REUTERS | David Mercado

The CAT delivers helpful judgment on litigation funding and ATE insurance for class actions

On 28 October 2019, the Competition Appeal Tribunal (CAT) handed down judgment in the Trucks Cartel claims (UK Trucks Claim Limited v Fiat Chrysler Automobiles N.V. and others and DAF Trucks N.V. and others and Road Haulage Association v MAN SE and others and Daimler AG) on a preliminary issue taken by several objectors who were contesting the compliance of funding arrangements with the CAT Rules.

An adverse judgment against either of the two parties applying for an order from the tribunal to be potential class representatives would have led to a severe restriction in the ability of the litigation funding and after the event (ATE) insurance market to support the nascent class action regime in the CAT. In the end, the judgment underlines how the CAT will seek to help applicants by accepting reasonable litigation funding and insurance solutions available from the market to fund and underwrite Collective Proceedings Order (CPO) applications.

This short piece examines how the funding and ATE market would be blocked from supporting credit rating agency (CRA) claims, at a practical level, had the CAT formed a different view.

The objectors claimed the litigation funding agreements (LFA) financing the class representatives amounted to unenforceable damages based agreements (DBAs) (a DBA is unenforceable if it relates to opt out proceedings (section 47C(8) of the Competition Act 1998); furthermore, the LFAs did not purport to comply with the DBA Regulations 2013). This assertion was based on the fact that the success fee payable to the funders was calculated by reference to the award of damages (or specifically, financial benefit obtained). They say that this amounts to a DBA as defined by section 58AA of the Courts and Legal Services Act 1990.

This characterisation of the funding arrangements was rejected by the CAT. This means that litigation funders retain the important flexibility to structure their arrangements so that their reward can be geared towards the financial outcome for the class.

The decision was crucial from a practical perspective within the funding market. It would have been counter-intuitive to insist the funder’s returns were completely uncorrelated to the financial outcome for the class (as a consequence of needing to avoid being characterised as a DBA) because it would mean needing to factor in returns to the funder in a vacuum (that is, without knowing the outcome for all the stakeholders). Reducing the options available and the visibility the class members would have over their potential share of the proceeds would just make it harder to secure a critical mass of clients needed by a funder to justify funding a viable CPO application.

However, the “DBA issue” may not have gone away as one of the objectors has sought permission to appeal to the Court of Appeal. Certainly, the argument smacks of an objection based on technicality rather than substance. One might expect the rule makers to clarify that LFAs are not DBAs were the Court of Appeal to uphold any appeal.

Secondly, the CAT considered the adverse costs arrangements of the potential class representatives. The objections were that the cover was not sufficient and that the ATE policies were inadequate (see Rule 78(2)(d) of CAT Rules).

The CAT ultimately approved the adverse costs arrangements of both class representatives. This was a positive outcome, particularly insofar as the CAT recognised that the level of cover required to obtain a CPO does not need to be for the full potential exposure up to a fully contested trial. The CAT interpreted the rules on certification such that the tribunal needs only to be satisfied that a “substantial level of adverse costs cover for at least a significant part of the proceedings” (paragraph 109 of the Trucks judgment) is in place at the CPO application stage.

A highly pragmatic decision. Here is why: most adverse costs arrangements involve large amounts of ATE insurance with premiums that are, in part, financed by the funder and, in part, made contingent upon success. In large and complex class actions, where it would not be surprising to see respondents claiming their costs are going to be £50 million plus simply to frustrate a CPO, there is not enough ATE insurance capacity in the market at the moment to cover the full risk of a trial, at such an early stage in the proceedings. To require full coverage at the certification stage would snuff out most class actions before they can get going. Ultimately, such large programs of ATE insurance have a much greater chance of being built to cover trials after certification.

However, the CAT accepted the adverse cost arrangements. Considering authorities on security for costs as analogous (paragraph 79 of the Trucks judgment) to the tribunal’s determination of whether the class representative would be able to pay the other side’s costs per rule 78(2)(d), the CAT accepted the ATE insurance policy wordings underpinning the arrangements because they limited the scope of the insurer to avoid a claim. Limiting the insurer’s rights under the policy does mean that adverse costs arrangements will probably be more expensive than they might have been because ATE insurers require extra consideration for the fortification of their ATE policies, particularly if anti-avoidance endorsements are necessary. It should also be noted that not every ATE insurer is keen to provide such fortification, so this could further narrow the pool of capacity.

Overall though, the Trucks decision is a green light for the future of class action funding.

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