competition Appeal Tribunal has its own regulatory framework, and the interaction between that framework and the PACCAR analysis is an area of active development. The outcomes in that space will have implications for how funding is structured in competition damages claims more broadly.

For practitioners who want to follow these developments as they emerge, the writing archive collects analysis across the litigation finance and commercial litigation landscape as the case law and market practice evolve.

What this means in practice

The practical implications of the post-PACCAR landscape can be stated with reasonable clarity, even where the legal analysis remains contested at the margins.

First, any litigation funding agreement that expresses the funder's return as a percentage of the damages recovered should be reviewed against the DBA regulations before it is relied upon. That review is not a formality. It requires a considered analysis of whether the agreement complies with the regulations and, if it does not, what the consequences of non-compliance are for the enforceability of the agreement as a whole.

Second, new agreements should be structured with the PACCAR analysis in mind from the outset. That means making a deliberate choice about how the funder's return is expressed, documenting that choice and its rationale, and ensuring that the agreement's mechanics are consistent with the chosen structure throughout. Agreements that mix MOIC-based and damages-linked language create ambiguity that serves no one's interests.

Third, the interaction between the funding agreement and any conditional fee arrangement, after-the-event insurance policy, or other funding instrument in the same matter should be reviewed as a whole. The economics of a funded matter are determined by the interaction of all of these instruments, and an agreement that is individually well-structured can produce unexpected outcomes if it is not coordinated with the other instruments in the funding stack.

Fourth, and perhaps most importantly, the parties to a funding arrangement should understand the economics of that arrangement before they commit to it. PACCAR has made that understanding more important, not less, because the consequences of an unenforceable agreement fall on all parties to the litigation, not just the funder. A funded party whose funding agreement is unenforceable may find itself without the capital it expected to prosecute its claim, and a funder whose agreement is unenforceable may find itself unable to recover its return even from a successful outcome.

The litigation funding market in England and Wales is more sophisticated than it was before PACCAR. The structures that have emerged from the market's response to that judgment are more carefully considered, more precisely drafted, and more commercially transparent than many of the arrangements they replaced. That is a genuine improvement, and it is one that practitioners, funders, and commercial operators should recognise and build on rather than treat as a temporary inconvenience pending legislative correction.

For specific questions about how these structures apply to a particular matter or portfolio, the contact page sets out how to get in touch.