With legislation to introduce collective actions currently making its way through Parliament (see our previous blog here), we are pleased to welcome a guest blog from Elaine Whiteford of King & Wood Mallesons LLP and Oliver Gayner of Burford Capital (UK) Ltd. They highlight a litigation funding problem which will arise under the proposed new regime, and suggest an ingenious solution.
Readers of this blog will be familiar with the Government’s announcement, following the conclusion last year of its consultation on private actions in competition law, that it intends to introduce an “opt out” regime for collective competition law actions. In brief, unless they specifically choose to opt out, UK-domiciled consumers and businesses will automatically be included as claimants in collective actions, provided they satisfy the criteria for membership set by the Competition Appeal Tribunal when it certifies the class. One of the particular policy objectives behind this proposal is to empower small businesses and consumers to seek redress in respect of anti-competitive behaviour. The combination of the complexity and cost of seeking such redress is seen currently to form an almost insurmountable hurdle to all but the largest claims.
What may be less familiar is one of the finer points of detail in the proposals, namely, that lawyers will not be permitted to enter into any form of contingency arrangement in respect of any opt-out actions. Consequently, if a collective claimant group wants to enter into any risk sharing arrangement with its lawyers, it will have no choice but to operate on an opt-in basis. However, that is precisely the mechanism that has been found wanting in the past.
The result is an unusual paradox: the Government introduces legislation permitting lawyers to act under DBAs (damages based agreements) to help address the otherwise potentially prohibitive costs of embarking on litigation, but at the same time excludes from these proposals one type of claim that it is policy to seek to encourage.
The issue is further complicated by the Jackson Reforms, since ATE insurance premiums and CFA success fees must be paid by claimants and can no longer be recovered from opponents. Thus, the damages pool at the end of a successful claim will be reduced by any such costs, which has the knock on effect of reducing the headroom for third party litigation funders to make a return. In opt-out cases where the economic margins are tight, claimants may already find it hard to attract funding, and now will be restricted from asking their lawyers to step into the breach.
The result is that the effectiveness of this policy may well be undermined before it has even been implemented. Many small businesses faced with the prospect of paying for expensive litigation and limited prospects of sharing that risk may simply decide that it is not worth the bother. The anomaly will need to be addressed if the (otherwise laudable) policy aims are going to succeed.
In the short term, synthetic risk sharing arrangements may offer a solution. In a hybrid arrangement, a litigation funder enters into a separate private agreement with the law firm to share a pre-agreed portion of its proceeds in the event the claim succeeds; such arrangements are in principle not caught by the DBA Regulations which only apply to agreements between “client” and “representatives” (i.e. the lawyers).
Clearly though it would be preferable for the issue to be properly addressed in legislation, rather than simply allowing the Law of Unintended Consequences to take its course. According to the Government’s consultation paper, the fear is that if contingency fees are allowed in opt-out claims, the floodgates of frivolous and unmeritorious claims will be opened, and the UK will be plunged into a US-style class action culture. Similar arguments were used against the introduction of litigation funding; however, a decade of practice has shown that funders will only support meritorious claims, and so tend to act as a filter for frivolous cases, as Jackson LJ found in his Report. The same applies to lawyers when considering whether to act on a contingency basis: few would be willing to risk their firm’s money on claims with poor prospects. Further, the comparison to the US seems specious, given that that US courts do not provide for the shifting of cost risk onto losing parties, and so attitudes to risk are fundamentally different.
Some safeguards for the new collective action regime are clearly appropriate: excluding the lawyers from sharing in risk and reward is, in our view, not one of them.