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Legal finance market focus: The UK

  • Craig Arnott

2017 decisions in UK class actions reveal challenges in achieving opt-out certification, but affirm the role external financing can play in the future. Looking ahead to 2018, expect law firms to consider new ways to run their businesses more efficiently.

Group actions: What to expect going forward

For some time, new practitioners have been discussing the Consumer Rights Act 2015 (CRA), which introduced significant changes to private actions in the UK. Most notably, the legislation created a regime for opt-out collective proceedings in competition cases to be brought before the Competition Appeal Tribunal (CAT).

Since the CRA went into effect, two major actions have been brought, each of which has significant implications for how future proceedings will be funded.

Dorothy Gibson v. Pride Mobility[1]

In the first action to be brought under the new opt-out regime, Dorothy Gibson sought a collective price-fixing action against the manufacturer of mobility scooters for the disabled and elderly. While Gibson eventually withdrew her request for the opt-out proceedings, the case sheds light on how collective actions are likely to be funded.

Damages Based Agreements are prohibited in UK collective actions, so Gibson had used a combination of a conditional fee agreement and after-the-event insurance to pursue the claim. This type of complex fee structure typically would be assembled with capital from an external finance provider, and there were questions as to whether the Tribunal would allow it.

Before Gibson decided not to move forward with the action, the CAT implicitly permitted the use of outside finance in collective actions.

Merricks v. MasterCard[2]

Walter Merricks CBE sought approval for opt-out collective proceedings for a £14 billion claim against MasterCard over its unlawfully high credit card fees—the second and largest matter to be brought before the CAT. Although a collective proceedings order was not granted, the results of the proceedings nevertheless are illuminating, especially in terms of the role of external finance in collective action.

One of MasterCard’s primary objections to the action centered on Merricks’ litigation finance agreement.[3] MasterCard argued that: (1) The agreement could be terminated by the funder; (2) The adverse costs protections were inadequate; and (3) The terms of the agreement gave rise to a conflict of interest.

In its decision, the Tribunal rejected outright MasterCard’s argument regarding Merricks’ funding arrangement. The CAT noted that the Government had “clearly envisaged that many collective actions would be dependent on third party funding, and it is self-evident that this could not be achieved unless the class representative incurred a conditional liability for the funder’s costs, which could be discharged through recovery out of the unclaimed damages.”

This decision cemented the important role that external funders will play in facilitating the opt-out regime, not least because its approach also indicated how costly actions will be to bring for the claimants.

What happens next?

While the collective action regime has been slow to gather speed, the judgments in Pride and MasterCard nevertheless affirm that external finance is an essential tool in follow-on competition claims. This is mainly a simple matter of economics: Follow-on claims are by nature expensive. Many are so large that it’s difficult if not impossible to see how they can even get off the ground without being financed by a third party.

Given the wide applicability of financing in competition claims, we expect there to be more class actions and therefore more opportunities for funding in the coming months and years.

Financing law in 2018

Lawyers are now benefitting from the emergence of sophisticated finance partners who are as comfortable providing classic case-based litigation finance as bespoke portfolio solutions that provide flexibility and attractive terms.

The use of portfolio-based litigation finance has proved increasingly attractive among US law firms, but in 2017 Burford announced the first portfolio arrangement between a leading UK law firm and a major funder. The multi-million-pound arrangement provides flexible capital that enables the firm to expand its ability to offer alternative fee arrangements to clients and grow the firm’s reach in commercial litigation and arbitration.

Portfolio finance gives assurance to lawyers and corporates not only about the reliability of capital sources, but also the ability to offer better terms to clients—two characteristics that will make the structure appealing to all firms seeking to grow their business.

[1] Dorothy Gibson v Pride Mobility Products Ltd [2017] CAT 9.

[2] Walter Hugh Merricks CBE v MasterCard Incorporated and Others [2017] CAT 16.

[3] The plaintiff’s case had been funded by Gerchen Keller Capital, which was later acquired by Burford Capital.