Achieving Optimal Alignment for Claimants: Enhancing Funding Structures in Opt-Out CAT Proceedings

By Gian Kull and Simon Latham

The funding of opt-out collective proceedings under the UK’s Competition Appeal Tribunal (CAT) regime is a pivotal factor in ensuring access to justice. The PACCAR judgment’s prohibition on funders charging a percentage of damages has reignited the debate about the optimal structure for funding agreements. The optimal structure must balance the interests of funders, legal representatives and claimants , as well as consider the perspectives of defendants such that settlement is not impeded or overcomplicated. This article explores three pathways to improve alignment: (i) permitting funders to charge a percentage of damages, (ii) allowing Damages-Based Agreements (DBAs) in the CAT, and (iii) enabling claimants to recover the funders’ invested capital and contingent ATE premia from defendants.

(i) The Case for Funders Charging a Percentage of Damages

Allowing funders to charge a percentage of damages ties their compensation directly to the success (and failure) of the claim. This model aligns funders’ interests with those of the claimants and avoids undue focus on the funder’s invested capital (which can lead to misaligned incentives).

To safeguard claimants, this model should include:

1. Capped Percentages: Funders’ returns should be limited to a reasonable proportion (e.g., 30%) of the total damages, ensuring the majority of recoveries remain with claimants.
2. Judicial Oversight: The CAT should review and approve funding agreements with supporting evidence from an independent expert to ensure they are fair, reasonable, and proportionate.
3. Performance Incentives: Funders should only earn fees on successfully recovered sums, ensuring their interests align with achieving meaningful compensation.

Such a structure balances the need for funders to recoup their investment with the regime’s overarching compensatory purpose.

(ii) Introducing Damages-Based Agreements in the CAT

DBAs, where lawyers receive a percentage of damages recovered, could serve as an alternative or complement to third-party funding. This arrangement incentivizes legal representatives to act in claimants’ best interests, as their compensation depends on successful outcomes.

Permitting DBAs in CAT proceedings offers several benefits:

1. Stronger Alignment: Lawyers, and the funders who back them, bear the financial risk, directly linking their incentives to claimants’ recoveries.
2. Simplified Structures: DBAs may reduce reliance on external funding, streamlining financial arrangements and reducing costs.
3. Enhanced Access to Justice: Claimants can pursue claims without upfront costs, especially in cases where external funding is challenging to secure.

However, to ensure DBAs’ efficacy:

1. Fee Caps: DBA fees should be capped at a reasonable percentage (e.g., 30%) to protect claimants from excessive legal costs.
2. Judicial Review: As with funder agreements, DBAs must be scrutinized by the CAT to ensure fairness.
3. Hybrid Models: For cases with significant ancillary costs (e.g., expert fees), DBAs could be combined with third-party funding to cover these expenses.

(iii) Making Invested Capital and Contingent ATE Premia Recoverable from Defendants

Another transformative reform would be to allow funders to recover their invested capital and insurers their contingent ATE premia from defendants as part of cost awards. This change would reduce the financial burden on claimants and lower the overall cost of funding. By shifting the responsibility for reimbursing invested capital and contingent premia to defendants, the regime would align more closely with the "loser pays" principle.

Key advantages include:

1. Lower Costs for Claimants: Claimants would retain a larger share of the recovery, as funders' initial investments and contingent premia would be recouped from defendants rather than the compensation pool.
2. Encouraging Efficient Funding: Funders and insurers would remain incentivized to manage costs judiciously, as all recoverable investments would still be subject to CAT scrutiny for reasonableness and proportionality.
3. Enhanced Access to Justice: By reducing claimants' financial burden, this reform could attract funders to support a broader range of claims, including those with higher risks or smaller potential recoveries.

Conclusion and Recommendations

The primary objective of collective proceedings in the CAT is to deliver genuine compensation to claimants, and funding structures must reflect this goal. Permitting funders to charge a percentage of damages, introducing DBAs, and making funders’ invested capital and insurer contingent premia recoverable from defendants represent viable pathways to achieve better alignment among stakeholders.

A hybrid approach, combining capped percentage-based funding with DBAs for legal fees and third-party funding for ancillary costs, alongside the recovery of invested capital and contingent premia from defendants, may offer the most balanced solution. This model ensures claimants receive fair compensation, incentivizes funders and legal representatives, and maintains the CAT’s commitment to justice and transparency. Judicial oversight will remain critical to prevent excessive fees and ensure equitable outcomes.

By adopting these reforms, the CAT can enhance the collective proceedings regime, ensuring fair, accessible, and efficient redress for claimants while fostering a sustainable funding ecosystem.