“The Cap-Neutrality Principle” – Court of Appeal Clarifies that Capped-Multiple LFAs Are Not Damages-Based Agreements

Sony Interactive Entertainment Europe Ltd & Anor v Alex Neill Class Representative Ltd & linked appeals
([2025] EWCA Civ 841)

1. Introduction

The Court of Appeal (Civil Division) has delivered a pivotal judgment in four conjoined appeals arising from competition collective proceedings in the Competition Appeal Tribunal (“CAT”). The key dispute concerned whether re-drafted litigation funding agreements (“LFAs”) – structured so that a funder’s return is calculated by reference to a multiple of capital outlay yet capped by the damages ultimately recovered – amount to damages-based agreements (“DBAs”) under s 58AA Courts and Legal Services Act 1990 (“CLSA”).

The appellants (Sony, Visa, Mastercard and Apple) argued that the mere existence of a cap linked to proceeds converts such LFAs into DBAs and thus renders them unenforceable in CAT opt-out actions (s 47C(8) Competition Act 1998). The CAT had rejected that submission. The Court of Appeal has now emphatically upheld the CAT, establishing what this commentary calls the “Cap-Neutrality Principle”:

“Where an LFA calculates the funder’s fee by a multiple of its expenditure, an upper limit expressed by reference to litigation proceeds does not mean the payment is ‘determined by reference to’ those proceeds. Such an LFA is not a DBA.”

2. Summary of the Judgment

• Issue 1: Does a cap (express or implied) tied to damages make the funder’s return “determined by reference to” damages under s 58AA(3)(a)(ii)?
  Held: No. “Determined by” concerns the calculation mechanism; a protective cap does not change that mechanism.
• Issue 2: Where an LFA contains a fall-back clause that would pay a percentage of proceeds “only if and when lawful”, is the agreement currently a DBA?
  Held: No. The conditional clause is presently of no contractual effect; therefore s 58AA is not engaged.
• Issue 3: (Neill only) If any percentage clause were void, could it be severed?
  Held: Question academic given answers to Issues 1-2; severance not decided.
• Outcome: All four appeals dismissed; the revised LFAs are enforceable.

3. Detailed Analysis

3.1 Precedents Cited and Their Influence

1. R (PACCAR Inc) v CAT [2023] UKSC 28
   • Supreme Court majority held that percentage-of-damages LFAs are DBAs because funders provide “claims-management services”.
   • The present case distinguished PACCAR: there the primary entitlement was a percentage; here it is a multiple of outlay.
2. Lexlaw v Zuberi [2021] EWCA Civ 16
   • Examined what part of a retainer constitutes the DBA; relied on (obiter) in severance discussion.
3. Diag Human v Volterra Fietta [2023] EWCA Civ 1107
   • Restated three-stage test for contractual severance; referenced but not applied.
4. Merricks v Mastercard [2017] CAT 16
   • Cited to show Parliament expected collective actions to rely on third-party funding.
5. Classical statutory-interpretation authorities (e.g. Williams v CBN, Hanlon) were discussed to reinforce that later statutes and explanatory materials can illuminate meaning.

3.2 Court’s Legal Reasoning

1. Textual focus on “determined by”.
   • Section 58AA(3)(a)(ii) looks to the calculation of the payment, not its source.
   • A cap is a safety valve, not a calculation method.
2. Primary contractual entitlement test (from PACCAR [99]).
   • Identify the funder’s first-order right. Here: a multiple of capital outlay escalating over time.
   • If that entitlement is independent of damages quantum, the agreement is not a DBA even if payment is funded from damages.
3. Avoidance of absurdity.
   • Adopting the appellants’ approach would mean almost every funded CAT case becomes a prohibited DBA because damages always fund recovery. Parliament cannot have intended to make collective actions practically unfundable.
4. Use of extrinsic materials.
   • 2009 Consultation Paper, 2010 & 2013 DBA Regulations, LASPO Explanatory Notes – all describe a DBA as percentage-based.
   • Therefore “DBA” was intended to capture shares of damages, not non-percentage multiples.
5. Conditional percentage clauses.
   • Such clauses are presently inoperative. A term of no current effect cannot convert the agreement into a DBA.
   • Validity principle (Tillman v Egon Zehnder): courts prefer a construction that upholds, not voids, parties’ bargains.

3.3 Practical & Doctrinal Impact

• Immediate certainty. Dozens of pending CAT cases using “capped-multiple” LFAs now have enforceable funding.
• Guidance for funders. Funders may safely incorporate protective caps without risking DBA status.
• Legislative context. Eases pressure for rapid statutory reversal of PACCAR, though government may still legislate more broadly.
• Scope beyond competition law. The reasoning applies to any civil LFA structured as multiple-of-outlay with a proceeds cap (e.g., securities actions, data-privacy group claims).
• Emerging doctrine: Cap-Neutrality Principle. – A cap tied to proceeds is neutral when classifying funding agreements.

4. Complex Concepts Simplified

Litigation Funding Agreement (LFA)

Contract by which a third-party funder pays the costs of litigation in return for a fee if the case succeeds.

Damages-Based Agreement (DBA)

An agreement where the fee is a percentage of the damages a client recovers. Unlawful in CAT opt-out collective actions.

Multiple-of-Outlay Model

Funder receives (e.g.) 2× or 3× the money it spent, regardless of damages size, though payment comes from damages.

Cap

Upper limit preventing the funder taking more than the available (or undistributed) damages.

Section 58AA CLSA

Statutory provision making non-compliant DBAs unenforceable; hinges on whether payment is “determined by reference to” damages.

Severance

Court’s power to strike out an illegal clause yet enforce the rest of a contract, if certain tests are met.

5. Conclusion

The Court of Appeal’s decision charts a clear path through the post-PACCAR uncertainty. By distinguishing between how a funder’s remuneration is calculated and where it is sourced, the Court prevents protective caps from transmuting legitimate funding structures into prohibited DBAs. The judgment secures the financial infrastructure of collective redress in the CAT and beyond, whilst preserving Parliament’s explicit ban on true percentage-of-damages sharing in opt-out actions. Going forward, practitioners can structure LFAs around multiples (with or without caps) confident that the agreements fall outside the DBA regime unless the fee itself is pegged as a share of damages.