On 4 July 2025, the UK Court of Appeal delivered what the litigation funding sector had been waiting for: a practical ruling on the enforceability of litigation funding agreements (“LFAs”).[1]
In Sony Interactive Entertainment Europe Ltd & another v. Alex Neill Class Representative Ltd (and related appeals involving Visa, Mastercard and Apple) (“Sony v. Neill”), the Court of Appeal unanimously confirmed that an LFA which prices the funder’s return as a multiple of the funder’s investment does not become a damages-based agreement (“DBA”) merely because payment comes from damages recovered or is capped by such damages.[2]
The decision matters because the 2023 UK Supreme Court’s (“Supreme Court”) decision in R (on the application of PACCAR Inc) v. Competition Appeal Tribunal (“PACCAR”)[3] had cast a long shadow over funding structures that underpin major UK proceedings, including arbitrations. Parliament attempted to address the disruption, but legislation stalled after elections. Against that backdrop, the Court of Appeal’s judgment brought in stability, at least until the Government’s promised reforms arrive.
Background and Procedural History
The Supreme Court’s 2023 Shockwave: PACCAR Ruling
In July 2023, the Supreme Court in PACCAR fundamentally reshaped litigation funding models. The Supreme Court held that commonly used LFAs, where the funder’s return is calculated as a percentage of damages recovered, qualified as DBAs and would be governed by the Courts and Legal Services Act 1990 (“CLSA”)[4] and the Damages-Based Regulations 2013 (“DBA Regulations”).[5] As a result, the LFAs that did not meet the statutory requirements under Section 58AA of the CLSA were unenforceable.[6] (For a detailed discussion of this judgment, see UK Litigation Funding Agreements for International Arbitration Now Void?)
The Market Response: Amending LFAs
This decision sent “shockwaves” across the litigation funding industry with immense consequences not only for funders but also for litigants seeking justice without the means to access it.[7]
The market’s response was swift and pragmatic. Rather than pricing the funder’s return by reference to damages (the trigger for the DBA concern), revised LFAs increasingly reframed the calculation of the funder’s return as a multiple of the capital deployed.[8] (For Aceris Law, this created the peculiar situation in which third-party funders encouraged the firm to charge far higher fees, despite its practice of keeping costs reasonable, in order to make LFAs commercially attractive.)
However, most LFAs still shared a commercial reality that the funder could only be paid from the damages recovered. This meant that revised LFAs included express or implied caps to a funder’s return to either the amount of proceeds recovered or a percentage of the proceeds.[9] Some LFAs also included a cautious fallback clause allowing a percentage-based return on damages only if the law permitted.[10]
Scrutiny of Amended LFAs Before the Competition Appeal Tribunal
These amended LFAs were challenged in collective proceedings before the Competition Appeal Tribunal (“CAT”). In a series of judgments, the CAT rejected those challenges and concluded that the amended LFAs were not DBAs under Section 58AA of the CLSA since the funder’s fee was not determined by reference to the proceeds.[11]
The unsuccessful defendants filed appeals before the Court of Appeal.
Litigation Funding Agreements (Enforceability) Bill 2024 and Civil Justice Council Review
In March 2024, Parliament attempted to restore certainty through the Litigation Funding Agreements (Enforceability) Bill (“Bill”), which provided for the exclusion of LFAs from the definition of DBAs.[12] But Parliament was dissolved before the Bill could be passed.[13]
At the same time, the Lord Chancellor asked the Civil Justice Council to carry out a wider review of third-party litigation funding. On 2 June 2025, the Civil Justice Council issued its Final Report recommending that the PACCAR judgment be reversed through legislation with both retrospective and prospective effect.[14]
Appeals Before the Court of Appeal
Since legislative change seemed likely, the Court of Appeal initially stayed the appeals. However, when the newly elected government decided to wait for the Civil Justice Council’s wider review before introducing a law on third-party funding, the Court of Appeal proceeded to hear the cases.[15]
Arguments
The appellants (Sony, Visa, Mastercard, Apple) contended that:
- The express or implied cap on the funder’s return by reference to the amount of proceeds or undistributed damages meant the amount payable to the funder is still “determined by reference to the financial benefit obtained” within Section 58AA(3)(a)(ii) of the CLSA.[16] This makes the LFAs unenforceable unless and until they comply with the statutory requirements for DBAs.
- Interestingly, the appellants accepted that if the funder’s return was calculated by reference to multiples of the funder’s outlay without any proceeds-linked cap, the LFAs would be enforceable.[17]
- The language providing for a percentage-based recovery “to the extent enforceable or permissible by law” meant the amended LFAs were DBAs.[18] Moreover, it incentivised funders and lawyers to focus only on large cases and would be contrary to public policy.[19]
The respondents (funders/class representatives) countered that:
- The Court of Appeal should focus on the primary contractual entitlement. Here, the funder’s return was calculated as a multiple of the funder’s outlay/commitment, not by reference to damages.[20]
- The source of payment (damages) is not the same as the method of calculating the return.[21] Similarly, a cap on the funder’s return in practice does not turn an LFA into a DBA.
- The words “only to the extent enforceable or permissible by law” have no effect unless and until legislation makes percentage-based returns lawful.[22]
What Did the Court of Appeal Decide?
Issue 1: Is the amount of the funder’s fee in the amended LFAs determined “by reference to the amount of the financial benefit obtained”?[23]
The Court of Appeal dismissed the appellant’s arguments and held that the amended LFAs are not DBAs since the funder’s return was calculated by a multiple of its outlay, and not as a percentage of damages.[24] Briefly, it reasoned that:
- Applying the analysis of Lord Sales JSC in PACCAR, the words in Section 58AA(3)(a)(ii) of the CLSA, i.e., “determined by reference to the amount of the financial benefit obtained”, refers to the “primary contractual entitlement of the funder”, which is a multiple of its investment rather than a percentage of damages.[25]
- The appellant’s interpretation would make third-party funding “practically impossible save in those cases where the DBA Regulations could be complied with.”[26]
- Merely because payment comes from damages or because the funder’s recovery is capped by the amount of proceeds does not alter the character of an LFA into a DBA.[27]
Issue 2: If the LFAs provide for the funder to be paid a percentage of the proceeds “only to the extent enforceable and permitted by applicable law”, is it a DBA?[28]
The Court of Appeal held that a contingent percentage mechanism “to the extent enforceable or permissible by law” had no contractual effect until the law changed.[29] The Court also found no evidential basis for the suggestion that such drafting distorted incentives or was contrary to public policy.[30]
Issue 3: If the LFAs are unenforceable, can any part thereof be severed?[31]
Since the LFAs were held to be enforceable, the question of severability became academic.[32]
Government Intention to Legislate
In a Written Ministerial Statement (“Statement”) of 17 December 2025, the Minister of State for Justice, Sarah Sackman KC MP, confirmed that the Government intends to legislate, with prospective effect, to clarify that LFAs are not DBAs and to introduce “proportionate regulation” of third-party litigation funding agreements.[33] Notably, this contrasts with the earlier Bill, which contemplated a retrospective solution.
The Statement also makes clear that legislation will be introduced “when parliamentary time allows”, leaving the position to be governed by the courts in the meantime.[34]
The Civil Justice Council’s Final Report recommends adopting a “light-touch” regulatory model, with a planned review after a defined period.[35] However, until the Government publishes the text of any bill, the precise scope and design of the forthcoming legislation remain uncertain.
Why This Matters for Arbitration
Although Sony v. Neill arose from CAT collective proceedings, the broader funding question matters to arbitration because the statutory DBA framework is not limited to court litigation. Under Section 58AA of the CLSA, “proceedings” include not only court proceedings but also other proceedings for resolving disputes.[36] Therefore, the question of enforceability of LFAs applies equally to funding arrangements in English-seated arbitrations, where third-party funding is frequently used.[37]
Importantly, the Civil Justice Council’s Final Report recommends that the proposed litigation funding regulations should not apply to the funding of arbitration proceedings, which should remain “a matter for arbitral centres to determine”.[38] This recommendation was made in light of the view that there is no “identifiable problem or market failure” in arbitration proceedings, as the funded parties are typically well-informed and need less protection.[39]
Conclusion
Whether arbitration funding will ultimately fall within any future statutory regulatory framework depends on the Government’s legislative choices, even though the Civil Justice Council has explicitly recommended an arbitration carve-out. Until legislation is enacted, the Court of Appeal’s decision in Sony v. Neill brings much-needed stability to the litigation funding sector. Importantly, the Supreme Court has refused permission to appeal the Court of Appeal’s decision.[40]
Parties and funders can continue to rely on multiple-of-outlay funding structures under English law, but should keep a close eye on the forthcoming legislation.
[1] Sony Interactive Entertainment Europe Ltd v Alex Neill Class Representative Ltd [2025] EWCA Civ 841.
[2] Id. [115]-[123].
[3] R (on the application of PACCAR Inc) v Competition Appeal Tribunal [2023] UKSC 28.
[4] Courts and Legal Services Act 1990, s. 58AA.
[5] The Damages-Based Regulations 2013, SI 2013/609.
[6] PACCAR [2023] UKSC 28 [29], [99].
[7] M. Cross, ‘Shockwaves’ as Supreme Court rules litigation funding deals unenforceable, Law Gazette, 26 July 2023, https://www.lawgazette.co.uk/law/shockwaves-as-supreme-court-rules-litigation-funding-deals-unenforceable/5116775.article (last accessed 30 January 2026).
[8] Sony v Neill [2025] EWCA Civ 841 [3].
[9] Ibid.
[10] Id. [22].
[11] Id. [29]-[44].
[12] Litigation Funding Agreements (Enforceability) Bill HL Bill (2023-24) 72.
[13] UK Parliament, Litigation Funding Agreements (Enforceability) Bill [HL] – News, 29 April 2024, https://bills.parliament.uk/bills/3702/news (last accessed 30 January 2026) (“The 2023-24 session of Parliament has prorogued and this bill will make no further progress.”).
[14] Civil Justice Council, Review of Litigation Funding: Final Report, 2 June 2025, para. 3.2.
[15] Sony v Neill [2025] EWCA Civ 841 [12].
[16] Id. [66].
[17] Id. [115].
[18] Id. [70].
[19] Id. [73].
[20] Id. [89].
[21] Id. [94].
[22] Id. [104].
[23] Id. [5(1)].
[24] Id. [115]-[123].
[25] Id. [118].
[26] Id. [117].
[27] Id. [118].
[28] Id. [5(2)].
[29] Id. [124].
[30] Id. [126].
[31] Id. [5(3)].
[32] Id. [129].
[33] Sarah Sackman, Third-Party Litigation Funding (Statement UIN HCWS1192), 17 December 2025, https://questions-statements.parliament.uk/written-statements/detail/2025-12-17/HCWS1192 (last accessed 30 January 2026).
[34] Ibid.
[35] Review of Litigation Funding: Final Report, 2 June 2025, para. 2.4.
[36] CLSA, s. 58AA(7A) (“‘proceedings’ includes any sort of proceedings for resolving disputes (and not just proceedings in a court), whether commenced or contemplated”).
[37] N. Henshall, UK Supreme Court decision renders many litigation funding agreements unenforceable, February 2024, https://www.nortonrosefulbright.com/en/knowledge/publications/445e891c/uk-supreme-court-decision-renders-many-litigation-funding-agreements-unenforceable (last accessed 30 January 2026).
[38] Review of Litigation Funding: Final Report, paras. 2.4, 3.7.
[39] Id. paras. 7.14-7.15.
[40] UK Supreme Court, Visa Inc. and others (Appellants) v Commercial and Interregional Card Claims I Limited and another (Respondents), Case ID UKSC/2025/0158, 6 November 2025 (permission to appeal refused), https://www.supremecourt.uk/cases/uksc-2025-0158 (last accessed 30 January 2026).