COMPETITION BULLETIN

Anyone who has ever tried to settle a cartel damages case will know that the law relating to settlements is fraught with difficulty. The recent judgment of the High Court in IMI Plc v Delta Ltd [2015] EWHC 1676 (Ch) highlights some of the problems.

The basic position was fairly typical. The original claimants (“C”) were companies which claimed to have suffered damage as a result of a cartel among manufacturers of copper fittings. They sued one of the cartelists, “D1” (IMI), seeking full damages on a joint and several basis. D1 then sued another cartelist, “D2” (Delta), for a contribution under the Civil Liability (Contribution) Act 1978. C then settled with D1, leaving D1 to pursue its contribution claim against D2.

The 1978 Act provides that, in contribution proceedings, D2 can argue that it would not have been liable to C, but (subject to a proviso) it cannot argue that D1 was not liable. There are good policy reasons for that position, as D1 would be put in a very difficult position if it had to prove its own liability to C. In the vast majority of cases, this rule causes no unfairness – D2 is free to argue about its own liability to C, and the question of whether D1 was really liable to C is irrelevant.

There is, however, a proviso. Under section 1(4) of the 1978 Act, D2 can argue in its defence that D1 would not have been liable to C even assuming that the factual basis against D1 could be established.

The purpose of the proviso is unclear, although it must be intended to give some sort of protection to contribution defendants. It enables D2 to argue that the case against D1 was bad in law. But the case-law establishes that it also allows D2 to argue that, even assuming that the factual case advanced by C was correct, D1 had available to it some other factual defence – which the cases call a “collateral defence” – to C’s claim.

The IMI case explored what is meant by a “collateral defence”. In short, D2 wanted to argue that C knew about the cartel, and that its case against D1 was therefore limitation barred. The question was whether that issue – broadly, whether or not C was limitation barred – was: (a) part of the factual basis relied on by C against D1, and therefore not open to debate in the contribution proceedings; or (b) a “collateral defence” which D2 could raise in the contribution proceedings.

The Judge (Rose J) held that, given that it was part of the C’s pleaded case that they were not limitation barred because the cartel had been concealed from them, and given that C would have had to prove that assertion in the main claim, the issue was properly characterised as being part of the factual case against D1 which could not be challenged in the contribution proceedings. It was not a “collateral defence”.

It is worth noting that the only reason why limitation/concealment was part of C’s pleaded case was that they had raised it in their Reply in response to a limitation defence advanced by D1. This therefore raises the prospect that contribution defendants may be prevented from running particular arguments just because of the way in which the main proceedings were pleaded and/or the moment when those proceedings were settled (i.e. before or after a Reply). On the other hand, as the Judge noted, this is a difficult area of law. There is no perfect way of resolving the problem.

Stepping back from the legal detail, it is worth asking why any of this matters. As mentioned above, it is not normally unfair to prevent a contribution defendant from arguing that the original defendant, who settled the claim, actually had a valid defence. D2 should just get on with defending the case against it, without worrying about D1’s liability.

The problem arises because of the rules on limitation. The 1978 Act disapplies the normal limitation rules: D2 cannot argue, in defence of contribution proceedings, that it would not be liable to C on the grounds that C’s claim against it would be limitation barred. The benefits of this rule are clear. It means that, when C sues D1, D1 does not have to rush out immediately to sue D2. It can wait until it settles the claim, or until C obtains judgment against it, and then sue D2.

But the consequence is that D2 is denied the opportunity to run its limitation defence. In the IMI case, Delta tried to come up with a way around the problem by arguing that D1 should have run the limitation defence itself. The Court has held that it cannot do so.