The Competition Appeal Tribunal (CAT) has ruled on a significant preliminary issue in two related applications for collective proceedings orders (CPO) brought against a number of truck manufacturing groups. The decision considers the adequacy of the applicants’ funding arrangements for the purposes of a collective proceedings order, as well as the appropriate regulation of the litigation funding agreements.
Applications for significant CPOs cannot realistically be brought without litigation funding, and the CAT examines the enforceability and adequacy of these arrangements carefully. The CAT’s finding that third-party litigation funding does not constitute a Damages-Based Agreement (DBA) will come as a relief to both the litigation funding industry as well as parties contemplating the use of professional funders to finance a claim.
In UK Trucks Claim Limited v Fiat Chrysler Automotives N.V. and others and DAF Trucks N.V and others and Road Haulage Association Limited v MAN SE and others and Daimler AG  CAT 26 (related actions which are now being heard together) UK Trucks Claim Limited (UKTC) and Road Haulage Association Limited (RHA) each sought permission to act as class representatives of collective damages proceedings against various truck manufacturers. The proceedings are based upon a finding by the European Commission that five major truck manufacturing groups had infringed competition law over a period of 14 years.
UKTC and RHA each applied for a CPO on behalf of certain purchasers of trucks. The CAT may only make a CPO if two conditions are satisfied: (i) the person who brought the proceedings is authorised to act as a class representative; and (ii) the claims are eligible for inclusion in collective proceedings. A person may be authorised to act as a class representative if the CAT considers it just and reasonable, by reference to several defined factors. Several of those factors relate to the adequacy of the representative’s funding arrangements, both as regards their own costs and their ability to meet the other side’s costs. On this basis, inadequacy of funding arrangements can lead to the CAT refusing a CPO, and therefore the claim failing.
The key issues for the CAT were whether:
1. The litigation funding agreements (LFAs) to which UKTC and the RHA were party should be classified as DBAs and therefore regulated as such.
2. The funding arrangements were adequate to allow UKTC and RHA to act as class representatives.
Whether the LFAs should be classified as DBAs and therefore regulated as such
Under s.58AA of the Courts and Legal Services Act 1990 (CLSA 1990), a DBA is an agreement between a person providing advocacy services, litigation services or claims management services and a recipient of those services, which provides that if the recipient obtains a specified financial benefit then they shall make a payment to the service provider, the amount of which to be determined by reference to the amount of the financial benefit obtained.
A DBA will only be enforceable if it meets certain conditions set out in the Damages-Based Agreements Regulations 2013 (the DBA Regulations). It was common ground that the LFAs in this case did not comply; the issue that divided the parties was whether the LFAs were in fact DBAs at all, based upon the question of whether the activity of third-party litigation funding constituted “claims management services”. Claims management services are regulated under the Compensation Act 2006 and the Compensation (Regulated Claims Management Services) Order 2006 sets out the activities to be regulated as claims management services. The explanatory notes to that order explain that claims management businesses gather cases either by advertising or direct approach and then act either directly for the client in pursuing the claim or as an intermediary between the claimant and a legal professional or insurer. The key issue in this case therefore turned upon the correct interpretation and application of those provisions.
In coming to its decision, the CAT reviewed the full legislative development of the relevant statutory provisions. It recognised the importance of fully scrutinising the arguments, due to the potential implications of the decision upon any future litigation funding. It noted that litigation funding was a well-recognised feature of modern litigation that facilitated access to justice for those who otherwise may not be able to afford it.
The CAT concluded that the LFAs were not DBAs pursuant to s.58AA of the CLSA Act 1990 and therefore not subject to the requirements of the DBA Regulations.
The CAT considered that, when viewed in its context, it was clear that s.58AA was never intended to apply to LFAs. On the contrary, when the provision was introduced, there was already another distinct provision (s.58B) expressly designed to cover them (though this provision has never been brought into force). To construe s.58AA as applying to LFAs would therefore otherwise amount to bringing in regulation of LFAs by the back door. The CAT found further support for its decision within the wording of the DBA Regulations, which indicated that they were never intended to apply to LFAs. The DBA Regulations refer to a person “instructing” a “representative” and the CAT considered it would be a curious use of language to apply those terms to a litigation funder, but that they were apposite and understandable when applied to a party’s lawyer or claims manager.
Finally, the CAT found that its conclusion appeared consistent with the views of Jackson LJ in his review of costs. In accordance with the recommendations of Jackson LJ, the Association of Litigation Funders of England and Wales (ALF) published its first Code of Conduct for Litigation Funders (ALF Code) in 2011. The CAT held therefore that it would be flying in the face of Jackson LJ’s conclusions for Parliament to have rendered LFAs subject to statutory regulation as DBAs and rendered unenforceable LFAs which complied with the ALF Code. When speaking at the occasion of the launch of the ALF Code, Jackson LJ had observed that there was likely to be a greater role for litigation funders in the future and that the ALF Code marked the satisfactory implementation of his recommendation for a voluntary code, to which all litigation funders subscribe, in place of any requirement for full statutory regulation of LFAs.
Whether the funding arrangements were adequate to allow UKTC and RHA to act as class representatives
The defendants contended that even if the LFAs were not DBAs (which the CAT had concluded that they were not), the CAT should refuse to authorise either UKTC or the RHA as a class representative because the funding provided in the LFAs was inadequate. Both had an LFA with a third-party funder to provide for the costs of their own class and, additionally, after-the-event insurance policies for the opposing parties’ costs.
In deciding whether it is just and reasonable to approve a person as a class representative, the factors to be considered by the CAT include whether that person would fairly and adequately act in the interests of all class members, including whether adequate funding has been arranged, and whether they would be able to pay the opposing parties’ costs if so ordered. The defendants challenged both the LFAs in respect of UKTC and RHA’s own costs and their cover for potential liability for any adverse costs order.
The CAT examined the relevant funding arrangements in detail and concluded that, following further amendments to the policies and agreements agreed between the parties during the hearing (and subject to certain further conditions in the case of UKTC), the funding arrangements did not prevent either RHA or UKTC from being authorised as a class representative.
The CAT noted that the regime of collective proceedings introduced into the Competition Act is dependent upon third-party funding for its success, since there will be limited cases where the class members will themselves be able to fund their claims. The CAT placed reliance upon the ALF Code which, whilst voluntary and not legally binding, provides a satisfactory means of self-regulation of the litigation funding industry for the protection of those receiving such funding. The CAT was satisfied that the litigation funders in this case had taken responsibility for compliance with the ALF Code, which included a requirement to maintain the capacity to meet necessary funding obligations. The CAT concluded that the funding arrangements in place would enable UKTC and RHA to act adequately in the interests of the class members in pursuing the claims.
The CAT explained that, when determining whether to authorise a person as a class representative, the factors to be considered are not necessarily given equal weight and complete satisfaction of each relevant factor is not a condition for authorisation. Given that the applications were made at a very early stage of proceedings, there was inevitable uncertainty as to the likely level of the defendants’ costs, but the CAT was satisfied, on review, that the insurance policies in place provided adequate cover.
The CAT noted that the costs figures in this case were high, in part because the infringement was so long in duration, involved so many manufacturers and was so extensive in scope. This increased the number of parties, the range of disclosure and factual evidence and made more complex the quantum expert evidence required. The CAT commented that: “the more heinous a cartel infringement of competition law, the greater the costs for victims of the cartel in recovering compensation, and thus the harder it is for them to bring collective proceedings”. Whilst the defendants argued that insurance cover was needed at three times the level in fact obtained by UKTC and RHA, the CAT expressly resisted an approach to authorisation which would require adverse costs insurance at a level which made the obtaining of such cover prohibitive. It considered that the proper approach was to determine whether sufficient adverse costs cover is available for at least a significant part of the proceedings and that the issue could then be revisited as the proceedings advanced and the defendants’ costs became clearer.
This judgment illustrates the recent approach of the CAT in scrutinising the funding arrangements of CPO applicants. In recent cases, whilst the CAT has carefully reviewed any funding and insurance arrangements, it has exercised a degree of leniency in favour of claimants, both in terms of: (i) allowing claimants to adjust funding structures either during the hearing or after any CPO application is filed; and also (ii) its approach to assessing the adequacy of any insurance cover for any adverse costs. In the recent Merricks v Mastercard Inc. case, at the initial hearing the CAT allowed the class representative to adjust the funding arrangements in response to criticisms raised by the defendant (see our previous Law-Now on that judgment here).
As to assessing the adequacy of funding, the CAT refused to accept the defendants’ criticisms at face value. However, it noted that suitability for a CPO is a continuing test, allowing defendants further opportunity to question adequacy of funding at a later stage if appropriate.
As the CAT recognised, the determination of the status of LFAs for the purpose of statutory regulation has significant implications and the decision that LFAs are not DBAs will come as a relief to the growing litigation funding industry, as well as to those who may avail themselves of such funding. Third-party funding is particularly important in the context of complex competition litigation as these types of proceedings often involve more complex, and therefore costly, evidential requirements.
A copy of the full judgment is available here.
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