Factual and Procedural Background
These appeals concern the enforceability of litigation funding agreements ("LFAs") entered into by various class representatives with litigation funders in collective proceedings before the Competition Appeal Tribunal ("the CAT"). The LFAs under consideration were amended following the Supreme Court decision in R (PACCAR Inc) v Competition Appeal Tribunal [2023] UKSC 28, which held that the original LFAs were damages-based agreements ("DBAs") under section 58AA of the Courts and Legal Services Act 1990 ("the CLSA") and thus unenforceable. The amended LFAs calculate the funder's fee based on multiples of the funder's outlay, capped at the amount of proceeds recovered, differing from the original percentage-based fee arrangements.
The CAT found the revised LFAs not to be DBAs and therefore enforceable. The unsuccessful defendants appealed with the CAT's permission. The appeals raise issues about whether the funder's fee being capped by or payable from the proceeds means it is "determined by reference to the amount of the financial benefit obtained" under section 58AA(3)(a)(ii), the effect of conditional percentage payment provisions, and severance of unenforceable provisions.
The underlying claims involve allegations of breaches of Articles 101 or 102 of the Treaty on the Functioning of the European Union ("TFEU") against various defendants, including claims related to digital game distribution, card transaction fees, app store practices, and device performance management features. The LFAs were amended after the PACCAR decision and the appeals were stayed temporarily pending potential legislative changes which did not materialize. The CAT lifted the stay and scheduled the appeals for hearing in June 2025. The Civil Justice Council issued a report recommending legislative reversal of PACCAR, but the Government has not yet responded.
Legal Issues Presented
- Whether a payment to a funder or insurer under an LFA that is payable from and/or capped by the proceeds of a successful outcome is "to be determined by reference to the amount of the financial benefit obtained" for the purposes of section 58AA(3)(a)(ii) of the CLSA.
- Whether an LFA provision that the funder or insurer is paid a percentage of the proceedings "only to the extent enforceable and permitted by applicable law" constitutes a DBA or is otherwise impermissible or inappropriate for certification.
- Whether unenforceable or unlawful parts of an LFA can be severed.
Arguments of the Parties
Appellants' Arguments
- The appellants argued that any express or implied cap on the funder's fee by reference to the proceeds means the payment is determined by reference to the financial benefit obtained, thus constituting a DBA under section 58AA(3)(a)(ii) and rendering the LFA unenforceable unless compliant with the DBA Regulations 2013.
- They contended that the conditional provision allowing payment of a percentage of damages "only to the extent enforceable and permitted by applicable law" does not prevent the LFA from being a DBA, as it still provides for payment determined by reference to damages when the law changes.
- They submitted that severance of unenforceable provisions is not appropriate because removing the percentage payment clause would fundamentally alter the nature of the contract, converting it from a DBA to a different funding agreement.
- The appellants raised public policy concerns, arguing that percentage provisions incentivize funders and lawyers to focus on larger claims, fostering a litigation culture Parliament sought to avoid.
Respondents' Arguments
- The respondents accepted that if the funder's fee is calculated solely by reference to multiples of outlay without any cap linked to damages, the LFA is not a DBA.
- They argued that the cap on the funder's fee by reference to proceeds or undistributed damages does not mean the fee is determined by reference to the financial benefit obtained; rather, the primary contractual entitlement is to a multiple of outlay.
- Regarding the conditional percentage payment provisions, the respondents submitted these are currently of no contractual effect due to the law (post-PACCAR), and thus do not render the LFA a DBA.
- They contended severance is appropriate and supported by express severance clauses in the LFAs and relevant case law, as removing unenforceable provisions would not change the character of the contract.
- The respondents denied any elevated risk of conflict of interest arising from the percentage provisions and highlighted safeguards in the collective proceedings regime.
- They submitted that the appellants’ public policy arguments lack evidential support and that the Supreme Court in PACCAR recognized the public policy benefits of litigation funding.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| R (PACCAR Inc) v Competition Appeal Tribunal [2023] UKSC 28 |
Definition and enforceability of damages-based agreements (DBAs) under section 58AA of the CLSA. |
Established that original LFAs were DBAs and unenforceable; guided interpretation of "determined by reference to the amount of financial benefit obtained" focusing on primary contractual entitlement. |
| Williams v Central Bank of Nigeria [2014] AC 1189 |
Interpretation of statutory definitions by reference to earlier statutes. |
Supported approach that meaning of "claims management services" in CLSA must be consistent with earlier legislation. |
| Lexlaw Ltd v Zuberi [2021] EWCA Civ 16 |
Scope of DBA within contracts and severance of unenforceable provisions. |
Clarified that only the percentage payment provisions constitute a DBA; severance of unenforceable DBA provisions is a separate contract law question. |
| Diag Human v Voltera Fierra [2023] EWCA Civ 1107 |
Test for severance of unenforceable provisions in contracts involving public policy considerations. |
Applied three-stage test for severance; public policy may preclude severance in some cases. |
| Egon Zehnder v Tillman [2020] UKSC 32 |
Validity principle in contract interpretation favoring interpretations that uphold contracts. |
Supported preference for interpretation that upholds parties’ agreements rather than invalidates provisions. |
| Hollins v Russell [2003] EWCA Civ 718 |
History and regulation of conditional fee agreements (CFAs). |
Provided context on CFAs and distinction from DBAs relevant to statutory interpretation. |
| Merricks v Mastercard Inc [2017] CAT 16 |
Payment of funder's fee out of undistributed damages under CAT Rules. |
Confirmed that payment of funder's fee from undistributed damages is permitted and relevant to structuring LFAs. |
| R (Hertfordshire CC) v Secretary of State for Housing [2021] EWHC 1093 (Admin) |
Use of subsequent legislation as persuasive authority in statutory interpretation. |
Supported looking at later legislation and subordinate legislation to interpret statutory provisions. |
| Beckett Investment Management Group Ltd v Hall [2007] EWCA Civ 613 |
Three-stage test for severance of unenforceable contract provisions. |
Informed the Court’s approach to severance in the present case. |
| Garnat Trading & Shipping (Singapore) Pte Ltd v Thomas Cooper (a Firm) [2016] EWHC 18 (Ch) |
Application of "blue pencil" test for severance. |
Distinguished from current case where severance would alter the contract’s nature. |
| R(N) v Walsall Metropolitan Borough Council [2014] PTSR 1356 |
Use of subsequent legislation as an aid to statutory interpretation. |
Referenced to support coherent interpretation of DBA provisions over time. |
Court's Reasoning and Analysis
The Court began by accepting the appellants’ concession that where a funder's fee is calculated by reference to multiples of outlay without any cap linked to damages, the LFA is not a DBA under section 58AA(3)(a)(ii) of the CLSA.
The appellants’ primary argument—that any cap on the funder's fee by reference to the proceeds causes the fee to be "determined by reference to the amount of the financial benefit obtained"—was rejected. The Court reasoned that such a construction would render nearly all LFAs unenforceable DBAs, an absurd outcome inconsistent with the legislative and policy context, which recognizes the necessity of litigation funding in collective proceedings.
The Court emphasized that the statutory phrase "determined by reference to the amount of the financial benefit obtained" focuses on the primary contractual entitlement. Here, the funder's primary entitlement is to a multiple of its outlay, not a percentage of damages. The existence of a cap linked to proceeds does not transform the nature of the fee into one determined by reference to the financial benefit.
In the alternative, if the statutory language were ambiguous, the Court considered aids to interpretation, including explanatory memoranda and subsequent legislation, all of which consistently identify DBAs as agreements where fees are calculated as a percentage of damages recovered. The Court found no support for the appellants' broader interpretation.
Regarding the conditional percentage payment provisions ("only to the extent enforceable and permitted by applicable law"), the Court held these provisions are currently of no contractual effect due to the prevailing legal position post-PACCAR. As such, they do not render the LFAs unenforceable DBAs, and the argument that they do was dismissed as untenable.
On severance, the Court declined to decide the issue as it was rendered academic by the resolution of the previous issues. The Court noted the complexity and prudence in leaving severance questions for cases where they are necessary.
The Court also rejected the appellants' public policy arguments, finding no evidence that the conditional percentage provisions incentivize undesirable litigation behavior or create conflicts of interest. The Court highlighted existing safeguards in the collective proceedings framework that mitigate such risks.
Holding and Implications
The Court DISMISSED all appeals.
The direct effect of this decision is that the amended LFAs, which calculate the funder's fee as a multiple of the funder's outlay subject to a cap linked to the proceeds, are not damages-based agreements under section 58AA of the CLSA and are therefore enforceable. The conditional percentage payment provisions currently have no contractual effect and do not render the LFAs unenforceable. The Court refrained from ruling on severance as it was unnecessary in these appeals.
This ruling preserves the current litigation funding model in collective proceedings before the CAT, avoiding an interpretation that would effectively prohibit funding arrangements essential to such proceedings. No new precedent was set beyond the application of existing statutory interpretation principles and prior case law to the specific facts of these LFAs.