Introduction
Litigation funding and class proceedings are inextricably intertwined. Without a source of funding, class proceedings are a hollow promise – available as an access to justice route, but only for those who can afford to pay a potentially multi-million-dollar adverse costs award (not to mention the law firms who have to sustain litigation over the course of many years).
When the first class actions legislative framework was being debated in Ontario, funding was central to the controversy and ultimately an issue that had to be resolved in order for any reform to be meaningful. This resulted in the establishment of the Class Proceedings Fund and the lifting of the ban on contingency fees (which remained for regular cases until 10 years later).[1]
A similar controversy is currently raging in the U.K., where class proceedings are only permitted in competition law.[2] Since the introduction of collective proceedings on October 1, 2015, litigation funding in that area has surged – but this trend has been stopped in its tracks by two recent developments. This article will describe those developments and their implications for the litigation funding industry in collective proceedings.
The PACCAR decision
In July 2023, the U.K. Supreme Court handed down its judgment in R (on the application of PACCAR Inc) v Competition Appeal Tribunal.[3] PACCAR Inc, along with several other defendants, were truck manufacturers who were found by the Commission of the European Union to have operated a cartel. The claimants were buyers of heavy goods vehicles who alleged that they suffered loss as a result of the cartel.
As part of its defence strategy, PACCAR Inc argued that the litigation funding agreement (“LFA”) into which the class representative had entered was a Damages Based Agreement (“DBA”), because it entitled the funder to recover a percentage of any damages recovered. A DBA is unenforceable if it does not comply with the 2013 DBA Regulations,[4] which the LFA in this case did not. Furthermore, under the U.K.’s collective proceedings regime, DBAs are not enforceable at all.[5]
Unfortunately for the class representative and the class, the UK Supreme Court agreed with PACCAR Inc and held that the LFA was a DBA and therefore unenforceable.
The decision rocked the litigation funding industry (and not just in collective proceedings), because most LFAs entered into up to that point did not comply with the 2013 DBA Regulations, and therefore they too were unenforceable. In collective proceedings, even LFAs that complied with the DBA Regulations were unenforceable.
Many litigation funders and claimants have since modified the LFAs to which they are a party, making funding recoverable as a multiple of the capital advanced by the funder, which is not a DBA and is therefore enforceable under the collective proceedings regime.
However, the decision has thrown the litigation funding industry into a great deal of uncertainty, and in March 2024 the U.K. government introduced legislation to reverse the effects of PACCAR and clarify that LFAs are not DBAs and are therefore enforceable.[6] However, that legislation was never passed because of the general election held in July 2024. The U.K. Civil Justice Council (“CJC”)[7] is now conducting a review of third-party litigation funding and is scheduled to release its final report this summer.[8] Its recommendations are likely to include regulation of the litigation funding industry. In the meantime, however, the litigation funding industry continues in a state of flux.
The Settlement of Merricks v Mastercard
In the fall of 2024, the parties in Merricks v Mastercard (“Merricks”) – the first proceeding to be certified under the U.K.’s collective proceedings regime[9] – agreed upon a settlement. Any settlement of a collective proceeding must receive the approval of the Competition Appeal Tribunal (“CAT”), the tribunal that oversees collective proceedings in competition law.[10]
Unfortunately, the litigation funder that had backed Mr. Merricks objected to the settlement. It stated that the settlement was not just and reasonable and that the proposed distribution of the £200 million settlement (which was, roughly speaking, £100 million to the class, £50 million to the funder, and £50 million to the funder and/or to top up class members’ compensation) was inappropriate. The funder claimed that:
- The settlement undervalued the claims and failed to adequately compensate class members;
- It was agreed without the funder’s consent; and
- It raised policy concerns about the fairness and viability of UK collective actions.[11]
The funder also served a request for arbitration on Mr. Merricks for alleged breach of the litigation funding agreement. In a final twist, Mastercard has made £10 million available to Mr. Merricks so he can defend the arbitration claim.
The funder was granted permission to intervene in the settlement approval hearing, which took place on February 21 of this year. The CAT approved the settlement with reasons to follow.[12] Nevertheless, it expressed some concern that the defendant was funding Mr. Merricks’ defence in the arbitration proceedings and ordered Mastercard’s solicitors to disclose to the CAT attendance notes of ‘without prejudice’ discussions between Mastercard and Mr. Merricks – presumably to ensure that the settlement was not a form of ‘sweetheart deal’.[13]
The conduct of the funder in this case would raise eyebrows amongst even the most jaded Canadian class action litigators. Nevertheless, while the U.K. litigation funding industry is a mature and sophisticated one that antedates the establishment of class actions in Canada, the litigation funding of collective proceedings in the CAT is new. Issues such as the extent of funder control over collective proceedings are still under discussion, and the case law on this point is virtually non-existent, in contrast to Canada.[14]
The implications of the Merricks settlement, however, is that funders cannot control settlement decisions and that they are very limited in their ability to challenge settlement agreements.
Conclusion
Recent developments in the litigation funding of U.K. collective proceedings shows how ethical and policy issues can shape the availability of funding in class actions, and therefore the availability of class actions as a form of access to justice.
Just as Ontario struggled with these issues when class action legislation was first introduced here,[15] the U.K. is faced with similar questions in its nascent collective proceedings regime. However, the very high costs of litigation in the U.K., coupled with an extremely well-capitalized and mature litigation funding market, means the impact of recent developments is much more deeply felt. The widespread use of contingency fees in Canada (including in class actions) means that a PACCAR-type scenario is unlikely to arise in this country. As for the spectre of a litigation funder insisting on control over whether to settle and for how much, this is allayed by s 33.1(9)(a)(ii) of Ontario’s Class Proceedings Act, 1992, SO 1992, c 6 and its common-law equivalents in other provinces. Section 33.1(9)(a)(ii) states that court approval of a third-party funding agreement will only be provided if “the agreement will not diminish the rights of the representative plaintiff to instruct the solicitor or control the litigation or otherwise impair the solicitor-client relationship”.
U.K. litigation funders’ investment portfolios tend to be widely distributed and not just limited to collective proceedings. As a result of the developments discussed in this article, they may therefore choose simply to steer clear of collective proceedings until such proceedings become a more predictable and stable investment and the risks are easier to assess. This would be a huge disadvantage to a regime that is only just getting off the ground, and which has proved enormously popular as a tool for access to justice and holding wrongdoers to account.
[1] Suzanne Chiodo, The Class Actions Controversy: The Origins and Development of the Ontario Class Proceedings Act (Toronto: Irwin Law, 2018) at 65-68, 186-188, 191-202.
[2] Competition Act 1998, 1998 c 41 [Competition Act 1998], s 47, as amended by Schedule 8 of the Consumer Rights Act 2015, 2015 c 15 (U.K.).
[4] The Damages-Based Agreements Regulations 2013, 2013 No 609 (U.K.).
[5] Section 47C(8) of the Competition Act 1998 states that, “A damages-based agreement is unenforceable if it relates to opt-out collective proceedings”.
[6] The Litigation Funding Agreements (Enforceability) Bill is discussed here: Aleisha Robertson, “Litigation Funding: Legislation to Reverse PACCAR Remains in Political Limbo but Have Funders’ Concerns Materialized” (November 6, 2024), Clifford Chance.
[7] The CJC advises the Lord Chancellor, the Judiciary and the Civil Procedure Rule Committee on civil matters.
[8] The CJC’s interim report was published in October 2024, and consultations prior to the final report closed in early March 2025: Rachel Rothwell, “Renewed Calls for Urgent Action on PACCAR Ahead of Key Court of Appeal Ruling” (March 9, 2025), The Law Society Gazette.
[9] Suzanne Chiodo, “Becoming Competitive on the Worldwide Stage: UK Supreme Court Gives Green Light to Class Actions” (December 11, 2020), Western Law.
[10] The settlement will not be approved unless it is “just and reasonable”: s 49A(5) of the Competition Act 1998 and the Competition Appeal Tribunal Rules 2015, SI 2015, No 1648, Rule 94(8) [CAT Rules].
[11] Emma Carr & Louise Macdonald, “UK Litigation Funding: Mastercard Settlement Approved by Court Despite Funder Challenge” (February 26, 2025), Lexology (blog).
[12] The reasons are scheduled to be released in late March 2025.
[13] Julian Strait et al, “Merricks v Mastercard: Competition Appeal Tribunal Approves Settlement, but Issues of Distribution Reserved for Future Judgment” (February 24, 2025), Millbank LLP.
[14] While there is legislation covering litigation funding agreements generally (which apply to collective proceedings under CAT Rule 113), they do not relate to funder control of proceedings: see Courts and Legal Services Act 1990, 1990 c 41, Part II, s 58B.
[15] One of the first actions brought under the CPA, Smith v Canadian Tire Acceptance Ltd, 1995 CanLII 7163 (ONSC), involved a non-party seeking to secure financial gain from the promotion of a class action, which Winkler J found to be akin to champerty or maintenance.
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