Litigation funding agreements amended in the light of the Supreme Court’s ruling in PACCAR are legally enforceable, the Court of Appeal has said in a widely-watched decision. Sir Julian Flaux, chancellor of the High Court, was ruling on seven appeals brought by collective action defendants.

The defendants were challenging Competition Appeal Tribunal findings that claimants’ funding agreements - under which funders' returns are calculated as a multiple of their investment - were not damages based agreements (DBAs) under the 1990 Courts and Legal Services Act. As such, the CAT said, they were not subject to the Supreme Court’s ruling that a funding agreement in the PACCAR trucks cartel case was not enforceable.  

In Sony Interactive Entertainment v Alex Neill Class Representative Ltd, handed down on Friday, Sir Julian Flaux, chancellor of the High Court, noted that a compelling reason for the cases to go to the Court of Appeal was continuing uncertainty about litigation funding agreements. Proposed legislation by the last government to amend to exclude LFAs from the definition of DBAs was lost in the runup to the general election; the current government has yet to respond to the Civil Justice Council’s recommendation that recommended that PACCAR be reversed through legislation. 


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In the Court of Appeal, the appellants argued that where funding agreements contain an express or implied cap on the funder’s return according to the amount won in the action, the payment to the funder is 'determined by reference to the amount of the financial benefit obtained' and thus making the agreement a DBA under the 1990 act. In his judgment, with which Lord Justice Green and Lord Justice Birss agreed, the chancellor said: 'Since the entire system of litigation funding is predicated upon the return which a funder makes being paid out of damages or the subset of undistributed damages, it is difficult to envisage in what scenarios... there would not be an implied cap even if there were no express one.' It is therefore 'difficult to see how any LFA could avoid being a DBA'.

The effect of the appellants’ argument is therefore 'to produce the absurd result that funding under LFAs in the CAT would become practically impossible save in those cases where the DBA Regulations could be complied with'. 


Citing authorities staging that the court 'will not interpret a statute so as to produce an absurd result, unless clearly constrained to do so by the words parliament has used', Flaux concluded:  'Unless and until the law is changed.. the argument that the percentage provision is an unenforceable DBA, let alone an argument that  the presence of the percentage provisions renders the whole LFA an unenforceable DBA, is unsustainable.'

'A provision which is of no contractual effect cannot have the contractual consequence of rendering what is otherwise an enforceable agreement an unenforceable DBA.'