Litigation funding agreements are not DBAs, tribunal rules

Trucks: Main hearing on CPO adjourned

Agreements with third-party litigation funders are not damages-based agreements (DBAs), the Competition Appeal Tribunal has ruled.

The panel, led by tribunal president Mr Justice Roth, also expressed its support for the Association of Litigation Funders’ (ALF) code of conduct.

The CAT is facing two applications for a collective proceedings order (CPO) in the truck cartels case, one brought by UK Trucks Claim Ltd (UKTC), a special purpose vehicle, and the other by the Road Haulage Association (RHA).

Though the applications have been adjourned pending the Supreme Court’s ruling on CPO applications in the Merricks v Mastercard case, the CAT heard as a preliminary issue the question whether, as a result of their funding arrangements, the UKTC and/or the RHA should not be authorised to act as a class representative.

Some of the defendants argued that the applicants’ litigation funding agreements (LFAs) constituted DBAs and were therefore unenforceable and unlawful, and also questioned the nature and adequacy of the funding arrangements.

UKTC’s action is backed to the tune of £24m by based Yarcombe Ltd, a Calunius fund, while the RHA has secured £27m in support from Therium Litigation Funding.

It was common ground that the LFAs did not comply with the DBA Regulations 2013, while DBAs cannot be used for opt-out CPOs.

The defendant argument was that the LFAs constituted the provision of financial assistance in relation to the making of the claims and so the services provided by the funders were therefore “claims management services”, within the statutory definition in section 4 of the Compensation Act 2006.

As the payment to the funders would be determined by reference to the award of damages, it was contended that the LFAs therefore satisfied the definition of a DBA under section 58AA of the Courts and Legal Services Act 1990.

In his witness statement for UKTC, Leslie Perrin – chairman of Calunius and also of the ALF – said such a finding “would invalidate most if not all LFAs that have been agreed since litigation funding began”.

As a result, he warned, “a radical review not only of these LFAs but of the entire litigation funding sector as it has developed in the United Kingdom” would be required.

The CAT concluded that litigation funders were “engaged in the funding of a claim, not the management of the making of a claim” and so were not providing claims management services. As a result, the LFAs were not DBAs as defined by section 58AA.

This “avoids the potential for an undesirable outcome” as outlined by Mr Perrin.

The review of the DBA regulations published last month also included a recommendation that LFAs be expressly excluded to avoid any confusion.

The defendants argued that there was no evidence of how or where the two Therium entities that were parties to the RHA LFA acquired their funds nor was it clear that they were “associated entities” of Therium Capital Management Ltd (TCML) for the purpose of the ALF code. TCML is the company signed up to the code.

Chief investment officer Neil Purslow confirmed to the tribunal that they were associated entities, and the tribunal said: “This means that, pursuant to para 4 of the code, TCML accepts responsibility to the ALF for their compliance with the code and, pursuant to para 9.4 of the code, that it will ensure that Therium will maintain the capacity to meet their funding obligations.

“Of course, this is a voluntary code and not a binding legal obligation, but we think that it is wholly unrealistic to suppose that a leading litigation funder that is commercially active in this field would not honour these commitments to the association of which it is a founder member, and thus place at risk the whole regime of self-regulation.”

Concerns raised about the detail of the Therium LFA were addressed by amendments made to it during the course of the hearing.

In view of Yarcombe’s status as a Guernsey special purpose vehicle with no apparent assets, the tribunal said it was sympathetic to the defendants’ concern as to how much reliance could be placed on Yarcombe’s contractual commitment to fund the litigation.

Calunius LLP gave a written undertaking to the tribunal that it would itself comply with the ALF code and use its best endeavours to ensure that Yarcombe did so for the duration of the proceedings.

“Mr Perrin explained that Calunius LLP cannot give an absolute undertaking as regards Yarcombe because it has no legal authority to manage or control Yarcombe or to act as its agent.”

The tribunal said the CPO regime depended on third-party funding for its success since class members would rarely be able to fund their claims.

“The basis of the ALF code is to provide a satisfactory means of self-regulation of the litigation funding industry for the protection of those in receipt of TPF, and the terms of the ALF code, on its initial introduction, received the endorsement of Lord Justice Jackson.

“There are different models of commercial litigation funding now adopted by members of the ALF and it would be wrong for the tribunal to seek to place TPF for the purpose of collective proceedings under the [Competition Act] into a straightjacket.

“On the contrary, the tribunal seeks to facilitate the access to justice for claimants achieved by properly constituted collective proceedings. In that regard, the concern of the tribunal when reviewing a LFA is (a) that the terms of the funding agreement do not impair the ability of the class representative to act fairly and adequately in the interests of the class members, and (b) that adequate funding has been arranged to pursue the litigation effectively in the interests of the class members.”

Noting that it was in the defendants’ interest “to make the pursuit of those claims as burdensome as possible”, the tribunal said UKTC, Calunius and Yarcombe “have taken significant steps since the hearing which sufficiently allay our concerns”.

Both claimant groups have after-the-event insurance, with the defendants’ ‘conservative’ estimate for their costs put at £60-65m. They said the insurance may not be enough to cover this.

The tribunal said it resisted an approach whereby it was “only ‘just and reasonable’ to authorise someone to act as the class representative if that person has adverse costs insurance at a level which may make the obtaining of such cover prohibitive”.

It continued: “Where the tribunal finds that there is no other reason to refuse authorisation of a class representative under rule 78, we consider that the proper approach to such a very high costs case is to determine that the class representative has at the outset the ability to pay a substantial level of adverse costs cover which should be sufficient for at least a significant part of the proceedings.

“Authorisation should not then be refused on the basis that this may prove insufficient to the end of trial. As the proceedings advance, and the defendants’ costs become much clearer, the issue can be revisited under rule 85 and the tribunal can vary or revoke the terms of the CPO accordingly.”

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