The evolution of the litigation funding landscape in the UK and future predictions

Against an increasingly sophisticated backdrop of complex structures, litigation funding continues to evolve at speed. That evolution has generated greater access to justice, greater flexibility and risk management that impacts both law firms and their clients. 

So, what are the essential cost and funding models in play?

Contingency funding and litigation finance are both central, and often complementary to each other, in the third-party financing of legal cases. But there are key differences. Often referred to as conditional fee agreements (CFAs), contingency funding has been a part of the UK legal landscape for nearly 30 years.

In 1998, CFAs were expanded to all types of civil litigation: a fee arrangement where payment to the lawyers is contingent on the client winning the case. In most cases, clients pay nothing upfront, and only pay if the case is successful. If the case is lost then the client may pay nothing or only on a reduced fee, depending on the terms.

Although litigation finance has been permitted in the UK since the 1960s, subsequent reforms, particularly The Civil Litigation Costs Review 2010 led by Lord Justice Jackson, have fuelled significant growth in the UK litigation funding market over the past decade, especially in larger, more complex cases. In turn, there has been a growth in complex litigation, particularly in the group and class action spaces, which typically go hand in hand with third-party litigation funding.

In essence, litigation finance involves third-party funders investing in a legal case, typically paying for legal fees and expenses (sometimes including the costs of adverse costs protection), in return for a pre-agreed return on the funder's investment, which again is typically paid from any damages awarded or recovered. Financial risk is assumed by the lawyers in CFAs and by third-party funders in litigation finance. If the case is lost, funders and lawyers are unlikely to recover their investment.  

Disclosure of third-party litigation funding has become an issue in many jurisdictions with Courts demanding greater transparency that requires litigants to disclose the identities of third-party funders and the nature of their funding arrangements.

The impetus towards mandatory disclosure is becoming stronger. In September 2022, the European Parliament passed a resolution urging the European Commission to propose legislation regulating third-party litigation funding, although a finalised directive has not yet been enacted.

In the UK, there is no mandatory disclosure, except for certain collective actions in the CAT or when the Defendant needs the information in order to consider a  security for costs application. There is no rule, therefore, which says that the other party is entitled to disclosure of funding or finance agreement. However, the UK's Civil Justice Council (CJC) is expected to produce a comprehensive report on litigation funding in the summer with its recommendations, potentially including recommendations on mandatory disclosure.

An alternative fee mechanism, damages-based agreements (DBAs), was introduced in 2013 with a view to making litigation more cost-effective and efficient. Whether that has been achieved remains to be seen.

Like CFAs, lawyers’ fees under a DBA are contingent upon the client's successful recovery of damages. However, under a DBA a lawyer’s fees are calculated as a percentage of the damages received.

It is now two years since The Supreme Court decision in R (PACCAR) v Competition Appeal Tribunal which sent shockwaves through the litigation funding market. The UKSC judgment had a major impact on litigation funding agreements (LFAs) and their relationship to DBAs: the court determined that LFAs that entitle the funder to recover a percentage of damages recovered are considered to be DBAs, pursuant to the Courts and Legal Services Act 1990 (CLSA). Unless LFAs complied with the CLSA requirements and corresponding regulations, they were unenforceable. Further, they could not be used in opt-out proceedings within the CAT.

The Litigation Funding Agreements (Enforceability) Bill, introduced in March 2024 to restore the pre-PACCAR position by amending the definition of DBAs in the CLSA, was dropped during the 'wash-up' process before the general election last July. 

The Labour Government has since confirmed that the Bill will not be reintroduced until this summer when the CJC’s report is anticipated. Legislation to address the challenges thrown up by the PACCAR decision, and potentially the regulation of the third-party litigation funding market more generally, will have to wait until it is published. 

Although the legislative delay in reversing PACCAR may be unwelcome to many in the litigation market, the consequences of the judgment have not been as far reaching as everyone initially anticipated. Creative solutions have shown that there are ways around it.

Notably, one of the underlying issues thrown up by PACCAR is that legislators and regulators have failed to keep pace with the development and presence of litigation funding and the needs of the litigation market more generally.

The interim findings of the ongoing review suggest that legislative change is certainly needed to address issues around PACCAR. Whether the Labour government will seek to regulate the litigation funding market more generally and/or legislate in a more pro-claimant manner is yet to be seen. We eagerly await the outcome of both the review and the legislation which follows it.  

By Becca Hogan and Rory Spillman, Signature Litigation