Landmark case in the UK: standard third party funding agreements in collective actions appear to be unenforceable
On 26 July 2023, the UK Supreme Court rendered a landmark decision on third party funding agreements in collective actions proceedings. This case concerned follow-on damages proceedings in the renowned truck cartel case. In this decision, the Supreme Court qualified the (standard) funding agreements that the claimants use as “damages-based agreements” (“DBAs”), which is a type of ‘contingency fee’ arrangement in UK law for ‘representatives and those providing other services in relation to the making of the claim’. The Supreme Court now decided that funders offer such services and therefore should follow DBA regulations.
Under UK law, DBAs are regulated, especially in cases before the Competition Appeal Tribunal (“CAT”). Claim vehicles are not allowed to use DBAs at all in opt-out proceedings (where a claim vehicle starts proceedings on behalf of a defined group, but group members may opt-out) and they can only use them when they comply with a specific regulatory regime in opt-in proceedings (proceedings that parties should actively join). By qualifying standard third party funding agreements as DBAs, the agreements cannot be used to fund opt-out proceedings and should be changed in order to comply with the regime for opt-in proceedings.
Effect on the current funding practice in the UK
This decision therefore has far-reaching effects for all current and future cartel damages proceedings in the UK. At this moment, 31 collective action cases are pending before the CAT. Most, if not all, of these cases are funded by a third-party funder using such agreements. Claimants and funders of these cases should now reconsider their funding agreements. They might have to renegotiate the funding agreements or even find new ways to fund class action litigation.
The impact of this decision is therefore enormous, as funders face difficulties in recouping their investment after a settlement or an award. That might lead to difficulties for claimants to find funding for their cases. That is acknowledged by the Supreme Court, but it does not change the decision. Lord Sales notes that the Court has been informed that “the likely consequence in practice would be that most third party litigation funding agreements would (…) be unenforceable as the law currently stands”. However, the fact that claimants and funders were under the impression that such agreements did not fall within the definition of a DBA when they concluded these agreements “would not justify the court in changing or distorting the meaning of ‘claims management service’”.
As for the current collective action proceedings, it cannot be ruled out that some opportunistic claimants at the end of proceedings with enough money in the bank will try to conclude the case without paying their funders. UK class action proceedings can cost up to several million pounds, which is normally paid by these funders in advance, so that can save a lot of money.
On the other hand, we need to add some nuance. Since proceedings are so expensive, it is unlikely that the current practice of third party funding will stop at all. However, if the UK parliament will not change the law – and funders are probably lobbying for that already – it might be more difficult to invest in such cases and it is well possible that funders shift their focus to more funder-friendly countries, such as the Netherlands.
What are the Dutch rules?
Under Dutch law, there are only rules on financing opt-out cases, which aim to protect damaged parties (often consumers) that cannot instruct the claim vehicle representing them. These damaged parties are possibly not even aware of the case. These rules, however, do not apply to opt-in cases, for example when claimants litigate on the basis of assignments. This was confirmed in one of the trucks cases in July 2022. The Dutch Court of Amsterdam ruled that the opt-out regulations are not applicable to opt-in proceedings started by claim vehicles, as they claim on behalf of professional parties that made a free choice to join the proceedings and who may instruct the claim vehicle. They don’t need the legal protection that is provided for the opt-out cases.