The Civil Justice Council (“CJC”) has published its final report on third party funding of civil litigation (“TPF”) in England and Wales (“CJC Final Report”). The CJC Final Report follows on from the CJC’s interim report in October 2024 (“CJC Interim Report”), which launched a comprehensive consultation on TPF and other alternative forms of funding disputes to which Stewarts responded.

In this article, Julian Chamberlayne and Olivia Amos review some of the key takeaways from the CJC Final Report in so far as they impact parties to commercial disputes. Analysis of how the CJC Final Report impacts on class actions and actions on behalf of consumers (including serious injury claims) will be covered in a further article.

Reversal of PACCAR

The CJC Final Report recommends legislation should be introduced as soon as possible to reverse the effect of the controversial Supreme Court judgment in R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents) [2023] UKSC 28 (“PACCAR”). In doing so, it makes clear that TPF is not a form of damages-based agreement (“DBA”). The CJC Final Report makes a clear distinction between the differing regulatory requirements and regimes that are suitable for funding provided by commercial litigation funders on the one hand, and conditional or contingency agreements provided by a party’s legal representative on the other.

PACCAR has brought significant uncertainty to the TPF market and satellite litigation in funded claims, some of which remains ongoing. In keeping with the pre-election Litigation Funding (Enforceability) Bill, the CJC’s proposal would be both prospective and retrospective in effect. Once implemented this will likely resolve ongoing PACCAR related challenges, disputes and uncertainty more generally. From our discussions with funders, we understand that they view this as simply restoring the commercial bargain that they and the funded parties in question thought they had entered into pre-PACCAR.

“Light touch” regulation of TPF

We welcome the CJC’s approach that funding ought to be regulated differently depending on the party being funded, as the drivers for regulation of funding agreements with commercial parties is more minimal than for funded cases on behalf of consumers. In this regard, the CJC Final Report recommends that TPF should be subject to a comprehensive but “light touch” regulatory scheme that is intended to be consistent with the approach taken in the European Law Institute’s ‘Principles Governing the Third Party Funding of Litigation Principles’ (see our previous analysis of these principles here) and underpinned by proposed ‘Litigation Funding Regulations’ (LFRs). Some key points that this regime would address include the following:

• litigation funders should be made subject to ongoing case-specific capital adequacy requirements;
• the existing restrictions (under common law and – for funders that are members of the Association of Litigation Funders of England and Wales (“ALF”) – the ALF Code of Conduct) on litigation funders directly or indirectly controlling funded litigation, including settlement proceedings, should be codified;
• the fact of litigation funding, the name of the litigation funder and the ultimate source of the funding should be disclosed to the other parties and the court at the earliest opportunity after the funding agreement is entered into. There will likely be further debates around the detail of the requirement to disclose the ultimate source of funding, as while the funders may be willing to identify the funding entity, most funders would find it challenging under their current investor agreements to disclose the identity of their underlying investors; and
• an independent, binding dispute resolution process to resolve disputes between funders and funded parties should be established.

The CJC Final Report acknowledges that TPF has outgrown self-regulation but does not recommend regulation by the FCA at this stage. Instead, it is recommended that the Lord Chancellor regulate TPF assisted by a new Standing Committee of the Civil Procedure Rules Committee, with a review in five years’ time. Notably, the proposed regulatory regime for TPF would not apply to the funding of arbitration, with regulatory matters being left to each arbitral institute to determine themselves (see our previous analysis of the CIArb guidelines for TPF here).

We agree with many of the principles of the new regulatory regime. Case-specific, capital adequacy requirements for funders will provide welcome certainty to funded parties that they will have access to the funding required to see their claim through to conclusion.

While codifying the prohibition on funders controlling litigation is, in our view, formalising what is already expected of reputable funders, setting this out in regulation should make the position clearer to all funders. The consequence of unenforceability for breach will likely prove a serious deterrent to any funder who is tempted to cross this line. However, to avoid deterring funders from the market, lawmakers should be careful to ensure that the legislation allows funders to take reasonable steps to protect their commercial interests that do not amount to control.

The requirement for an independent, binding resolution process is also to be welcomed, particularly if the LFRs give the parties sufficient flexibility to agree the nature of the process themselves and are not overly prescriptive or cumbersome. Disputes relating to, in particular, budget variation, termination and key litigation decisions, including offers to settle, need to be resolved quickly and confidentially in order to minimise disruption to the progress of the litigation of the underlying funded claim.

The CJC Final Report also recommends that numerous breaches of the LFRs, including those parts highlighted immediately above, would render a funding agreement unenforceable in its entirety (a heavy consequence for supposed “light touch” regulation). This carries significant risk for funders, albeit mitigated by the proposal for parties to be able to apply to the court to effectively waive any such breaches. The DBA Regulations have acted as an impediment to the litigation market due, in part, to their draconian unenforceability provisions and demonstrate how – unless very carefully drafted – such regulations can have unintended and deleterious consequences.

Rejection of caps on funder returns, DBA and CFAs

The CJC Final Report unequivocally rejects the introduction of caps on funders’ returns. We agree with this, and this was a key position in Stewarts’ response to the CJC Interim Report. Blanket caps would inevitably result in more cases being viewed as economically unattractive to funders and would drive some funders away from certain classes of cases (or even the England and Wales market more generally).

The CJC Final Report also recommended that there be no caps on the success fees (or ‘return’) payable to legal representatives acting under a conditional fee agreement (“CFA”) or DBA where the client is a commercial party. Commercial parties are usually sophisticated users of legal services and will almost certainly have had the benefit of legal advice (or at least the awareness of the availability of such advice if they require it). Caps are, therefore, unnecessary to protect their interests and may restrict funding options available to commercial litigants.

The CJC Final Report also proposes to replace the current, complex and cumbersome regulatory regime governing CFAs and DBAs with a single, simplified legislative contingency fee regime. This is to incorporate the DBA reforms proposed by Professor Rachael Mulheron KC and Nicholas Bacon KC in 2019, including – notably – clarification that ‘hybrid DBAs’ (which still enable the lawyer to receive a payment or some proportion of their fees during the case and/or in the event that the claim fails) are permissible. The intention to unify and simply the regime is welcome and the DBA reforms are long overdue.

Conclusion

Released at the start of London International Disputes Week, the CJC Final Report’s recommendations show how important different methods of funding have become to litigation in England and Wales and strike a balance between the interests of different stakeholders in the justice system. Several of the key proposals, including the reversal of PACCAR by legislation, the rejection of caps on litigation funders’ returns and the rejection of state-level regulation of funding in arbitration, signal to the world markets that England is a place for funders to do business. Given the UK government’s current priority is said to be economic growth, we hope many of these proposals will be acted on quickly.

The quality of both TPF offerings and law firm expertise in litigation funding currently varies considerably. The CJC recommendations will, if implemented, raise standards, protections and options for litigants.

We were pleased to see that the CJC Final Report adopted so many of the proposals made in Stewarts’ response to the CJC Interim Report. The CJC working group is to be congratulated for conducting such a wide-ranging review, assimilating views from 84 respondents and then delivering this impressive report ahead of schedule.

Careful drafting of the detail of the proposed new regulatory framework for TPF will be crucial to ensure that it properly reflects the CJC’s intentions for “light touch” regulation, providing protection and clarity for funded parties without stifling the funding industry. In this regard, the CJC Final Report observed that the TPF market in England and Wales is now the second largest worldwide and one which has grown in value tenfold since 2011 to one worth several billion. It is clear that the TPF market is, in this jurisdiction at least, no longer nascent.

We urge the government to implement the CJC Final Report’s recommendations to reverse the effect of PACCAR without further delay and expedite both the reform of the CFA and DBA regime and the LFRs.