Litigation Funding – Challenges and Opportunities

The litigation funding market continues to develop at breakneck speed: in England and Wales it ballooned in value from £198 million to £2.2 billion between 2011 and 2021, while the regulatory and common law framework in which it operates has experienced near continuous upheaval. Recent years have seen the erosion of the so-called ‘Arkin Cap’ on costs recoverable from a funder, the seismic impact of the PACCAR ruling and most recently, the Civil Justice Council’s (‘CJC’s’) completed Review of Litigation Funding. Against this background both challenges and opportunities arise for solicitors.

Pre-PACCAR

Historically, third party funding arrangements were unenforceable and indeed until 1967 the funding of another’s litigation – so called ‘maintenance’ – was both a crime and a tort. Judicial attitudes shifted in the early 2000s, culminating in the landmark case of Arkin v Borchard Lines Ltd [2005] EWCA Civ 655. The Court of Appeal held that professional third party funding agreements (‘LFAs’) could be valid and enforceable. In addition, the judgment introduced the Arkin Cap: if the funded case failed, the commercial funder could be liable for the other side’s costs, but (provided it did not control the litigation) only up to the amount of their financial contribution to the client.

The Arkin Cap appeared to be good law for fourteen years, during which time the market for third party LFAs grew substantially. One particular growth area has been mass claims (including group litigation and collective actions), which require large legal spends. In the absence of regulation, and further to recommendations in the Jackson Report, a voluntary Code of Conduct for Litigation Funders was launched by the CJC in 2011 and at the same time the Association of Litigation Funders was formed as a means of industry self-regulation.

The Courts began to depart from the Arkin Cap in cases such as Davey v Money [2019] EWHC 997 (Ch) (subsequently upheld by the Court of Appeal in Chapelgate Credit Opportunity Master Fund Ltd v Money [2020] EWCA Civ 246). The Arkin Cap was not, it turned out, a binding rule, and funders could be liable for more than they had invested. The Court would make appropriate decisions on a case-by-case basis. Regard could be had to the amount they stood to gain and their level of control over the case (see Laser Trust v CFL Finance Ltd [2021] EWHC 1404 (Ch).

PACCAR

R (PACCAR Inc & Others) v Competition Appeal Tribunal [2023] UKSC 28 provided an abrupt shock to commercially funded cases. The Claimant had agreed an LFA with their funder providing that the funder would receive a portion of the damages if the claim succeeded. The Supreme Court interpreted the arrangement as a Damages Based Agreement (‘DBA’), which under the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (‘LASPO’), could only be lawfully entered into between solicitor and client, not between a third party and client. As a result, the Court ruled the LFA was invalid and unenforceable. 

The fallout from PACCAR was serious, with ongoing cases menaced by the potential invalidity of the agreements which funded them. The industry’s answer was to seek to renegotiate all agreements where the funder’s return was calculated as a percentage of damages. Instead, returns were based on a multiple of the sum invested. Whether this extension of regulation benefitted the consumer is doubtful, however, as the net effect appears to have been that funding became more costly.

The CJC’s Report

In response to the disruption caused by PACCAR, the CJC conducted a review and ultimately published its Final Report on Litigation Funding in June 2025 (‘the Report’).

Applicability of LASPO and the Arkin Cap

The Report recommended that legislation be brought forward to make clear that litigation funding is not a form of DBA, reversing the decision in PACCAR, and that such legislation should have retrospective and prospective effect. The Working Party reflected on the overly-inclusive drafting of claims management regulation and recommended that future legislation makes clear that funding under LFAs does not amount to the provision of claims management services and that LFAs include arrangements where the funder’s return is calculated by reference to damages.

Furthermore, the Report recommended that Litigation Funders’ exposure to adverse costs be codified in new CPR and CAT Rules and that the post-Chapelgate, case-by-case approach to the Arkin Cap be retained.

Adverse Costs and Security for Costs

The possibility of adverse costs must be addressed in all funded cases and is typically met by ATE insurance. Law firms and funders had been concerned, prior to the Report, about the prospect of being required to disclose their LFAs in full, as well as about the frequency of applications for security for costs. The requirement to provide security for costs represents an additional financial burden for the funder which ultimately increases the cost of funding for clients.

The Working Group recommended that it become mandatory for funded cases to be covered by adequate ATE insurance with anti-avoidance endorsements. This, together with case-by-case capital adequacy requirements, would remove the need for a presumption in favour of security for costs. In cases where security for costs is appropriate (for example where the funder fails to comply with the proposed requirements), the costs of providing the security should fall on the funder.

The Report recommends mandatory disclosure of the fact of litigation funding and the identity of the funder. While some contributors argued for disclosure of the full terms of LFAs, the Report instead endorses a certification model. Under this approach, the certification of capital adequacy and appropriate ATE insurance would obviate the need for disclosure of the detailed terms of the LFA to the other parties.

Rejection of Caps on Litigation Funding Returns

Another concern, raised by lawyers and funders in advance of the Report, was that a cap on funder’s returns would be introduced, either as a proportion of damages recovered, fees incurred, or multiples of money lent out. A cap ranging from 10% to 75% of damages was proposed by some consultation respondents. Some pointed to the position in Germany, where consumer collective redress cases have a cap of 10% of damages recovered, and argued that funders there had been reluctant to get involved as a result.

Ultimately the Report did not recommend adopting caps and cited a variety of countries which have not adopted such caps. The reasoning for this was given at paragraph 8.25 of the Report:

The Working Party rejects the imposition of statutory caps or mandatory minima on the basis that they are a blunt instrument and are unable to take proper account of the variable risks of funding different claims. They are also unnecessary as a means to secure effective consumer protection. Such protection … is provided by making provision for the court to approve that the level of return is fair, just and reasonable.

Costs Budgeting

Recognising the particular importance of control of costs in funded litigation, the Report recommends mandatory costs budgeting and costs management for all funded collective proceedings, representative actions and group actions.

Abrogation of the Indemnity Principle

Another important issue also suggested to be addressed in legislation, was the formal abrogation of the indemnity principle with regard to the recovery of costs when cases are run under CFAs, DBAs and LFAs.  The indemnity principle provides that the receiving party under a costs order may recover no more than the amount they are liable to pay their representatives. In practice, this principle allows losing parties to litigation to bring technical challenges to the enforceability of their opponent’s funding arrangements in order to avoid paying costs, even where the parties to the agreement are not in dispute as to its enforceability.

To address this, the Report recommends that across all three types of funding agreement, the indemnity principle be abrogated, meaning that such technical challenges will no longer be available to paying parties in costs proceedings.

Portfolio Funding, Litigation Loans and Crowdfunding

The Report also deals with portfolio funding, where a solicitor can receive funding for a range of cases from the same funder in exchange for a return structured similarly to an LFA, thereby spreading the funder’s risk across multiple claims. Consultation respondents pointed to the high-profile collapses of firms which had used such funding, raising fears that high-risk, unstable business models had developed.

The Report calls for the Government to urgently investigate and recommends that this type of funding be treated as a loan regulated by the FCA with checks on capital adequacy and money laundering. The involvement of the FCA into law firms’ practices in this manner is unprecedented and if implemented law firms will have to adapt to a new level of oversight and compliance.

Traditional litigation loans are made by funders directly to the client for the funding of a single case. These types of loans are already regulated by the Consumer Credit Act 1974, however the Report suggests that new legislation may oblige solicitors to take more of an interest in these loans and advise the client about the nature of them even though they are not involved in the transaction and are not a party to the funding at all. Again, this represents a potential new onus on solicitors to advise on and be aware of how the client is finding the money for their case.

Crowdfunding has become increasingly popular in the social media age as a way of financing litigation. The Report recognises the distinction between reward-based crowdfunding, where contributors expect a financial return, and which should be treated as litigation funding, and donation-based crowdfunding, where no return is expected. Donation-based funding, previously unregulated, will now likely be subject to a separate regulatory regime whereby funds must be held on trust solely for the litigation, and the identities of the donors must be verified and potentially disclosed.

The Future

Upon implementation of the Report’s recommendations, LFAs structured on either a share of damages, a multiple of the funding advanced, or linked to costs incurred by the client will be permissible, both retrospectively and in future. This brings both certainty and flexibility for clients and funders to negotiate appropriate agreements for each case. If the anticipated regulatory changes around ATE have the hoped-for effect of reducing the frequency of orders for security for costs, then the overall cost of funding cases will decrease. The Report’s recommendations are therefore to be welcomed as helping to ensure the increased availability of third party litigation funding, and will strengthen the UK’s reputation as a leading jurisdiction for dispute resolution. PwC UK has forecast the litigation funding market to grow to £3.7 billion by 2028, and much of this growth can be expected to come from large-scale group actions, which are becoming increasingly common.

The changes arising from the Report will make it safer and more straightforward for clients to obtain litigation funding, while protecting them from the pitfalls seen most starkly in the collapse of portfolio funded firms undertaking volume work. Solicitors will need to remain vigilant to ensure that funders do not exercise undue control over the conduct of cases or over the solicitor–client relationship, continuing to safeguard both their own independence and that of their clients, acting in the best interests of the client rather than the funder. Practitioners will also need to make sure costs are appropriately managed throughout the case in accordance with the proposed compulsory introduction of costs budgeting for all funded collective proceedings, representative actions and group actions.

The Report offers positives for clients, solicitors and funders by eliminating the uncertainty caused by PACCAR and addressing the problems with portfolio funding while eschewing heavy-handed interference in the parts of the market that are functioning well. The future appears bright.

Eugene Doris and Antony Whittaker