The Great Recalibration: Reversing PACCAR and the New Era of UK Litigation Strategy

The Great Recalibration: Reversing PACCAR and the New Era of UK Litigation Strategy

The London litigation market, long considered the premier global forum for complex dispute resolution, is currently navigating a period of profound "jurisdictional retrenchment" following the Ministry of Justice’s December 2025 confirmation that it will finally legislate to reverse the 2023 Supreme Court ruling in R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal.

The move aims to dissolve the immediate legal friction that has, for over two years, effectively paralyzed the third-party litigation funding (TPLF) sector.

The statutory hook of this crisis lies in the interpretation of the Courts and Legal Services Act 1990, specifically the interplay between Section 58AA and the Damages-Based Agreements Regulations 2013.

In PACCAR, the Supreme Court held that Litigation Funding Agreements (LFAs) providing for a return based on a percentage of damages were, by definition, Damages-Based Agreements (DBAs). Under the 2013 Regulations, any DBA that fails to meet stringent formatting and disclosure requirements—requirements almost no LFA was designed to satisfy—is rendered unenforceable.

For the UK's burgeoning class action market, particularly within the Competition Appeal Tribunal (CAT) where DBAs are statutorily prohibited in opt-out proceedings, the ruling was catastrophic.

The "So What?" is simple: the PACCAR decision acted as a massive regulatory tax on access to justice, causing collective action filings to collapse from 17 in 2022 to a mere three in 2025. This legislative pivot by the Labour government, following the June 2025 Civil Justice Council (CJC) Final Report, represents a forced realignment of global legal risk. For the first time, the state is moving beyond mere reversal toward a codified distinction between "claims management services" and "professional litigation funding."

The primary strategic consequence of this legislation will be the restoration of the "Percentage-of-Damages" model as the standard for high-stakes UK class actions, significantly lowering the barrier to entry for predatory mass-tort litigation against multinational corporations.

The government's intent, as unsealed in MoJ briefing notes and reinforced by Sarah Sackman KC’s December 2025 statement, is to treat the UK legal sector—valued at £42.6 billion—as a vital export. By removing the "PACCAR shadow," the state seeks to re-arm the "David" (funded claimants) against the "Goliath" (resourced defendants). However, the lingering question remains the scope of retroactivity. While the CJC recommended both prospective and retrospective reversal to protect concluded cases, the current government has signaled a potentially narrower, prospective-only path. This creates a secondary risk of "Legacy Litigation," where defendants may still challenge pre-2026 LFAs in a desperate attempt to leverage the PACCAR precedent before the window of opportunity permanently closes.

The legislative reversal of PACCAR initiates a profound recalibration of the "economic weapons" available in English civil litigation. The era of the "un-fundable" claim is ending, but it is being replaced by a highly regulated ecosystem where the price of entry for funders is no longer just capital, but compliance.

Power Dynamics: The Sword and the Shield

In this new landscape, the Sword is held by the litigation funder, now liberated from the structural threat of "unenforceability." The ability to once again utilize the percentage-of-damages model allows for more aggressive capital deployment in opt-out collective proceedings.

Conversely, the Shield for defendants—primarily large-cap corporations—has shifted from a procedural knockout blow (challenging the legality of the LFA) to a substantive regulatory defense. Defendants will now look to the MoJ’s proposed "fairness and transparency" framework to challenge the ethical and financial standing of funders, aiming to disqualify claimants via regulatory technicalities rather than substantive merits.

The Outcome Matrix: Structural Realignment

Strategic Deep Dive: Regulatory Arbitrage and Market Heating

The primary strategic concept at play is Regulatory Arbitrage. While the UK is moving to institutionalize third-party funding to maintain its status as a "litigation powerhouse," the European Union has maintained a divergent path. By refusing to follow suit with standardized funder regulation, the EU creates a fragmented landscape where funders may "forum shop" between London and various EU member states depending on the transparency requirements.

For the UK, the "Market Heating" effect is immediate. The 2026 legislation doesn't just return the market to 2023; it supercharges it. By providing statutory clarity, the government has essentially de-risked the asset class for institutional investors and pension funds.

This influx of capital will likely lead to "Social Inflation"—a phenomenon where the availability of funding drives higher settlement demands and larger jury/tribunal awards, regardless of the underlying merits of the case.

Furthermore, the shift from a voluntary to a statutory regime creates a new "grey area" of Successor Liability. For law firms and funders who restructured their agreements mid-2024 to survive PACCAR, the transition back to percentage-based models creates a complex web of transitional contracts. If the 2026 Act is not perfectly retrospective, we will see a "litigation of the litigation," where defendants challenge the validity of funding transitions made during the "interregnum" period.

Precedent Comparison: Jurisdictional Reach and Market Dominance

To understand the scale of this shift, we must look at how the legal system handles the expansion of accountability. Just as historical precedents redefined the jurisdictional reach of international law by stripping away sovereign protections to ensure accountability, the PACCAR reversal strips away the "regulatory protection" that large corporations enjoyed over the last two years. The UK government is essentially declaring that no corporate entity is "too well-resourced" to be beyond the reach of a funded class action. The "Long Arm" of the English court is being re-extended via private capital.

This movement also mirrors the era of major antitrust interventions like Standard Oil or Microsoft (1998), where the law was used to check overwhelming market dominance. In those instances, the state used competition law; here, the state is using procedural law as a tool of market correction. By empowering third-party funders, the government is artificially creating a "competitive" legal market where individuals can finally challenge the near-monopoly of resource power held by multinational defendants.

The 180-Day Outlook: Navigating Second-Order Volatility

Over the next 6–12 months, the industry should expect Jurisdictional Retrenchment to accelerate. As London stabilizes its funding rules, we anticipate a "Flight to London" for complex, multijurisdictional claims that were previously diverted to the Netherlands or Germany. However, this surge will trigger a secondary wave of volatility:

• The Regulatory Congestion: The introduction of "light-touch" statutory regulation, including mandatory Capital Adequacy and Anti-Money Laundering (AML) requirements for funders, will create a temporary bottleneck. Funding vehicles failing to meet these new MOJ standards by mid-2026 will face "funding disqualification" motions from defendants, leading to a new class of procedural skirmishes.

• The "Social Inflation" Spike: With the return of percentage-based rewards, funder IRR (Internal Rate of Return) expectations will rise. This will manifest as a 15–20% increase in initial settlement demands in CAT proceedings as funders seek to maximize the now-legalized "success fees."

• Legacy Litigation Tail: Until the retroactivity of the 2026 Act is settled by a "test case," defendants will aggressively challenge any LFAs signed between July 2023 and the 2026 implementation date that do not strictly adhere to the 2013 DBA Regulations.

The Strategic Mandate: Governance Pillars

The following pillars are framed as Attorney-Client Work Product for the Office of the General Counsel and the Board. These are not operational tasks; they are structural realignments required to mitigate un-hedged liabilities.

Pillar I: Active Oversight of Material Controls

Under the UK Corporate Governance Code requirements effective January 2026, Boards must issue a Public Declaration of Effectiveness regarding material controls. In the context of the PACCAR reversal, this mandate requires the board to treat "Litigation Risk" not as a contingent liability, but as a failure of internal control.

• Mandate: Establish a "Claim Anticipation Workflow" that utilizes anonymized internal data mapping to identify high-risk exposure areas (e.g., consumer finance or environmental impact) before they can be aggregated by professional funders.

Pillar II: Mens Rea Mitigation & Evidence Architecture

With funders now incentivized to pursue "David vs. Goliath" narratives, corporate defendants must pivot from defensive litigation to "Evidence-First" governance.

• Mandate: Institutionalize an "Adversarial Review" of all external communications and regulatory filings. The strategic objective is to eliminate "low-hanging fruit" for funder-backed claimant firms by creating a contemporaneous record of compliance that makes the "Cost-to-Win" for a funder prohibitively high.

Pillar III: Regulatory Shielding & Funder Due Diligence

The MoJ’s proposed framework for "fairness and transparency" provides a new defensive aperture.

• Mandate: Develop a standing "Funder Profile Matrix." In the event of a mass claim, the strategy must immediately shift to challenging the funder’s compliance with the 2026 statutory standards (Capital Adequacy/Conflict of Interest). By attacking the funding structure rather than the claim merits in the first 90 days, defendants can force a settlement on terms favorable to the organization before the claim gains momentum.

Strategic Summary: Executive Briefing & FAQs

3 Executive Takeaways

1. Barrier Removal: The reversal of PACCAR removes the primary procedural obstacle to mass-claim funding in the UK.

2. Increased Exposure: Expect a significant uptick in "opt-out" collective actions, particularly in competition and consumer sectors.

3. Mandatory Regulation: The move from voluntary to statutory funder regulation provides new avenues for procedural defense.

Strategic Briefing FAQs

• Are existing LFAs automatically valid? Pending the final text of the 2026 Act, uncertainty remains. If the Act is not fully retrospective, "Legacy LFAs" may still be challenged under the 2023 PACCAR precedent.

• How does this affect the cost of settlements? Higher funder returns usually correlate with higher settlement demands to ensure the claimant class and the funder both receive sufficient "recovery."

• Will this impact arbitration? No. Current indications suggest the MoJ will exclude arbitration from the new regulatory framework to maintain the UK's attractiveness as an ADR hub.

• Is there a cap on funder returns? The CJC explicitly rejected a statutory cap, meaning returns remain a matter of private contract, albeit subject to "fairness" oversight.

• What is the role of ATE insurance? The 2026 framework is expected to make "After-The-Event" insurance more central to the certification process for collective proceedings.

• Can we challenge the funder directly? Yes. The new "light-touch" regulation allows defendants to scrutinize a funder’s capital adequacy and source of funds as a prerequisite for the case proceeding.

People Also Ask (PAA)

• Who is liable for costs if a funded claim fails? Under the 2026 framework, funders may face direct "Security for Costs" orders if they fail to meet capital adequacy standards.

• Can I claim damages if my LFA was voided by PACCAR? Parties are advised to review the "Contingency Clauses" in their modified LFAs; most were drafted to reactivate upon legislative reversal.

• What is the penalty for funder non-compliance? Non-compliance with the new MoJ framework could lead to the stay of proceedings or the decertification of a collective action class.

• Is an appeal likely for the 2026 Act? Primary legislation cannot be appealed in the same way as case law, though it can be challenged via Judicial Review on human rights or procedural grounds.

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