THIRD PARTY FUNDING AND CLASS ACTIONS REFORM

Rachael Mulheron*
Professor of Law, Queen Mary University of London

I. Introduction
Third party funding has come a long way since medieval times, when rich and
powerful noblemen and others of wealth and influence—those who could expect
to receive a sympathetic hearing from the courts—would take an assignment of
the legal claims from society’s “less fortunate”, in expectation of achieving
favourable outcomes in those disputes.1 That these powerful figures (third parties)
would then take a share of the proceeds of any recovery for themselves, was “an
abuse which afflicted the medieval administration of justice”.2 As the Privy Council
emphasised in Massai Aviation Services v Attorney General (Bahamas),3 the torts
of champerty4 and maintenance,5 which emerged in these murky environs, have
historically sought to defend the vulnerable—whether that be a defendant faced
with vexatious litigation brought by a funded claimant, or an impecunious claimant
forced to sacrifice a part of their recovery to a funder.
Move to contemporary society, in a world far removed from customs of medieval
patronage: times—and public policy—have marched on, whereby a strong and
independent judiciary has removed concerns of bias and undue influence.6
Champerty and maintenance are no longer either crimes or torts7 (although their

*
The author is a member of the Civil Justice Council of England and Wales (CJC), was a former member of the
CJC/MOJ Working Parties on Contingency Fees and on Third Party Funding, and is a current member of the
Competition Appeal Tribunal (CAT) Class Actions Working Party, which was responsible for drafting the “Draft
Tribunal Rules” applicable to Collective Proceedings and Collective Settlements in the CAT, and which are subject
to forthcoming public consultation prior to implementation (available at: http://www.catribunal.org.uk/247-8406
/Draft-Tribunal-Rules-on-Collective-Actions.html). However, the views expressed in this article are written in a
personal academic capacity, and should not necessarily be taken to represent the views of any entity with which the
author is associated or of which the author is or was a member.
1
Giles v Thompson [1994] 1 A.C. 142 HL at 153; [1993] 3 All E.R. 321 at 350, where Lord Mustill observed that
the torts are “so old that their origins can no longer be traced, but their importance in medieval times is quite clear”.
2
According to the Jersey Royal Court in Re Valetta Trust November 25, 2011 Royal Court (Samedi Division) at
[13]. See also Barclays Wealth Trustees (Jersey) Ltd v Equity Trust (Jersey) Ltd [2013] JRC 94 at [55(iii)].
3
[2007] UKPC 12 at [13]. See also Giles v Thompson [1994] 1 A.C. 142 at 164; and the Harbour Litigation Funding
Inaugural Lecture by Lord Neuberger, “From Barratry, Maintenance and Champerty to Litigation Funding” (Gray’s
Inn, London, May 8, 2013), where he described the origins of those torts as protecting the poor and weak from
exploitation (available at: http://www.harbourlitigationfunding.com/news/from-barretry-maintenance-champerty-lord
-neubergers-lecture-at-harbour-litigation-funding-inaugural-keynote-address).
4
i.e. a person maintaining another’s action in return for a share of the proceeds of the action: R. (on the application
of Factortame Ltd) v Secretary of State for Transport, Local Government and the Regions (No.8) [2002] EWCA Civ
932; [2003] Q.B. 381 at [32].
5
i.e. a person supports litigation in which they have no legitimate interest, without just cause or excuse: Trendtex
Trading Corp v Credit Suisse [1980] Q.B. 629 CA at 634; [1980] 3 All E.R. 721 at 751.
6
As noted in: Barclays Wealth Trustees (Jersey) Ltd v Equity Trust (Jersey) Ltd [2013] JRC 94 at [57].
7
Pursuant to ss.13(1) and 14(1) of the Criminal Law Act 1967, respectively.

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presence can still render a tainted agreement unenforceable,8 and compel a stay of
the principal proceedings).9
The use of Third Party Funding10 has been sanctioned at several levels in English
law. Extra-curially, Sir Rupert Jackson remarked, in his seminal 2009 costs and
funding study (the Jackson Report)11 that:
“[i]t is now recognised that many claimants cannot afford to pursue valid
claims without third party funding; that it is better for such claimants to forfeit
a percentage of their damages than to recover nothing at all; and that third
party funding has a part to play in promoting access to justice.”12
The concept has also received appellate approval in several cases since the House
of Lords’ affirmation in Giles v Thompson in 1994.13 Further, in 2007, the Civil
Justice Council of England and Wales (CJC), the civil advisory body of the
jurisdiction, observed that, “[p]roperly regulated Third Party Funding should be
recognised as an acceptable option for mainstream litigation”.14 Academically, it
has been noted that, although Third Party Funding “is relevant only in certain
situations, it has the potential to significantly increase opportunities to pursue
certain claims”.15
Following the Jackson Report, a Code of Conduct for Litigation Funding was
promulgated.16 The Code’s operation has since been supervised by the Association
of Litigation Funders (ALF), as the (self)regulator of the Third Party Funding
industry in England. In 2013, the ALF considered that “best practice” could be
improved, which led to the publication of the 2014 Code of Conduct (the 2014
Code), and a new complaints procedure.17 A critical analysis of these recent
amendments to the regulatory regime has been undertaken by the author elsewhere.18

8
R. (on the application of Factortame Ltd) v Secretary of State for Transport, Local Government and the Regions
(No.8) [2003] Q.B. 381 at [31] (“champerty survives as a rule of public policy capable of rendering a contract
unenforceable”), as permitted by s.14(2) of the Criminal Law Act 1967.
9
Although an abuse of process has to be proven, for a stay of the funded action to occur: Stocznia Gdanska SA v
Latreefers Inc [2000] EWCA Civ 36 at [59] and [61]. A stay was granted in Grovewood Holdings Plc v James Capel
& Co Ltd [1995] Ch. 80 at 87–88; [1994] 4 All E.R. 417 at 424–425.
10
In this article, Third Party Funding (also called Litigation Funding) means the funding of disputes by parties
who have no pre-existing interest in, or connection with, the subject-matter of the dispute, and where the Funder is
engaged in the business of funding litigation in return for a share of the proceeds.
11
Review of Civil Litigation Costs: Preliminary Report (May 2009) (the Jackson Preliminary Report).
12
Jackson Preliminary Report, Ch.15 at para.1.1, endorsed in: Review of Civil Litigation Costs: Final Report
(December 2009) (the Jackson Final Report), Ch.11, at paras 1.2 and 2.12, where Sir Rupert preferred “soft regulation”,
“[p]rovided that a satisfactory code is established and that all funders subscribe to that code”.
13
[1994] 1 A.C. 142. For judicial reference to the line of cases, see particularly: Gulf Azov Shipping Co Ltd v Idisi
[2004] EWCA Civ 292 at [54] (Lord Phillips M.R.); Mansell v Robinson [2007] EWHC 101 (QB) at [5]–[7]; London
& Regional (St George’s Court) Ltd v MOD [2008] EWHC 526 (TCC); (2008) 152(14) S.J.L.B. 28 at [102]–[107];
Sibthorpe v Southwark LBC [2011] EWCA Civ 25; [2011] 1 W.L.R. 2111 at [15]–[33]; Golden Eye (Intl) Ltd v
Telefonica UK Ltd [2012] EWHC 723 (Ch); [2013] E.M.L.R. 1 at [92]–[100].
14
The Funding of Litigation: Alternative Funding Structures (June 2007), at p.53, recommendation 3.
15
C. Hodges, J. Peysner and A. Nurse, Litigation Funding: Status and Issues (Research Report, January 2012), at
p.2 (an excellent report which contains interesting insights regarding particular Funders in England and Wales, and
also discusses issues surrounding the self-regulation-versus-full-regulation debate). The author has also previously
endorsed the utility of Funding in: R. Mulheron and P. Cashman, “Third Party Funding of Litigation: A Changing
Landscape” (2008) 27 C.J.Q. 312 at 324–329.
16
The CJC was closely involved in the drafting of the Code, by way of the Working Party on Third Party Funding
(under the Chairmanship of Michael Napier Q.C., and of which the author was a member). A description of that
project, and the 2011 Code itself, are at: http://www.judiciary.gov.uk/about-the-judiciary/advisory-bodies/cjc/working
-parties/contingency-fees.
17
These documents are available full-text at: http://associationoflitigationfunders.com/code-of-conduct/.
18
See R. Mulheron, “England’s Unique Approach to the Self-Regulation of Third Party Funding: A Critical Analysis
of Recent Developments” (2014) 73 C.L.J. 570.

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April 2015] Third Party Funding and Class Actions Reform 293

Nevertheless, notwithstanding the widespread acknowledgement and

endorsement of Third Party Funding, the industry is entering into a very changeable
and evolving landscape, by virtue of the foreshadowed introduction of opt-out
collective actions for competition law grievances in the UK. That proposal is
contained in Sch.8 of the Consumer Rights Bill 2013–14, entitled Private Actions
in Competition Law.19 The Bill is, at the time of writing, proceeding through
Parliament, having had its Third Reading in the House of Lords on December 8,
2014.20 The regime (hereafter, the “Competition Law Class Action”) will adopt an
opt-in or opt-out approach for the formation of the class, depending upon judicial
election on a case-by-case basis.21 The claims are to be heard in the Competition
Appeal Tribunal (CAT), in which exclusive jurisdiction will be vested. This
proposed reform followed from the Government’s 2012 consultation on private
enforcement of competition law in the UK.22
The introduction of sectoral opt-out collective actions for England is likely to
give rise to some very challenging legal issues for Funders. Following a brief
discussion (in Part II) of the status of Third Party Funding, insofar as the
forthcoming class actions reform is concerned, the article deals with three
contentious legal matters. First, the precise basis upon which a Funder is lawfully
entitled to take a portion of the damages obtained by class members, as a success
fee, has proven to be highly-contentious in the jurisdictions of Australia, Canada
and the US. Important lessons can be learnt from those experiences, when drafting
appropriate legislative provisions for England’s Competition Law Class Action,
which are discussed in Part III. Secondly, the potential impact of a recent
Recommendation on Collective Redress published by the European Commission
(EC) is examined in Part IV. The influence of that EC Recommendation may
become evident in two respects, viz regarding the governance of Funding, and
regarding notification of a Litigation Funding Agreement (LFA) between Funder
and representative claimant, to the defendant, at the outset of the Competition Law
Class Action. Finally, the thorny legal issue of whether Funders should adopt full
liability for adverse costs in collective actions, is critiqued in Part V, given some
recent judicial observations in England and in Canada, and in the earlier Jackson
Report, on that very topic. Part VI contains a conclusion.
Overarching the entire landscape of Third Party Funding in England is the
crucial debate as to whether statutory regulation will be implemented at some time
in the future.23 Sir Rupert Jackson remarked that the option of full regulation might
likely become necessary in the future if, inter alia, “funders are supporting group

19
The relevant provisions of Sch.8 will be inserted in the Competition Act 1998 and the Enterprise Act 2002.
20
The Bill, which started in the House of Commons, has now proceeded through both Houses, and has been returned
to the Commons with amendments (in a process known as “ping pong”). The particular provisions the subject of this
article have not been amended during the passage of the Bill through the Lords. See further: http://services.parliament
.uk/bills/2013-14/consumerrights.html, and for Sch.8 itself, see: H.L. Bill 64, 2014–15, commencing at p.115.
21
Proposed s.47B(7)(c).
22
The reform was promulgated by the Department of Business, Innovation and Skills (BIS), via the consultation,
Private Actions in Competition Law: A Consultation on Options for Reform (April 2012). The Government Response
on this important consultation was published on January 29, 2013.
23
An analysis of that debate lies outside the scope of this article. For recent examination of this debate, considering
“both the policy and practical aspects of regulating the third party litigation funding market”, see: Hodges, Peysner
and Nurse, Litigation Funding: Status and Issues Litigation, section 11 (quote at p.141). Also see: Mulheron, “England’s
Unique Approach to the Self-Regulation of Third Party Funding: A Critical Analysis of Recent Developments” (2014)
73 C.L.J. 570, section B(2).

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actions brought by consumers on any scale”.24 Undoubtedly, the interrelationship

between Third Party Funding and the Competition Law Class Action may well
have an impact upon that full-regulation-versus-self-regulation-debate in the future.

II. Third Party Funding for Competition Law Class Actions

It is worth noting, at the outset, that lawyers will not be permitted to fund
Competition Law Class Actions by means of percentage contingency fees. Pursuant
to the proposed s.47C(8) of the Competition Act 1998, “[a] damages-based
agreement is unenforceable if it relates to opt-out collective proceedings.”25 The
Government was clearly concerned with lawyers’ contingency fees, perceiving
that they could “unduly distort the incentives to bring cases”, and:
“[c]reate an incentive for lawyers to focus only on the largest cases, neglecting
smaller, meritorious claims, as the amount received by the legal firm is directly
proportional to the number of claimants, rather than the amount of work
done.”26
It was the incentivising for lawyers that the Government seemed particularly keen
to avoid, and this was reiterated in the Government’s Final Response, where it
restated its intention to “prohibit contingency fees, though continuing to allow
conditional fees”.27
There was, however, no similar bar for Third Party Funders acting on a
contingency basis, in any of the consultation documents which preceded the
promulgation of Sch.8 of the Consumer Rights Bill. Sir Rupert Jackson also
approved this means of funding for collective redress:
“[i]f the claimants are advised that the proposed funding agreement is
appropriate, and if the funders subscribe to the voluntary Code … this would
be a proper means of funding many collective actions”.28
Instructively for English law-makers, in Ontario and in Australia, where opt-out
class actions have been implemented for over 20 years (and in similar costs-shifting
landscapes to England’s), the interaction between class actions and Third Party
Funding remains contentious. In the Ontario securities class action in Bayens v
Kinross Gold Corp, Perell J. observed that:
“courts have been left to develop the approval criteria for third party funding
largely on their own initiative, relying on common sense, knowledge of the
problems of access to justice and of the administration of justice, and academic
commentary”.29
24
Jackson Final Report, Ch.11, at paras 3.2–3.4 (emphasis added).
25
In addition, the Consumer Rights Bill 2013–14 proposes to amend the Courts and Legal Services Act 1990 to
render a damages-based agreement (DBA) for opt-out collective actions unenforceable, by inserting a new s.58AA(11)
to that effect.
26
Private Actions in Competition Law: A Consultation on Options for Reform (April 2012), especially at p.5, Box
6, and at para.A.14.
27
Private Actions in Competition Law: Government Response, particularly the discussion at paras 5.43–5.45, and
5.62–5.63, and the box of recommendations at p.5.
28
Jackson Final Report, Ch.33, at para.4.3, also supported in Sir Rupert Jackson’s Sixth Lecture in the Civil
Litigation Costs Review Implementation Programme (RCJ, November 23, 2011), at para.4.3.
29
[2013] ONSC 4974 at [37]. Even in British Columbia, where costs-shifting does not apply in class proceedings,
a Funder can be very useful in assisting the representative claimant with the payment of disbursements, especially

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April 2015] Third Party Funding and Class Actions Reform 295

Meanwhile, the Australian Productivity Commission has recently conducted an

enquiry as to the inter-relationship between class actions and Third Party Funding,
given concerns about Funders’ capital adequacy, and whether they should be
required to hold an Australian Financial Services Licence.30 There are undoubtedly
important lessons to be learnt from the jurisprudence which has emerged in these
jurisdictions.
It is now appropriate to turn to the three vexed issues which deserve detailed
consideration by the law-makers (whether legislative or judicial), given the
forthcoming implementation of the UK Competition Law Class Action, and
thereafter, its use by victims of competition law infringements, with the likely
assistance of Funders.

III. Legally Establishing the Funder’s Right to Recovery in a

Collective Action
Where engaged to provide financial assistance for an opt-out collective action,
then a Funder who acts for the representative claimant faces a dilemma, when its
fees are calculated on a percentage-of-recovery basis, namely how does it establish
a right to recover a percentage of those damages, as against the representative
claimant and each class member?
After all, if the class has been formed on opt-out principles, then the Funder
has not obtained any explicit permission from absent class members to take a
portion of each class member’s damages. Moreover, even if the representative
claimant is awarded an aggregate assessment of damages (which is permitted under
the Sch.8 regime, expressly in respect of collective proceedings, and impliedly in
respect of collective settlements),31 that representative claimant receives the
aggregate sum on behalf of the entire (and unidentified) class. The representative
cannot just give away a portion of each class member’s damage to a third party,
such as a Funder, without a pre-established legal right to do so.
The vexing problem of recovering fees in a class action, in the absence of any
contractual relationships between the party funding the litigation (whether that be
the representative’s law firm, or a Funder) and the individual class members, has
been well-identified by leading law reform commissions in Canada32 and Australia.33

where a “battle of the experts” is likely: Stanway v Wyeth Canada Inc [2014] BCSC 931 at [11]–[12]. This was the
first occasion upon which Third Party Funding had been considered in a British Columbia class action.
30
Access to Justice Arrangements (Issues Paper, September 2013), at p.37. The final report, released to the
Government on September 5, 2014, and published on December 3, 2014, concludes that, while the Commission
“supports litigation funding, it recognises that consumers need to be adequately protected”, and hence, that “funders
need to be licensed to ensure they hold adequate capital to manage their financial obligations” (Vol.2, Ch.18, “Private
Funding for Litigation”, at p.601). Further discussion of that report lies outside the scope of this article.
31
Respectively: the CAT can award damages in collective proceedings “without undertaking an assessment of the
amount of damages recoverable in respect of the claim of each represented person”: per proposed s.47C(2) of the
Competition Act 1998; and it can approve a proposed collective settlement for an opt-out class “if satisfied that its
terms are just and reasonable”: per proposed s.49A(5). It is envisaged that any such settlement will include terms as
to fees, including a Funder’s success fee.
32
For example, OLRC, Report on Class Actions (1982), at p.671 (“In order to require individual class members
to contribute a portion of their recoveries to the class lawyer, there must be separate agreements with each of them.
Whether this, in fact, can be achieved depends on the nature and size of the class”).
33
For example, ALRC, Grouped Proceedings in the Federal Court (Rep.46, 1988), at para.275 (“As there has
been no statutory solution to the impracticalities of contracting individually with absent class members, contingent
fees are rare in class actions in the United States”).

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It has been the subject of considerable academic attention too.34 Given the focus
of this article on the developing Third Party Funding landscape in England, this
section will concentrate upon the establishment by a Funder of a legal entitlement
to remuneration under the forthcoming UK Competition Law Class Action.
There are four potential legal avenues by which a Funder can claim a percentage
of both the representative claimant’s, and each class member’s, damages—via an
equitable doctrine, via a statutory right, via the court’s general supervisory power,
or via a contractual arrangement. Each of these will be considered in turn, to see
whether each offers any preferred solution for England’s law-makers, in addressing
the conundrum.

1. The equitable or restitutionary route

Under the American “common fund” doctrine, where there is “the creation,
preservation or increase of a fund in which others have an interest” (i.e. the
unidentified class members), then the successful lawyers who acted for the
representative claimant and created that fund are entitled to be reimbursed their
legal fees from the fund. That means that the burden which the representative
claimant would have borne for those lawyers’ fees from their damages is effectively
spread across the entire class, and without the express consent being obtained from
those class members.35
Under this doctrine, the class members are truly to be viewed as beneficiary
third parties, where “no contractual relationship exists between the original attorney
and those third parties”, as noted by the Ninth Circuit US Court of Appeals.36 In
essence, the doctrine applies where there is no contractual or statutory basis to
award lawyers their fees in a class action.37
It has been judicially authorised on various bases: as being an exercise of the
court’s “equitable powers”,38 or based on “the historic equity jurisdiction of the
federal courts”,39 or as “rooted in concepts of quasi-contract and restitution”.40 Its
foundation was described by the US Supreme Court in trustee/beneficiary terms
in Alyeska Pipeline Service Co v Wilderness Society, whereby the doctrine:
“permits the trustee of a fund or property, or a party preserving or recovering
a fund for the benefit of others in addition to himself, to recover his costs,
including his attorney’s fees, from the fund or property itself or directly from
the other parties enjoying the benefit.”41

34
See e.g. J. Kalajdzic, P. Cashman, A. Longmoore, “Justice for Profit: A Comparative Analysis of Australian,
Canadian and US Third Party Litigation Funding” (2013) 61 Am. J. Comp. L. 93; V. Morabito, An Empirical Study
of Australia’s Class Action Regimes: Second Report (Litigation Funders, etc.) (September 2010); Mulheron, Costs
and Funding of Collective Actions: Realities and Possibilities (Research Paper for the European Consumers’ Association
(BEUC), February 2011), at pp.70–75.
35
Further discussed by the author in: The Class Action in Common Law Legal Systems: A Comparative Perspective
(Oxford: Hart Publishing, 2004), at pp.439–442, from which some of this discussion is derived.
36
Vincent v Hughes Air West Inc 557 F.2d 759, at 770 (9th Cir. 1977). See also Lindy Bros Builders Inc of
Philadelphia v American Radiator & Standard Sanitary Corp 487 F.2d 161, at 165 (3d Cir. 1973).
37
Rodriguez v Disner 688 F.3d 645, at 653 (Cal., 2012).
38
Wininger v SI Management LP 301 F.3d 1115 at 1120 (9th Cir. 2002).
39
Sprague v Ticonic National Bank 307 U.S. 161 at 164 (1939).
40
Vincent v Hughes Air West Inc 557 F.2d 759 at 770 (9th Cir. 1977).
41
421 U.S. 240 at 257 (1975).

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Alternatively, in Re Zyprexa Prods Liability Litig, the New York Court of

Appeals reiterated that the doctrine was developed in restitution, to overcome the
“free-rider” problem, i.e. that:
“class members who do not hire counsel nonetheless benefit from any
recovery. The doctrine thus prevents the unjust enrichment of these class
members at the expense of class counsel by compensating counsel in
proportion to the benefit they have obtained for the entire class, rather than
just the named class representatives with whom they contracted.”42
In Boeing Co v Van Gemert, the Supreme Court further remarked that:
“[t]he doctrine rests on the perception that persons who obtain the benefit of
a lawsuit, without contributing to its cost, are unjustly enriched at the
successful litigant’s expense”,
going on to say that a court can use the doctrine to:
“prevent this inequity by assessing attorney’s fees against the entire fund,
thus spreading the fees proportionately among those benefited by the suit”.43
North American academic commentary has also emphasised that the doctrine:
“is grounded in the principles of quantum meruit and unjust enrichment [in
the sense that] the doctrine prevents unjust enrichment of absent members of
the class at the expense of the attorneys”.44
Hence, the legal basis for the doctrine appears to be multifariously-described
in American jurisprudence, albeit that it also has some significant caveats. For
example, the doctrine can operate only where there is a “discernible pot of money”
secured for the claimants45; and may not operate if the class lawyers fail to protect
adequately the interests of the absent class members.46
However, there has been no “common fund” doctrine recognised in English
law which would permit a Funder to recover its success fee from the aggregate
damages either awarded or settled in favour of the representative claimant. There
was no such doctrine explicitly recognised in Australian or Canadian jurisprudence
either, when their class actions reforms were implemented.
Still, in interesting recent developments in Australia’s class actions
jurisprudence, a common fund basis for recovery of the Funder’s fee was approved
in the bank fees class action of Farey v National Australia Bank Ltd47 (via a consent
order), in that group members in that action are required to pay the Funder their
share of the Funder’s costs and expenses “as if each Registered Group Member

42
594 F.3d 113, at 129 (NYCA, 2010) (citations omitted).
43
444 U.S. 472 at 478 (1980), noting that the doctrine is derived from 19th century cases: Cent RR & Banking Co
v Pettus 113 U.S. 116 (1885) and Trustees v Greenough 105 U.S. 527 (1882).
44
A. Conte and H. Newberg, Newberg on Class Actions, 4th edn (St Paul, Minnesota: Thomson West, 2002), at
§14.6. See also the detailed discussion by the Ontario LRC, Report on Class Actions (1982), at pp.664–672: Court
Awarded Attorney Fees, Report of the Third Circuit Task Force, 108 F.R.D. 237 (1985); R. Klonoff, Class Actions
and Other Multi-Party Litigation, 2nd edn (St Paul, Minnesota: Thomson West, 2004), at pp.231–234.
45
In Re Volkswagen and Audi Warranty Extension Litig 692 F.3d 4 at 16 (2012).
46
Rodriguez v Disner 688 F.3d 645 at 653 (2012).
47
[2014] FCA 1242 (Jacobsen J., November 18, 2014), at cl.22 of the order. The author is grateful to Mr John
Walker, Executive Director of Bentham IMF Ltd, for drawing this judgment to her attention, and for helpful discussions
on this issue.

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had entered into a funding agreement with the Funder containing those terms”,
plus 25 per cent of the judgment or settlement sum obtained in the action. Moreover,
the group notice published in the Allco Finance Group Ltd class action also contains
a common fund-type approach to recovery of the Funder’s costs and fees.48 The
issue has particular importance in Australia, given that a recent empirical report
demonstrated that 14.2 per cent of that jurisdiction’s federal class actions had been
conducted with the financial support of Third Party Funders.49 Australian media
commentators50 have acknowledged that this recent ushering in of a common fund
approach may have ramifications, including prompting Australian courts to
scrutinise the particular Funder more closely; or hastening legislative intervention
to prevent unmeritorious claims being filed, especially if the development were
to lead to larger recovery for Funders and greater exposure of defendants to large
damages claims via opt-out actions where the group members were not limited to
those with whom they had entered into fee agreements. The issue demonstrates
how, even 25 years after a class action was introduced into the Australian legal
landscape, creative solutions to funding conundrums are being posed, and contested,
in equal measure. English policy-makers and legislators have sought to circumvent
that type of litigant and judicial creativity, via a statutory solution discussed shortly.

2. Express statutory authorisation

i) The Australian position

The Australian class action regime does not give a Third Party Funder an express
statutory right to claim its share of the proceeds from the damages which the
representative claimant achieved on behalf of the class members either. The most
that the legislation provides is that, where an award of damages is made in a class
action, the solicitor has a right to recover certain costs from those damages, akin
to a first charge. So, by s.33ZJ(2) of the Federal Court of Australia Act 1976:
“If, on an application under this section [by the class representative], the court
is satisfied that the costs reasonably incurred in relation to the representative
proceeding by the person making the application are likely to exceed the costs
recoverable by the person from the respondent, the court may order that an
amount equal to the whole or a part of the excess be paid to that person out
of the damages awarded.”
Hence, this provision allows for the difference between what the losing defendant
is ordered to pay to the successful representative claimant, and what the
representative claimant actually incurred by way of costs, to be paid out of the
damages recovered on behalf of class members. It enables a successful
representative claimant to be fully reimbursed for the costs incurred in conducting
the class action. Its effect is that the “chunk” of non-recoverable costs will constitute
a first charge on the compensation recovered in the claim.
48
Published in The Australian, June 25, 2014, whereby the Funder’s success fee will be within the range of
22.5%–35%, depending upon the number of shares held by the group member.
49
See an update of the influential and ground breaking empirical study undertaken by Prof Vince Morabito, Class
Actions Facts and Figures: Five Years Later (November 2014), at pp.3 and 8–9.
50
M. Papadakis, “A-G’s advisory panel put on hold”, Australian Financial Review, August 28, 2014; and “Lucrative
class actions look more attractive to litigators”, Australian Financial Review, September 26, 2014.

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April 2015] Third Party Funding and Class Actions Reform 299

Whilst the provision provides an important costs protection for the representative
in a class action,51 the provision applies only if the representative claimant recovers
an award of damages, which precludes recovery of monies by way of settlement.52
This is one of the several measures which prima facie reduces the utility of the
provision.53
However, s.33ZJ(2) clearly does not assist the right of a Funder to recover
anything from an aggregate damages award, for two reasons. First, it is difficult
to perceive of how the success fee charged by the Funder could be “costs” incurred
in relation to the class action, and hence that fee falls outside the scope of the
provision.54 Secondly, even if the provision did apply to a Funder’s success fee, it
would cover only the difference between costs that the winning representative
claimant could recover from a losing defendant and what that winning representative
claimant must actually pay the Funder. That sum would likely be considerably
lower than the Funder’s success fee negotiated under the LFA.
Given the lack of utility of s.33ZJ(2), the Australian landscape has been
hallmarked by Third Party Funders entering into individual funding agreements
with class members, so as to ensure a percentage recovery from each class member’s
recovery as a contractual entitlement—and thereby creating the problem of “tied
classes”—discussed shortly. First, however, it is worth a close look at the Canadian
statutory provisions which also create a first charge.

ii) The Canadian position

As with the Australian legislation, none of the provincial Canadian regimes
expressly deals with the right of Funders to recover their success fee from an
aggregate award of damages. However, their regimes do contain a “first charge”
provision for the solicitor who acts for the representative claimant. Ontario’s Class
Proceedings Act 1992 s.32(3) is typical.55 It provides that, in respect of an agreement
respecting fees and disbursements between a solicitor and a representative party:
“[a]mounts owing under an enforceable agreement are a first charge on any
settlement funds or monetary award.”
The provision has been judicially described as effectively creating a solicitor’s
lien.56 It has proven effective, in permitting the amounts owing under a settlement
agreement and which are owing to the class lawyers to be retained on trust for
them, with the remainder of the funds available for distribution to the class
members.57 However, clearly the provision does not enable a Funder to apply that
first charge in respect of its success fee, because s.32(1) specifies that the section

51
McMullin v ICI Aust Operations Pty Ltd November 27, 1997 FCA at 4.
52
King v AG Aust Holdings Ltd (formerly GIO Aust Holdings Ltd) (2002) 121 FCR 480 at [53].
53
For academic commentary on the effect, virtues and problems of s.33ZJ(2), see e.g. V. Morabito, “Federal Class
Actions, Contingency Fees and the Rules Governing Litigation Costs” (1995) 21 Mon. L.R. 231 at 235–39; R.
Mulheron, The Class Action in Common Law Legal Systems (Oxford: Hart Publishing, 2004) at pp.461–464; D. Grave
and K. Adams, Class Actions in Australia (Sydney: Law Book Company, 2005), at para.15.310; P. Cashman, Class
action Law and Practice (Sydney: Federation Press, 2007), at pp.431–444.
54
The author is grateful for various beneficial discussions with Professor Peter Cashman on this point, during the
course of her study, Costs and Funding of Collective Actions: Realities and Possibilities (2011), at pp.72–73.
55
See also British Columbia’s Class Proceedings Act R.S.B.C. 1996 s.38(6); Saskatchewan’s Class Actions Act
S.S. 2001 s.41(4); Nova Scotia’s Class Proceedings Act S.N.S. 2007 s.41(4); and New Brunswick’s Class Proceedings
Act R.S.N.B. 2011 s.40(4).
56
Hislop v Canada (AG) [2009] ONCA 354; (2009) 95 OR (3d) 81 at [32].
57
For example, Class Proceedings of RN Parton Ltd (Fees of Class Counsel) [2006] BCSC 1621 at [19].

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applies only to agreements between solicitor and the representative claimant.

Funders are quite outside its ambit.

3. The court’s general supervisory power to do justice

Under both Australian and Canadian regimes, there is a general power conferred
upon the courts to make appropriate orders to ensure that class actions litigation
is conducted fairly and expeditiously. However, the extent to which those provisions
have assisted a Funder, who is seeking to establish an entitlement to claim its
success fee against an aggregate sum of damages or a settlement sum which is
awarded to the class members, has differed markedly.

i) The Australian position

There is a general power vested in the courts under the Australian class actions
legislation by s.33ZF(1) of the Federal Court of Australia Act 1976, as follows:
“In any proceeding (including an appeal) conducted under this Part, the Court
may, of its own motion or on application by a party or a group member, make
any order the Court thinks appropriate or necessary to ensure that justice is
done in the proceeding.”
Recently, this provision has been judicially noted to “give to the Court the widest
possible power to do whatever is appropriate or necessary in the interests of justice
in the conduct of a group proceeding” (in Matthews v SPI Electricity Pty Ltd
(No.9)58).
Whether this provision could, or should, provide any basis for recovery of a
Funder’s success fee is not entirely clear. In Pharm-a-Care Laboratories Pty Ltd
v Commonwealth of Australia (No.6),59 the Federal Court was asked to approve a
settlement agreement between a defendant and 161 class members, where an
amount payable to a Funder was expressed as a percentage of the total settlement
sum. The court observed that s.33ZF may confer a power on the court to grant
approval for such a settlement agreement, but to make that order “subject to a
condition limiting the amount payable to the litigation funder”.60 This suggests
that the provision may be of some utility for a Funder who is seeking the recovery
of its success fee prior to any distribution of a settlement fund. However, so far
as the author’s searches can ascertain, no court has yet considered whether this
provision would enable a Funder to apply for an order that its success fee constituted
a first charge on an aggregate damages sum awarded in favour of a representative
claimant.

ii) The Canadian position

Section 12 of Ontario’s Class Proceedings Act 1992 gives the court a wide power
in managing class actions:

58
[2013] VSC 671 at [67], referring to the Victorian provision which is in the same terms as the federal provision,
and citing, e.g. Johnson Tiles Pty Ltd v Esso Aust Pty Ltd (1999) 94 FCR 167 at 175–176.
59
[2011] FCA 277.
60
Pharm-a-Care Laboratories [2011] FCA 277 at [42]. Such an order was not necessary in that case, as all but
three class members had expressed no objection to the amount being paid to the Funder: see at [37].

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“The court, on the motion of a party or class member, may make an order it
considers appropriate respecting the conduct of a class proceeding to ensure
its fair and expeditious determination and, for the purpose, may impose such
terms on the parties as it considers appropriate.”
This provision has turned out to be a successful route by which a Funder’s success
fee was authorised to be paid by the representative claimant, pursuant to the 2011
judgment of Dugal v Manulife Financial Corp.61 The representative claimant had
asked the court to approve the LFA, prior to the class action being certified. A
Funder entered an LFA with that representative claimant, entitling the Funder to
a 7 per cent share of the proceeds of any recovery in the class action. Strathy J.
referred to s.12, and remarked that:
“I am being asked to approve an agreement made between the representative
plaintiff and [the Funder]. That agreement has implications for the defendants,
for proposed class counsel and for potential class members. It is an agreement
that could affect the integrity of the litigation process and the due
administration of justice. I am satisfied that I have jurisdiction to approve the
agreement as part of the court’s inherent jurisdiction to control its process.”62
Thus, he added, when exercising judicial supervision over the class proceeding:
“I am entitled to put myself in the shoes of prospective class members and ask
whether the proposed [LFA] is fair and reasonable.”63 The case verified that an
Ontario court is statutorily authorised to bind an absent class member to give up
a portion of damages to a Funder, where the court considers that to be a fair and
reasonable arrangement, given the access to justice which Third Party Funding
provides to those class members who, otherwise, could be left without any feasible
remedy at all.
Of this decision, it has been academically remarked that its endorsement of an
LFA under s.12:
“obviates the need to contract with each individual class member, as has been
the practice in Australia. The case management judge acts as a proxy for the
entire class, and once the agreement is approved, it binds both the
representative plaintiff who has contracted with the funder, and the putative
class members who are strangers to that contract.”64
In Dugal, the class lawyers did contact a representative cross-section of class
members to ascertain that they consented to the arrangement (which may now be
viewed an essential pre-requisite for the granting of that judicial approval),65 but
this did not take the form of entry into separate agreements between Funder and

61
[2011] ONSC 1785; (2011) 105 O.R. (3d.) 364. The Funder was Claims Funding Intl Plc, an Irish Funder. The
LFA was approved, subject to the Funder’s providing adequate security for costs, given its lack of assets in Canada.
Those arrangements were subsequently put in place: [2011] ONSC 3147.
62
Dugal (2011) 105 O.R. (3d.) 364 at [16] and [17].
63
Dugal (2011) 105 O.R. (3d.) 364 at [17].
64
Kalajdzic, Cashman, Longmoore, “Justice for Profit: A Comparative Analysis of Australian, Canadian and US
Third Party Litigation Funding” (2013) 61 Am. J. Comp. L. 93 at 115, who discuss Dugal in perceptive detail.
65
That step was not taken in Metzler Investment GMBH v Gildan Activewear Inc (2009) 81 CPC (6th) 384 (SCJ),
but the LFA was not approved for other reasons too (see fn.67 below). See, further: A. Koshal, “Third Party Funding
for Class Actions: Problems and Solutions” (2013) 8 Canadian Class Action Rev. 225 at 229–234; A. Cicero, “The
Fiction of Representative Plaintiff Liability” (2013) 8 Canadian Class Action Rev. 243 at 258–260.

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each class member. Along the same lines as Dugal, Perell J. subsequently observed,
in Fehr v Sun Life Assurance Co of Canada that:
“[p]utative class members are also concerned about the extent of the levy of
the third party funder … [and] it would be for the court to determine whether
the third party funding agreement is fair to the persons who would be bound
by it”.66
It appears that other Ontario cases which have considered whether to approve
LFAs—Metzler Investment GMBH v Gildan Activewear Inc67; Trustees of the
Labourers’ Pension Fund of Central and Eastern Canada v Sino-Forest Corp68;
and Bayens v Kinross Gold Corp69—have not explicitly considered any other basis
for the Funders’ recovery from absent class members. However, the author
understands70 that, in Bayens, the Funder anticipates that funding of the action will
not require that separate LFAs be entered into with each class member so as to
establish a contractual entitlement to take a portion of each class member’s damages
(an option that is more applicable to the Australian landscape, and that is considered
next).
Clearly, it is an emerging, and variant, landscape in Canada too. In its very
recent consideration of an LFA in Stanway v Wyeth Canada Inc71 (in which the
terms of the LFA were approved), the Supreme Court of British Columbia noted
that courts in the provinces of Alberta and Nova Scotia (the legislatures of which
have also eschewed cost-shifting for class actions) “have not adopted the same
critical view of LFA approval. Those courts have approved third party funding
arrangements on an ex parte basis without releasing reasons”.72 In Stanway itself,
the basis for a Funder’s recovery from absent class members was broadly similar
to the Ontario view adopted in Dugal.

4. A contractual entitlement

i) The Australian phenomenon of “tied classes”

The concept of the funding of representative proceedings by a Funder has received
judicial approval at the highest level in Australia,73 as being neither champertous
nor constituting an abuse of process. However, in respect of Australian’s federal
opt-out regime, and in the absence of any “common fund” doctrine (the
aforementioned recent developments notwithstanding), or statutory authorisation

66
[2012] ONSC 2715 at [93]. The Funder was Bridgepoint Global Litigation Services Inc.
67
Metzler Investment GMBH v Gildan Activewear Inc (2009) 81 CPC (6th) 384 (SCJ) (the Funder was Claims
Funding Intl Plc). The LFA was not approved, because until the outcome of the litigation was known, it could not
be determined whether a 7% share of the recovery was fair and reasonable.
68
[2012] ONSC 2937 (the Funder for this claim was also Claims Funding Intl Plc).
69
[2013] ONSC 4974, with the terms of funding noted at [15]. The LFA was entered into by Harbour Fund II (an
investment arm of Harbour Litigation Funding Ltd, one of the founder members of the ALF).
70
The author has had beneficial discussions with the relevant Funder on this point, and notes this discussion herein
with the permission of the Funder.
71
[2013] BCSC 1585, and also [2014] BCSC 93.
72
Stanway [2013] BCSC 1585 at [16], citing A. Lang and S. Hosseini, “The Absent Party” (2013) 41 Advocate’s
Quarterly 1.
73
Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd [2006] HCA 41; (2006) 229 C.L.R. 386 (Gleeson C.J.,
Gummow, Kirby, Hayne and Crennan JJ.; Callinan and Heydon JJ. dissenting on this issue).

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April 2015] Third Party Funding and Class Actions Reform 303

for a first charge, Funders in that jurisdiction have developed a funding model
which entails a “tied class” of individual class members.74
Essentially, where the model applies, class members are obliged to take a
positive act to join the class—by proactively entering into a contract with a Third
Party Funder which is financing the litigation—because, from the outset, the class
definition is worded so as to impose that “tie”.75 A class description, in the case of
a “tied class”, may read something like those persons who, inter alia, “have, as at
the commencement of this proceeding, entered a litigation funding agreement with
[Funder]”. Even though aggregate assessment of damages is permissible under
that federal regime,76 individual funding agreements with class members have been
regarded as being necessary and prudent, to enable a Funder to take its success
fee from each class member’s recovery, in the absence of a statutory authorisation
or common law “common fund” doctrine.
However, the implementation of “tied classes” has the consequence of closing
the class well before any judgment on the common issues or judicially-approved
settlement. It requires putative class members to take some proactive step to be
included within the represented class, prior to any determination (or settlement)
of liability, under what is purportedly an opt-out class actions regime. Hence, the
issue is of great potential interest for any opt-out class action introduced into
English law, and generates controversy precisely because of the question as to
when a class can legitimately be closed under an opt-out regime. This very point
has been litigated in a series of Australian decisions since 2005—with entirely
differing judicial views being reached.

ii) The judicial disagreement surrounding “tied classes”

On the one hand are those Australian judges who considered that any such
conversion to an opt-in class action, by virtue of a “tied class”, was impermissible.
In Dorajay Pty Ltd v Aristocrat Leisure Ltd, Stone J. held that a class action brought
on behalf of a class which was described as the clients of a particular law firm was
an abuse of the court’s process.77 That class was described as those “for whom the
solicitors for the [representative claimant] have instructions to act at any particular
time, who at some time during the [nominated] period … acquired an interest in
shares in Aristocrat and who suffered loss and damage by or resulting from the
conduct of Aristocrat”.78 As a class definition, it contravened the spirit of an opt-out
regime, and “subverted” the policy of the legislation by imposing an opt-in
requirement and by defining the class other than by reference to the cause of action
itself. Stone J. also noted it to be “an extraordinary proposition” that a class action
could be defined by reference to the clients of one law firm: “there is no support
in principle or authority for this proposition and it is repugnant to the policy of the

74
This discussion draws upon, and updates, the author’s analysis of this issue in: “Opting In, Opting Out, and
Closing the Class: Some Dilemmas for England’s Class Action Law-makers” (2011) 50 C.B.L.J. 335 at 359–362;
and her report, Costs and Funding of Collective Actions: Realities and Possibilities (2011), at pp.70–75.
75
Precisely the same issue can arise with ties to law firms, via the client retainer with the law firm which has
conduct of the collective proceedings (as discussed in the previously-mentioned article, and by the sources cited
therein). However, this article will focus upon tied classes with Funders.
76
Pursuant to Pt IVA s.33Z(1)(f).
77
[2005] FCA 1483; (2005) 147 FCR 394 at [111]–[126].
78
Dorajay (2005) 147 FCR 394 at [3].

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Act.”79 That view was endorsed by Hansen J. in Rod Investments (Vic) Pty Ltd v
Clark80 (in respect of the equivalent state class action regime in Victoria),81 and by
Young C.J. in Jameson v Professional Investment Services Pty Ltd (who noted, in
dicta, that “[t]he key focus must be on the overriding purpose of the statute”).82
Furthermore, in Dorajay, Stone J. remarked that:
“Parliament has made a clear choice [in Part IVA], and it is not for the courts
to hold otherwise. Therefore it is necessary to address whether [a tied class]
has the effect of implementing an opt-in procedure or otherwise subverting
the process that the legislature has adopted”,
and that:
“[t]he legislature made a clear choice [to adopt an opt-out regime] that was
consistent with the recommendation of the Australian Law Reform
Commission on this issue. Whatever advantages, real or apparent, may flow
from the ability to identify each member of the class at the outset, a decision
to apply an opt-in procedure can only be made by the legislature”.83
On the other hand, various Australian judges have held the opposite view at
first instance, and concluded that any conversion from opt-out to opt-in, brought
about by tied classes, was entirely lawful. In P Dawson Nominees Pty Ltd v
Multiplex Ltd,84 the class was defined by reference to those who entered into an
LFA with International Litigation Funding Partners Inc. At first instance, Finkelstein
J. doubted the correctness of Stone J.’s decision, and endorsed the position of the
Funder in seeking to exclude “free riders” from the action (whereas Young C.J.,
in Jameson, considered that Finkelstein J. had “overemphasised” the Funder’s
concerns in that regard).85 Finkelstein J. held that:
“a group that excludes free riders cannot be criticised. On the contrary, there
are economically rational reasons to establish such a group. The most obvious
is that it provides each group member with an incentive to agree to
contribute.”86
Also, as a matter of statutory interpretation, it was “not forbidden” under Pt IVA
to require class members to consent to bring an action; and that, even if tying the
class definition to a Funder amounted to “opting in” to the action:
“all that Pt IVA requires … is that a group member can opt out of a group
proceeding. That is what these group members can do … if a group member
decides that he does not want to be bound by any judgment in the action,
there is nothing preventing him from opting out at the appropriate time”.87

79
Dorajay (2005) 147 FCR 394 at [126].
80
[2005] VSC 449.
81
Part 4A of the Supreme Court Act 1986.
82
[2007] NSWSC 1437 at [106].
83
Dorajay Pty Ltd v Aristocrat Leisure Ltd (2005) 147 FCR 394 at [111] and [117].
84
[2007] FCA 1061; (2008) 25 ACLC 1192.
85
[2007] NSWSC 1437 at [107].
86
P Dawson Nominees Pty Ltd v Multiplex Ltd [2007] FCA 1061 at [48].
87
Multiplex [2007] FCA 1061 at [50].

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April 2015] Third Party Funding and Class Actions Reform 305

The issue ultimately required an appellate determination—and it was the second

of these views that prevailed. Less than two weeks after the first instance decision
of Jameson, the Full Federal Court unanimously upheld the decision of Finkelstein
J. in Multiplex, and endorsed “tied classes” formed by reference to those who had
entered into an LFA.88 It held that the wording of Pt IVA “expressly permit[ted]
the representative party to commence a proceeding on behalf of less than all of
the potential members of the group”,89 especially in circumstances where Parliament
(when enacting Pt IVA) would not have considered the “phenomenon” of litigation
funding, or whether a class definition could be tied to a class of persons who had
instructed a certain law firm or signed an LFA. Lindgren J. also considered that,
as a matter of statutory interpretation, s.33C(1) used the concluding words, “as
representing some or all of them”, and that these words must have demonstrated
a positive intention “that there was to be no right of complaint merely because
some of the persons falling within [those who shared a common issue of fact or
of law] had been omitted from the group as defined”.90 The appeal in Jameson also
approved tied classes as being lawful under Pt IVA.91
Some Australian academic commentary has been critical of the willingness of
the Multiplex-type view to convert an opt-out regime to an opt-in one.92 However,
that reality is now judicially accepted in Australia. Recently, in 2013, the Victorian
Supreme Court concluded, in Matthews v SPI Electricity Pty Ltd,93 that,
notwithstanding the previous division in judicial views, tied classes which are
linked to a Funder, are legally permissible under Australia’s federal class actions
regime (and under the equivalent Victorian class actions regime), per the appellate
decision in Multiplex. Given that the class representative could commence a class
action on behalf of fewer than all of the potential class members (“as representing
some or all of them”), that was neither an abuse of process nor inconsistent with
the opt-out model. Forrest J. observed that, since Multiplex, “a number of closed
class proceedings have been issued in this state, primarily in shareholder class
actions”, and that “[t]he end result is that it is now clear that class actions may be
issued for a limited class”.94
However, in this author’s view, the “tied class” scenario should not be
judicially-permitted under England’s Competition Law Class Action. Three reasons
underpin that view. First, tied classes are, as Stone J. stated above, subversive to
the opt-out ethos. In fact, that subversive effect would be even more apparent under
the English model, if the CAT permitted the collective action to proceed on an
opt-out basis (given that the Competition Law Class Action model is a judicial
choice of opt-in or opt-out),95 but the class was nevertheless converted to opt-in
by virtue of funding arrangements entered into by the protagonists of the action.

88
[2007] FCAFC 200; (2007) 164 FCR 275 (Jacobson J., with Lindgren and French JJ. concurring).
89
[2007] FCAFC 200 at [111].
90
[2007] FCAFC 200 at [10].
91
[2009] NSWCA 28 at [108].
92
For example, B. Murphy and C. Cameron, “Access to Justice and the Evolution of Class Action Litigation in
Australia” (2006) 30 M.U.L.R. 399; M. Legg, “Funding a Class Action Through Limiting the Group” (2010) 33 Aust.
Bar Rev. 17; V. Morabito, “Class Actions Instituted Only for the Benefit of the Clients of the Class Representative’s
Solicitors” (2007) 29 Syd. L.R. 5.
93
[2013] VSC 17 at [40]–[46].
94
Matthews v SPI Electricity Pty Ltd [2013] VSC 17 at [45] (citing Clarke v Great Southern Finance Pty Ltd (in
liq) [2012] VSC 295) and at [46]. Most recently, see: Rodriguez & Sons Pty Ltd v Queensland Bulk Water Supply
Authority t/as Seqwater [2014] NSWSC 1565 at [23].
95
See the proposed s.47B(7)(c).

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Any attempt by the parties to contravene that deliberate judicial election would be
highly contentious at best, and unlawful at worst.
Secondly, tied classes do not necessarily preclude the prospect of the so-called
“free rider” problem. Free-riders have been judicially described as those “who
obtain the benefit of a lawsuit without contributing to its cost [and] are unjustly
enriched at the successful litigant’s expense”,96 or “persons who make no direct
or indirect contribution toward the costs of the action”.97 In Dawson Nominees Pty
Ltd v Multiplex Ltd, Finkelstein J. opined that a considerable benefit of the tied
class was that it excluded free riders, by allowing the Funder to require each class
member to accept the terms of its funding agreement, and that any class formation
that excluded free riders “cannot be criticised”; indeed:
“[e]ven respondents may benefit from the prospect of a smaller payout. … it
is odd to hear a complaint from a defendant that there are too few plaintiffs.”98
Australian academic commentary has since supported the notion that tied classes
represent a viable response to the “free rider problem”.99 A detailed empirical
survey of the Australian class actions landscape by leading Australian class actions
academic Professor Vince Morabito also confirmed that Funders prefer to fund
tied classes in that jurisdiction.100
However, the reality is that class members who are outside that tied class may
nevertheless indirectly benefit from a successful outcome achieved by the class
action, without entering any funding agreement at all. In that respect, those falling
outside the tied class are similarly-positioned to those class members who opt out
of a class action. As the Ontario Law Reform Commission observed, even where
a person is not bound res judicata by the outcome of a class action from which
they have validly opted out, it would be naive to think that that person would not
be affected, in practice, by a class actions judgment achieved for the rest of the
class: “[h]is interest is not ‘individual’ in the sense that … he can effect a result
different from that which would ensue had he remained a class member”.101
Similarly, Morabito has remarked that opt-out class members who choose to
exclude themselves from the original class action can benefit greatly:
“the uncertainty concerning precisely how much reliance the court will place
on the conclusions arrived at by the court presiding over the class suit, together
with the costs that the defendant has already incurred in defending the class
action (including payment of damages when the defendant is on the losing
side), may induce, or force, the defendant to settle. Thus, opt-out plaintiffs
achieve a monetary benefit, largely as a result of the efforts of those members
who have not abandoned the class suit.”102
These perceptive comments apply with equal force to the position of persons who
choose not to join a tied class, with all the risks, costs and uncertainties which such

96
Courtney v Medtel Pty Ltd (2002) 122 FCR 168; McMullin v ICI Aust Pty Ltd November 27, 1997 FCA.
97
P Dawson Nominees Pty Ltd v Multiplex Ltd [2007] FCA 1061 at [48].
98
Multiplex [2007] FCA 1061 at [48].
99
For example, S. Stuart Clark et al., “Australia” in P. Karslgodt (ed.), World Class Actions (Oxford: Oxford
University Press, 2012), at pp.404–405.
100
An Empirical Study of Australia’s Class Action Regimes: Second Report (September 2010), at p.43.
101
OLRC, Report on Class Actions (1982), at p.486.
102
V. Morabito, “Class Actions: The Right to Opt-Out” (1994) 19 M.U.L.R. 615 at 639.

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April 2015] Third Party Funding and Class Actions Reform 307

litigation entails, but who would otherwise fall within the relevant class definition.
There is also the unwelcome prospect that some of those individuals who did not
join the tied class in the original class action could launch competing class actions
(possibly upon more favourable funding arrangements than the original tied class
enjoyed). As Morabito’s empirical study aptly demonstrated, competing actions
instituted by different tied classes have occurred in Australia.103 With that in mind,
defendants may not complain of too few class members (as Finkelstein J.
mentioned, above), but rather, of too many class actions where tied classes are
permitted. Interestingly, the Victorian Law Reform Commission suggested, in
2010, that the Australian legislature should consider a strategy which did not
depend upon Funders entering into separate contractual arrangements with class
members at the commencement of the class action.104
The third basis for rejecting tied classes is that, in this author’s view,105 their
formation is just as contrary to the opt-out model as any other attempt to “close
the class” prior to the determination (or settlement) of liability. The early-practised
techniques of: “proof of claim” procedures immediately following the opt-out
notice; “proof of injury” requiring the submission of evidence before being included
in the class; and trials of individual liability issues prior to a common issues trial,
have all been rightly rejected in North American jurisdictions as standing opt-out
class actions “on their head”,106 and as being “fundamentally inconsistent” with
the language and policy of an opt-out class.107 Tied classes fall into precisely the
same category.

5. The UK response to the conundrum: how should a Funder be

recompensed?
Given that domestic jurisprudence does not endorse the notion of a “common
fund” doctrine, and given the unattractiveness of the tied class scenario which has
so divided Australian judicial opinion, the option was open to the drafters of Sch.8
of the Consumer Rights Bill 2013–14 to permit a statutory authorisation to entitle
a Funder to recover its success fee as a charge upon an aggregate damages award
or settlement sum.
However, the notion of asserting the Funder’s success fee as a first charge over
the relevant fund obtained for the class has, arguably, certain legal and political
difficulties, for three reasons. First, English policy-makers have always been keen
to avoid the spectre of “US-style class actions”,108 and any perception of a “litigation
culture” (a view strongly repeated in the Government’s consultation on collective
103
An Empirical Study of Australia’s Class Action Regimes: Second Report (2010), Ch.2 (although the conclusion
is drawn, at p.28, that the judicial permission of tied classes “has not increased the frequency with which this problem
[of competing class actions] has been dealt with by the Federal Court”, given that the phenomenon had already
manifested prior to that).
104
Civil Justice Review (chaired by Professor Peter Cashman) (Rep.14, 2008), at p.616.
105
Argued, by reference to relevant case law, in R. Mulheron, “Opting In, Opting Out, and Closing the Class:
Some Dilemmas for England’s Class Action Lawmakers” (2010) 50 C.B.L.J. 376 at 399–407.
106
To adopt the phrase of Strathy J. in Ramdath v George Brown College of Applied Arts and Technology [2010]
ONSC 2019 at [150], who was dealing with the individual liability trials point.
107
As described by the OLRC, Report on Class Actions, at pp. 474–78, criticising early US actions which permitted
“proof of claim” procedures.
108
See, e.g. Lord Steyn’s extra-judicial comment in “Foreword” in C. Hodges, Multi-Party Actions (Oxford: Oxford
University Press, 2001), at p.iii; Law Society of England and Wales, Group Actions Made Easier (1995), at para.5.2.7;
and the other sources of concern noted, e.g., in R. Mulheron, “Some Difficulties with Group Litigation Orders —
and Why a Class Action is Superior” (2005) 24 C.J.Q. 40 at 58–65.

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redress reform which immediately preceded the Consumer Rights Bill).109 Hence,
precluding a first charge would serve to avoid any public perception (however
ill-founded) that a class action is being created by “entrepreneurial” stakeholders
principally for their own benefit.110
Secondly, the compensatory principle has underpinned the policy of class action
reform in England as a “fundamental premise”, in that the primary beneficiaries
of such actions are those aggrieved parties for whose benefit the action was
brought.111 That principle has also been emphasised by the express prohibition
upon exemplary damages under the Competition Law Class Action regime.112
Hence, it would be entirely consistent with this if the class members had the first
charge upon any damages award or settlement fund garnered for that class, before
any right to recovery by a Funder were to attach to the undistributed residue of
the fund.
The third concern is one of practicality—if a Funder’s success fee is to have
primacy over the fund, then why not, too, the lawyer’s success fee, the ATE
insurer’s premium,113 and the irrecoverable part of the representative claimant’s
costs? These arguments, in combination, militate against the imposition of any
first charge specifically for the Funder’s success fee.
In any event, during the passage of Sch.8 through the House of Commons, the
UK legislature saw fit to include, by way of amendment to the Bill, the following
proposed s.47C(6) into the Competition Act 1998114:
“… the Tribunal may order that all or part of any damages not claimed by
the represented persons within a specified period is instead to be paid to the
representative in respect of all or part of the costs or expenses incurred by
the representative in connection with the proceedings.”
Hence, where the CAT so ordered, the success fee charged by a Funder, under an
LFA with the representative claimant, would amount to a “cost or expense”, and
hence, constitute a second charge on the damages award—the first charge
comprising the individual claims for damages by the class members. Given the
low-value nature of many of the claims in price-fixing cases, it is foreshadowed
that the “take-up rate” of those class members coming forward to claim their
individual compensation under the Competition Law Class Action (“the Claiming
Class Members”) would fall well short of 100 per cent—experience in other class
actions jurisdictions where aggregate damages assessments have been a feature

109
See BIS, Private Actions in Competition Law: A Consultation on Options for Reform: Government Response
(January 2013), at para.5.62.
110
Notably, the Government also disapproved of the notion that a Funder could commence a Competition Law
Class Action as a representative claimant under proposed s.47B(8) (per BIS’s Government Response, at p.26, and
para.5.32). Discussed in: R. Mulheron, “Poles Apart: Why England Has (Defensibly) Departed From the European
Commission’s Recommendation on Class Actions” (forthcoming, 2015).
111
BIS, Private Actions in Competition Law: A Consultation on Options for Reform: Government Response, at
paras 5.28, 6.18, 6.26.
112
See the proposed s.47C(1).
113
Both CFAs and ATE insurance were expressly endorsed by the Government as being suitable in these cases;
see the Government’s Response, at para.5.62. However, due to changes brought about the Jackson costs reforms
implemented via the Legal Aid, Sentencing and Punishment of Offenders Act 2012, both a CFA success fee and an
ATE premium would be irrecoverable from the defendant/s to a Competition Law Class Action.
114
See H.L. Bill, at p.118. For discussion of s.47C(6) during the passage of the Bill through the House of Lords,
see: Hansard HL Vol. 756, GC585–GC588 (November 3, 2014).

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April 2015] Third Party Funding and Class Actions Reform 309

demonstrates that take-up rates of up to 30 per cent are more common.115 Hence,
the second charge would attach to that unclaimed sum. If there were insufficient
funds left to pay for all costs and expenses, after the Claiming Class Members
came forward to receive their individual entitlements, then the Funder might be
out-of-pocket for some of its success fee (as others might be, such as the class’s
law firm or an ATE insurer), if it could not recover that shortfall from some other
source, such as the representative claimant with whom the Funder had entered the
LFA. However, were the CAT not to have made an order for the payment of the
representative’s costs and expenses incurred in connection with the class action,
then the unclaimed sum, in its entirety, would be paid to the charitable Access to
Justice Foundation (s.47C(5)) or to a prescribed different charity (s.47C(7)).
By contrast, insofar as settlements are concerned, there is no equivalent provision
to s.47C(6). It is anticipated that, where settlements are concerned, the Funder’s
fee (and all other costs and expenses) would be paid separately to the damages,
and that the various fee agreements would be part of the overall settlement terms
which must be approved by the CAT as being “just and reasonable”.116
The new s.47C(6) is very significant, for its operation would preclude the
difficult prospect of having to create tied classes by contractual arrangement, and
would fill the void left by the absence of any common fund doctrine in England
law. However, it must be acknowledged that one of its consequences would be
that, for a case which the class won, it would be inimical to the Funder’s interests117
for all the class members to come forward to claim, for that would dwindle the
unclaimed damages sum to which the Funder’s second charge applies. In response
to that concern, three points should be made.
First, where the CAT made an award of damages in an opt-out collective action,
then it would also have to make orders concerning by when, and how, class
members should claim their entitlement to share in that aggregate award.118 Hence,
given that control of the process of claiming from any aggregate award (including
the procedure for publicising that award) would be vested in the Tribunal itself
(in accordance with the Legislature’s express intentions),119 any potential for a
conflict of interest between Funder and class members at that latter stage of the
action would be negligible, and far more theoretical than real.
Secondly, where the class members’ individual entitlements to damages were
sufficiently sizeable to tempt large numbers of Claiming Class Members to come
forward, the risk of insufficient sums remaining, out of which to pay the Funder’s
success fee as a second charge, would increase. However, it should be noted that,
under the proposed regime,120 the CAT must explicitly take into account “the
estimated amount of damages that individual class members may recover”, when
determining whether the action should proceed as an opt-in collective action. If,
indeed, an opt-in approach were specified by the CAT at certification, then a Funder

115
See the comparative discussion in Mulheron, The Class Action in Common Law Legal Systems: A Comparative
Perspective (2004), at pp.431–434, and the sources cited therein; and the data and cases referred to in: Mulheron,
Reform of Collective Redress in England and Wales: A Perspective of Need (Research Paper for the CJC, February
2008), section 4.
116
See proposed s.49A(5).
117
Indeed, inimical to any party which has billed for costs and expenses incurred in relation to the claim, including
the representative’s lawyers or insurer, to whose claim for costs and expenses s.47C(6) may apply.
118
See CAT Draft Rules, rr.20 and 21.
119
See s.15B(2)(h) of the Enterprise Act 2002, inserted by Sch.8.
120
See CAT r.7(3)(b).

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310 Law Quarterly Review [Vol.131

could not recover its success fee as a second charge, given that s.47C(5) and (6)
would expressly limit the second charge arrangement to scenarios where the CAT
makes an award of damages in opt-out collective proceedings. Thus, for opt-in
proceedings, it is very likely that a Funder would enter into separate LFAs with
individual class members under a tied class arrangement, in order to secure a
contractual entitlement to its success fee.
Thirdly, and to reiterate,121 when balancing the conflicting policy viewpoints
of which party should obtain full compensation, the Claiming Class Members, or
the Funder, the Government’s view was clearly in favour of the former. It would
follow, from s.47C(6), that the Claiming Class Members would not forego any of
their damages recovery, to pay for the Funder’s success fee. The Funder could not
take a percentage success fee from each Claiming Class Member’s damages,
because it would not have a contract with any of them; the Funder would be
restricted to claiming its success fee from the unclaimed pot. Indeed, the
compromise to be borne by the Funder under s.47C(6) markedly distinguishes the
English Competition Law Class Action from the US class action, because under
the US “common fund” doctrine described previously, the Claiming Class Members
are liable (whether under equitable or restitutionary bases) for their pro rata share
of the class lawyers’ reasonable fees from their damages sum, and hence, each
Claiming Class Member will obtain less-than-full recovery. Under the English
reforms, however, the Claiming Class Members would be assured of receiving
full recovery, and it would be the Funder (and others, such as lawyers and insurers,
to the extent that their recovery depended on the second charge against the
unclaimed pot) which would bear the risk of less-than-full recovery.
Hence, the compromise which s.47C(6) represents is a tangible demonstration
of the “full compensation” principle that the UK Government has placed at the
forefront of these reforms, and is a feature which distinguishes the Competition
Law Class Action from the “US-style class action” which the Government was so
keen to avoid. It is also likely that, given the anticipated take-up rates, Funders
would ultimately receive due recompense for facilitating access to justice for the
aggrieved victims of anti-competitive practices, by virtue of the second charge
created by that provision.

IV. The impact of the EU’s Recommendation on Collective

Actions
Another potentially significant development, regarding the interaction of Third
Party Funding and the reform of collective redress in the United Kingdom was the
European Commission’s activity on collective redress during 2012–13.
According to the European Parliament resolution, “Towards a Coherent
European Approach to Collective Redress” dated February 2, 2012,122 for any
horizontal instrument which the European Commission might introduce, Third
Party Funding should not be prohibited. Some influential lobby groups were against
this view (e.g., with the European Consumers’ Association stating that the concept

121
See text accompanying fn.113 above.
122
Available at: http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//TEXT+TA+P7-TA-2012-0021+0
+DOC+XML+V0//EN, especially at para.20.

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April 2015] Third Party Funding and Class Actions Reform 311

“raises various fundamental concerns”123). However, in 2013, the EC published its

Recommendation on Collective Actions,124 which favoured the opt-in approach to
class formation,125 and also endorsed the notion that a “private third party”
(including professional Funders)126 could fund a collective action. Although the
EC’s Recommendation is non-binding, it provides that Member States should
implement the principles set out in the Recommendation within two years of its
publication.127 Two particular issues for English law-makers arise from the
Recommendation, concerning governance and notification. Dealing with each in
turn:

1. Governance
Article 32 of the Recommendation provides that:
“The Member States should ensure that … for cases of private third party
funding of compensatory collective redress, it is prohibited to base
remuneration given to … the fund provider on the amount of the settlement
reached or the compensation awarded, unless that funding arrangement is
regulated by a public authority to ensure the interests of the parties.”
The query hence arises as to whether the ALF is a “public authority” within the
meaning of this article. The term is not defined in the Recommendation itself.
Other entities have similarly queried just what that term covers.128
Regarding the English landscape, although the ALF is not in receipt of any
public funding, it clearly was established with the implicit approval of the Ministry
of Justice,129 and its mandate is certainly to “ensure the interests of the parties”, as
art.32 stipulates. However, it is doubtful that the ALF would meet the status of a
“public authority”, in light of some relevant comments of the CAT, in Institute of
Independent Insurance Brokers v DG of Fair Trading,130 when discussing the status
of the General Insurance Standards Council. This body had proposed a set of rules
to establish a “a system of self-regulation governing the selling, advising or
brokering of general insurance carried on from a permanent place of business in
the United Kingdom”.131 As the Tribunal noted:

123
BEUC, Litigation Funding in Relation to the Establishment of a European Mechanism of Collective Redress
(Rep.7, February 2, 2012), “Summary”, and see also section III.
124
See the EC Recommendation of June 11, 2013 “on common principles for injunctive and compensatory collective
redress mechanisms in the Member States concerning violations of rights granted under Union Law” (2013/396),
available at: http://www.rwi.uzh.ch/lehreforschung/alphabetisch/domej/archiv/hs13/ccphs13/ccpunterlagen/05-1
-CommissionRecommendation.pdf.
125
The usual exhortations against US-style class actions are repeated: see, especially, Recital 2 (“Europe must
refrain from introducing a US-style class action system or any system which does not respect European legal
traditions”). The author has critiqued the EC’s recommendations on opt-in/opt-out elsewhere: Mulheron, “Poles
Apart: Why England Has (Defensibly) Departed From the European Commission’s Recommendation on Class
Actions” (forthcoming, 2015).
126
EC Recommendation of 11 June 2013 art.16.
127
EC Recommendation of 11 June 2013 recital 24.
128
European Law Institute, Collective Redress and Competition Damages Claims (2014), at p.56, proposing that
a court which approves an LFA may be a “public authority” for the purposes of art.32.
129
Per the contemporaneous press release in which the Code of Conduct was “commended to Ministers by the
Chair of the CJC, Lord Neuberger, Master of the Rolls”, and available at: https://www.judiciary.gov.uk/wp-content
/uploads/JCO/Documents/CJC/Publications/CJC+papers/CJC+News+Release+-+Code+of+Conduct+for+Litigant
+Funders.pdf.
130
[2001] CAT 4.
131
Institute of Independent Insurance Brokers [2001] CAT 4 at [10].

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312 Law Quarterly Review [Vol.131

“while it is true that the assumption of regulatory powers in respect of general

insurance could properly be an activity of the State [under the Financial
Conduct Authority], the setting up of a framework for promoting professional
standards and consumer protection in general insurance is not an activity
which, by reason of its intrinsic nature, can necessarily only be carried out
by public authorities”.132
Hence, it is possible that the ALF would not be considered a “public authority”
per the EC Recommendation—which raises the query as to whether a more tangible
form of statutory regulation may be sanctioned for English Third Party Funding
in the future (a scenario which, as the author has discussed elsewhere,133 is currently
unwarranted, and lacking in any political appetite).

2. Notification of the LFA: the disparate viewpoints

Article 14 of the EC Recommendation is also controversial, from an English point
of view:
“The claimant party should be required to declare to the court at the outset
of the proceedings the origin of the funds that it is going to use to support the
legal action.”
Reference to “the origins” may arguably mean, at a minimum, that the Funder’s
identity and address be notified to the court, if that Funder has entered an LFA
with the representative claimant.
However, English law-makers have not adopted that bold initiative as yet. The
CAT’s Class Actions Working Party made no provision for the disclosure of an
LFA134; and nothing in the 2014 Code requires that the defendant (or the court) be
informed, at the outset of any litigation, that a Litigant is being assisted by a Funder
either. Given the terms of the EC Recommendation, the question inevitably arises
as to whether a defendant will be adequately protected, if notification of the fact
(if not the terms) of the LFA is not mandated.
There are strong arguments suggesting that a defendant is already afforded
adequate protection in English litigation, both by statute and by the common law,
where a Funder is “standing behind” the Litigant.
For one thing, where a defendant applies for a security for costs order, then the
presence of a Funder will become apparent, if the LFA provides that a Funder will
meet any security for costs order made against the Litigant (it being a requirement
of the 2014 Code135 that the LFA shall state whether, and if so to what extent, the
Funder will provide such security). Further, a non-party security for costs order is
possible against a Funder under the Civil Procedure Rules, where that party:

132
Institute of Independent Insurance Brokers [2001] CAT 4 at [253]–[257].
133
Mulheron, “England’s Unique Approach to the Self-Regulation of Third Party Funding: A Critical Analysis of
Recent Developments” (2014) 73 C.L.J. 570 at 577–580.
134
See the relevant “Draft Tribunal Rules”, available at: http://www.catribunal.org.uk/247-8406/Draft-Tribunal
-Rules-on-Collective-Actions.html.
135
See cl.10.3.

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April 2015] Third Party Funding and Class Actions Reform 313

“has contributed or agreed to contribute to the claimant’s costs in return for

a share of any money or property which the claimant may recover in the
proceedings, and is a person against whom a costs order may be made.”136
Moreover, because the Funder’s success fee will be taken from any monetary
recovery obtained by the Litigant, and not paid for by the defendant, it is not a
scenario in which the defendant will incur liabilities additional to the prospect of
paying damages and adverse costs, should it lose the dispute. Prior to the
implementation of the Jackson reforms in 2013, a defendant was liable to pay both
the solicitor’s success fee under a Conditional Fee Agreement and the cost of the
ATE premium, should the claimant win and, hence, in order to ensure that the
defendant was aware of that potential additional liability, upfront disclosure of the
facts of a CFA and an ATE policy were necessary.137 That scenario does not arise
in respect of Third Party Funding.
To date, English common law does not support the notion of compulsory
disclosure of an LFA, although it has endorsed the disclosure of the identities of
the funding parties, where the opposing party justifiably applies for such an order
(see, e.g. Merchantbridge & Co Ltd v Safron General Partner 1 Ltd,138 and Reeves
v Sprecher139). In Reeves, the court noted that, although there was no power in the
Civil Procedure Rules to mandate disclosure, the court’s inherent jurisdiction
would permit an order for disclosure of the identity and address of the Funder,140
because it was simply “an ancillary order” to make the remedy of a non-party
security for costs order effective—for how, otherwise, was a defendant to know
against whom the remedy should be sought?141 However, the claimant was not
required to disclose the terms of the LFA—and whether the disclosure of the LFA
itself would be necessary at that later point was not a question which the court had
to answer.142 Furthermore, the 2013 Court of Appeal decision in Flatman v
Germany143 supported disclosure of certain funding arrangements where it was
alleged that the claimant’s solicitors had pressed on with the litigation without
ATE insurance, contrary to the claimant’s express instructions, arguably taking a
lead in the litigation and effectively seeking “to control its course”.144 However,
clearly any such scenario would be removed from a properly-conducted LFA,
under which a Funder is required by the 2014 Code145 (and by the terms of the EC
Recommendation146) not to assume control or conduct of the dispute.
Meanwhile, in Thema Intl Fund Plc v HSBC Institutional Trust Services
(Ireland) Ltd,147 the Irish Supreme Court has favoured the English position (per
136
CPR r.25.14(2)(b).
137
CPR r.44.15 (“Providing Information about Funding Arrangements”), inserted by the Civil Procedure (Amendment
No.3) Rules 2000, and supported by the Costs Practice Direction.
138
[2011] EWHC 1524 (Comm); [2012] 2 B.C.L.C. 291.
139
[2007] EWHC 3226 (Ch); [2009] 1 Costs L.R. 1 (Sir Donald Rattee).
140
Reeves [2009] 1 Costs L.R. 1 at [20] and [29]. That information could also be disclosed to the defendant himself,
otherwise “it would give rise to great difficulties between the solicitors and their clients” (at [30]).
141
Reeves [2009] 1 Costs L.R. 1 at [15], citing an analogous observation in: Raiffeisen Zentralbank Osterreich Ag
v Crosseas Shipping Ltd [2003] EWHC 1381 (Comm) at [7].
142
Reeves [2009] 1 Costs L.R. 1 at [25].
143
[2013] EWCA Civ 278; [2013] 1 W.L.R. 2676.
144
Flatman [2013] 1 W.L.R. 2676 at [52].
145
See cl.9.3.
146
See art.16(a).
147
[2011] IEHC 357 at [5.5] and [5.10]. In Ireland, disclosure of the identity of a funder and the terms of the LFA
was held not to be necessary, where the Funder had a pre-existing interest in the subject-matter of the dispute (this
latter was compulsory in Ireland, to avoid champerty).

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314 Law Quarterly Review [Vol.131

Merchantbridge) of requiring disclosure of a professional Funder’s identity and

address, at the very least, because where a Funder:
“who has no direct or indirect connection with the litigation, becomes involved
by ‘buying in’ to the case on the basis of an agreement to fund the action in
return for sharing in the proceeds, then there is a very real sense in which that
person becomes an adversary. They had nothing to do with the case. They
now have a lot to do with the case by virtue of the arrangement entered into.”148
Knowing one’s “true adversary” is entirely justifiable in that scenario, said the
Irish Court.
As a sign of the contentious nature of the issue, recent developments in
Australasia are of interest. In 2011 (almost 20 years after the implementation of
its class action), the Federal Court of Australia introduced a requirement for the
compulsory disclosure of an LFA (with suitable redactions) in any class action
commenced in that court, “at or prior to the initial case management conference”.149
Furthermore, the Supreme Court of New Zealand recently held, in Waterhouse v
Contractors Bonding Ltd,150 that the fact that a claimant was being funded under
a Funder’s LFA, the identity of the Funder, and whether or not that Funder was
subject to the jurisdiction of New Zealand, should be disclosed to the other party
as a matter of course when the litigation is commenced, because there were a
variety of applications to which that information could be relevant,151 viz
applications for a stay on abuse of process grounds, for security for costs, and for
non-party costs awards against the Funder. However, it was not necessary for the
litigant automatically to disclose the contents of its LFA, or the financial standing
and viability of the Funder, to the defendant or to the court, at the outset of the
action. Any legitimate concerns by the defendant could be satisfied by security
for costs. In particular, it was not within the court’s competence or function to
regulate either the financial standing of the Funder in question or its litigation
funding arrangements152 (“[i]f that is considered desirable, it is a matter for
legislation or regulation”153), or the fairness of their bargain.154
The Australian law-makers, and the New Zealand Supreme Court, have each
adopted a more interventionist and robust approach in the defendant’s favour than
the English courts adopted in Reeves or Merchantbridge. Whether the EC’s
Recommendation as to compulsory disclosure of the “origins” of the funding may
eventually come to be mandated in domestic law, by a formal rule change, remains
to be seen.

148
Thema [2011] IEHC 357 at [5.9] (emphasis added).
149
See Practice Note CM 17 art.3.6, “Representative Proceedings Commenced Under Pt IVA of the Federal Court
of Australia Act 1976” (August 2011).
150
[2013] NZSC 89. The author wishes to acknowledge and thank Mr Robert Gapes, Partner of Simpson Grierson,
Auckland, New Zealand, for kindly drawing her attention to this important decision.
151
Waterhouse [2013] NZSC 89 at [68] and [73].
152
Waterhouse [2013] NZSC 89 at [70].
153
Waterhouse [2013] NZSC 89 at [28].
154
Waterhouse [2013] NZSC 89 at [76(f)].

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April 2015] Third Party Funding and Class Actions Reform 315

V. Funders, Adverse Costs, and Collective Actions

1. The preservation of costs-shifting

English litigation operates upon the principle of costs-shifting for contentious
litigation155 (albeit that the court retains a wide discretion to make a different
order156), and this principle has been applied with equal vigour to English collective
actions. Under the opt-in Group Litigation Order,157 costs-shifting applies, such
that group members are liable, severally, for an equal proportion of the “common
costs” incurred in relation to the common issues, unless the court orders otherwise158
(and several appellate decisions have had to untangle the application of
costs-shifting in this context159). Support by English policy-makers for the
application of costs-shifting to opt-out collective actions has been equally as evident
over the years, ostensibly as “a deterrent against speculative or so-called blackmail
litigation”,160 and because “it would normally be unfair if a defendant which wins
a case had to pay its own legal costs”.161 In his Preliminary Report, Sir Rupert
Jackson expressed the “tentative opinion” that dispensing with costs-shifting in
collective actions was “a matter which merits serious consideration in Phase 2”162;
however, by the time of the Final Report, his view had shifted to endorsing the
norm that costs-shifting should be the “default position” (except for qualified one
way costs shifting for personal injury actions163). Given this background, it is
unsurprising that the Competition Law Class Action has implemented
costs-shifting.164
However, the consequence of retaining costs-shifting for an opt-out collective
action regime is the risk of a significant adverse costs award against the
representative claimant, should that party lose certification, or (if the matter
progresses to trial) the common issues of fact or of law. Unless the representative
party is either wealthy or financially backed by an external source which will
indemnify that representative against an adverse costs award, the outlook will be
very poor, and not only for the representative claimant who bears the adverse costs
award, but also for the successful defendant who confronts the distinct possibility
of recovering nothing by way of costs. With that in mind, the Competition Law
Class Action insists, as proposed certification criteria, that the representative
claimant: “will be able to pay the defendant’s recoverable costs if ordered to do

155
By virtue of CPR r.44.2(2)(a).
156
CPR r.44.2(2)(b).
157
The regime is contained in CPR Pt 19.III (CPR rr.19.10–19.15), and was introduced in May 2000.
158
CPR r.46.6(3).
159
For example, Motto v Trafigura Ltd [2011] EWCA Civ 1150; [2012] 1 W.L.R. 657; Afrika v Cape Plc [2001]
EWCA Civ 2017; [2002] 1 W.L.R. 2274; Russell Young & Co v Brown [2007] EWCA Civ 43; [2008] 1 W.L.R. 525.
160
Civil Justice Council, Improving Access to Justice Through Collective Actions: Developing a More Efficient
and Effective Procedure for Collective Actions: Final Report (November 2008), at p.179, when discussing its
recommended generic opt-in or opt-out class action. This viewpoint was subsequently endorsed by the Ministry of
Justice in The Government’s Response to the Civil Justice Council’s Report (July 2009), at paras 49–50.
161
BIS, Private Actions in Competition Law: A Consultation on Options for Reform: Government Response (January
2013), at para.5.59, wherein BIS also stated that, “[t]he Government strongly agrees that the loser-pays rule is an
important safeguard in preventing frivolous or unmeritorious cases being brought”.
162
Jackson Preliminary Report, Ch.38, at pp.362–363. As noted in that Report (at p.363), that tentative view was
discussed between Sir Rupert and this author, and with particular reference to the author’s costs study contained in:
R. Mulheron, “Costs Shifting, Security for Costs, and Class Actions: Lessons from Elsewhere” in D. Dwyer (ed.),
The Civil Procedural Rules Ten Years On (Oxford: Oxford University Press, 2009), Ch.10.
163
Jackson Final Report, at p.334.
164
CAT r.26(1).

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316 Law Quarterly Review [Vol.131

so”; will be able to satisfy any cross-undertaking in damages which the CAT may
impose where an interim injunction is sought; and must give “an estimate of and/or
details of arrangements as to costs, fees and disbursements” if ordered by the CAT
to do so.165 In this regard, the drafters of the Competition Law Class Action have
deliberately and consciously departed from the certification regimes of North
America, by explicitly requiring the representative claimant’s financial wherewithal
to form an additional part of the adequate representative certification criterion. As
one Ontario certification judge put it, where financial adequacy is treated as part
of the broader adequacy criterion, then it represents “a sort of halfway house
towards requiring security for costs”,166 but without that being explicitly required,
then Ontario jurisprudence on financial adequacy has proven to be very inconsistent
over the years since the Ontario class action was introduced.167 The UK legislature
has learnt a lesson from that uncertainty.
A further consequence of retaining costs-shifting for an opt-out collective
actions regime is the prospect of an award of security for costs against the
representative claimant (the capacity to secure such an award from the Funder
itself, as a non-party, has already been mentioned).168 An award of security for
costs under the Competition Law Class Action has been explicitly provided for,
by a prospective amendment to the CAT Rules.169 English law reform opinion has
long favoured the availability of such an award, e.g. on the basis that the
representative claimant is only representative or nominal, whilst acting for class
members who are effectively immune from costs-shifting, and where that party
will likely face a large adverse costs award for prosecuting the claims of the entire
class, should he lose on the common issues.170 By analogy, security for costs has
been applied for against representative parties under the English representative
rule.171 The prospective CAT rule also reflects established practice in other opt-out
class actions jurisdictions, where security for costs awards against the representative
claimant (albeit usually of modest amounts) have occurred.172 It may be predicted,
however, that awards of security for costs against the representative claimant will
be rare under the Competition Law Class Action, given the onerous certification
requirement (in r.6(2)(d)) that the CAT must consider whether the class
representative “will be able to pay the defendant’s recoverable costs if ordered to
do so”. Hence, selecting a “person of straw”, who has no personal or external

165
Respectively, draft CAT rr.6(2)(d), (e) and 6(3)(d).
166
Mortson v Ontario (Municipal Employees Retirement Board) (2004) 4 CPC (6th) 115 (Ont SCJ) at [91] and
[94] (Cullity J.).
167
As analysed in Mulheron, “Costs Shifting, Security for Costs, and Class Actions: Lessons from Elsewhere” in
Dwyer (ed.), The Civil Procedural Rules Ten Years On (2009), at pp.202–214.
168
See text at fn.137 above, and CPR r.25.14(2)(b).
169
See CAT r.45(5)(h).
170
CJC, Improving Access to Justice Through Collective Actions: Developing a More Efficient and Effective
Procedure for Collective Actions: Final Report (2008), at pp.157, 173 and 178, Recommendation No.4, and the
proposed amendment, CPR r.25.13(2)(f), reproduced at p.226.
171
Security for costs applications were awarded under earlier versions of the representative rule, discussed in: J.
Sorabji, “Class Actions: Reinventing the Wheel”, in CJC, Improving Access to Justice, App.M, at p.395, citing: De
Hart v Stevenson (1875) L.R. 1 Q.B.D. 313.
172
See Mulheron, The Class Action in Common Law Legal Systems: A Comparative Perspective (2004), at
pp.368–373; Mulheron, “Costs Shifting, Security for Costs, and Class Actions: Lessons from Elsewhere” in Dwyer
(ed.), The Civil Procedural Rules Ten Years On (2009), at pp.214–225, and the legislative and case law references
cited therein, including App.A, “A sample of security-for-costs orders in class actions litigation in Australia and
Canada”.

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April 2015] Third Party Funding and Class Actions Reform 317

means of financially supporting the action, will be sufficient to preclude certification

outright.
Of course, if costs-shifting was revoked in favour of a no-costs rule, that would
obviate the risk of an unsuccessful representative claimant being subject to an
adverse costs order and a security for costs order, and of a successful defendant
facing no prospect of recovering its costs which were properly incurred in defending
certification or a class action trial. Indeed, there are numerous arguments in favour
of a no-costs rule for opt-out collective actions, as the author’s 2009 study of the
no-costs regimes in British Columbia, Saskatchewan, Newfoundland, and Manitoba
demonstrated.173 They include: that a no-costs rule promotes the objective of gaining
access to the courtroom or settlement table; that there is no evidence that no-costs
rules have opened the floodgates to class actions in those jurisdictions; that funding
from external sources (such as from Third Party Funders) would be more
forthcoming if those sources did not have the fear of being wiped out by an adverse
costs order; that covering the risk of adverse costs may be too expensive for an
ideological claimant such as a consumer organisation; and that any no-costs rule
can contain a safety net (as in British Columbia, for example)174 that, if the class
action is frivolous, then costs can shift. The view formed by this author, as a result
of that costs study undertaken of Canadian costs-shifting and no-costs regimes,
was that there was a strong case for departing from the usual costs-shifting rule
for opt-out class actions. Interestingly, in a recent 2013 series of cases in Ontario
(the so-called “pentalogy” of costs cases),175 Belobaba J. opined that the Ontario
legislature should have followed the recommendation of its Law Reform
Commission and invoked a no-costs regime for class actions,176 and that,
“[h]opefully, [that] mistake will be corrected” during a review of the Ontario
statute.177
However, as noted above, the Competition Law Class Action firmly adheres
to the costs-shifting principle long-favoured by English policy-makers, and hence,
the liability of a Funder itself for adverse costs, should the representative claimant
lose, comes into sharp relief.

2. The Arkin jurisprudence

English law has developed a unique precedent governing the liability of a Funder
for adverse costs, the so-called “Arkin cap”. This jurisprudence, which arose in
the context of unitary litigation, may give rise to some difficult issues when applied
to the foreshadowed Competition Law Class Action.
Briefly to recap the Arkin principle,178 which was developed in the competition
law case of Arkin v Borchard Lines Ltd: it would be:

173
See Mulheron, “Costs Shifting, Security for Costs, and Class Actions: Lessons from Elsewhere” in Dwyer (ed.),
The Civil Procedural Rules Ten Years On (2009), at pp.226–227.
174
Class Proceedings Act, R.S.B.C. 1996 s.37(1) and (2).
175
Rosen v BMO Nesbitt Burns Inc [2013] ONSC 6356; Crisante v DePuy Orthopaedics [2013] ONSC 6351;
Dugal v Manulife Financial [2013] ONSC 6354; Brown v Canada (AG) [2013] ONSC 6887; Sankar v Bell Mobility
Inc [2013] ONSC 6886.
176
OLRC, Report on Class Actions (1982), at p.749.
177
Rosen v BMO Nesbitt Burns Inc [2013] ONSC 6356 at [2].
178
The author has considered the “Arkin cap” jurisprudence elsewhere, re unitary litigation: “England’s Unique
Approach to the Self-Regulation of Third Party Funding: A Critical Analysis of Recent Developments” (2014) 73
C.L.J. 570, section C(2); and “Third Party Funding of Litigation: A Changing Landscape” (2008) 27 C.J.Q. 312 at
328–329 (co-authored with P. Cashman).

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318 Law Quarterly Review [Vol.131

“unjust that a funder, who purchases a stake in the action for a commercial
motive, should be protected from all liability for the costs of the opposing
party if the funded party fails in the action.”179
Hence, under the so-called “Arkin cap”, the Funder’s liability to pay an adverse
costs order should be capped to the extent of the funding which the Funder provided
to the Litigant.180 The Funder was liable for that award of costs against it as a
non-party,181 given that it had a “connection” with the proceedings in question.182
There is no compulsion under the 2014 Code for an LFA contractually to oblige
the Funder to provide a greater contribution to adverse costs than the Arkin cap.
According to cl.10, the LFA must merely state “whether (and if so to what extent)
the Funder, the Funder’s Subsidiary or Associated Entity is liable to the Funded
Party” to pay adverse costs, any ATE premium, security for costs, or other financial
liability.183

3. The relationship between Arkin and collective actions

There are several contentious issues associated with the Arkin cap, arising from
the foreshadowed Competition Law Class Action.
First, in his 2009 report, Sir Rupert Jackson recommended that, in order to
protect a winning defendant, the Arkin cap should be overruled:
“either by rule change or by legislation, [a Funder] should be exposed to
liability for adverse costs in respect of litigation which they fund. The extent
of the Funder’s liability should be a matter for the discretion of the judge in
the individual case [but] should not be limited by the extent of its investment
in the case”.184
Although that recommendation has not yet manifested itself in legislative reform,
intuitively, the prospect of a significant adverse costs order against a representative
claimant, if a defendant were to defend successfully a Competition Law Class
Action, could foreseeably prompt Parliamentary action in that regard.
Meanwhile, there remains a considerable degree of uncertainty as to how widely
the Arkin cap could be applied in collective proceedings, as against a Funder.185
For example, in Arkin itself, the Litigant was an impecunious party who was unable
to pay for expensive experts’ reports, so that the Funder, in providing £1.3 million
by way of contribution to those costs, was clearly acting to promote “access to
justice”. However, subsequent case law suggests that where the Funder is not
facilitating access to justice for an impecunious party, then policy reasons
supporting the cap may not apply.186

179
[2005] EWCA Civ 655; [2005] 1 W.L.R. 3055 at [38] (emphasis added).
180
Arkin [2005] EWCA Civ 655 at [39].
181
Pursuant to the Supreme Court Act 1981 s.51(1) and (3), inserted by Courts and Legal Services Act 1990 s.4.
182
Aiden Shipping Co Ltd v Interbulk Ltd (The Vimeira) (No.2) [1986] A.C. 965; [1986] 2 All E.R. 409 HL. For
recent discussion and application of the Arkin cap to Funders, see: Excalibur Ventures LLC v Texas Keystone Inc
[2014] EWHC 3436 (Comm); [2014] 6 Costs L.O. 975.
183
This provision is in the same terms as cl.8(a) of the 2011 Code.
184
See Jackson Final Report, Ch. 11, at para.4.7.
185
See Mulheron and Cashman, “Third Party Funding of Litigation: A Changing Landscape” (2008) 27 C.J.Q.
312 at 328, and citations therein.
186
Merchantbridge & Co Ltd v Safron General Partner 1 Ltd [2012] 2 B.C.L.C. 291 at [46].

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April 2015] Third Party Funding and Class Actions Reform 319

A further conundrum with the Arkin cap is that, in the context of Competition
Law Class Actions, it bears little resemblance to the realities of that type of
litigation. A cap will expose both defendant and representative claimant horribly,
given the likely costs involved. The question is whether more may be judicially
expected of a Funder than meeting the Arkin cap, in order to avoid any finding of
champerty and maintenance. In the recent Ontario case of Bayens v Kinross Gold
Corp,187 the Funder undertook to cover significant adverse costs and also to provide
security for costs totalling CA $3 million. In upholding the LFA as
non-champertous, Perell J. remarked that whether it is necessary that a Funder
undertake such liabilities, for the LFA to be enforceable and non-champertous,
was still undecided in Canadian class actions jurisprudence.188
As mentioned previously, the 2014 Code does not insist that adverse costs be
covered by a Funder. However, the abovementioned comments by Perell J., and
the Jackson recommendation, suggest that it is open to the CAT to take a stricter
stance than the 2014 Code adopts, under the Competition Law Class Action.

VI. Conclusion
While Sir Rupert Jackson called Third Party Funding a “nascent” and “evolving”
industry,189 and while the number of cases supported by Funders may still be fairly
low, and primarily focused on high-end commercial claims,190 the proposed
implementation of the Competition Law Class Action is likely to focus greater
attention on the legal framework under which Funders operate in the UK.
In that regard, this article has presented four suggestions for the development
of Third Party Funding within that changing landscape. First, comparative
jurisprudence indicates that the Funder’s right to recovery of a success fee cannot
depend upon a hitherto-unrecognised (in England) “common-fund”-type doctrine;
and the creation of “tied classes” by contractual arrangement will compromise the
opt-out ethos, should the CAT select that approach for class formation. Against
that background, the UK Parliament has (correctly, in this author’s view) belatedly
inserted a provision that the success fee may be a statutory charge upon a damages
award. Where ordered, this would take the form of a second charge, which
represents a workable balance between giving effect to the full compensation
principle, and providing access to justice, for the Claiming Class Members.
Secondly, if the EC’s 2013 Recommendation on Collective Redress is given effect
in domestic law, then the ALF’s status as a “public authority” will inevitably arise
for political and/or judicial consideration (albeit that, in this author’s view,
self-regulation of the Third Party Funding industry is manifestly and correctly the
choice of the Government at present). Thirdly, compulsory notification of the LFA
(or, at least, the identity of the Funder) to the court (and to the defendant) is not
currently endorsed by either English common law or by procedural rules, but may

187
[2013] ONSC 4974. Also: Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd [2006] HCA 41 at [149]–[150].
188
[2013] ONSC 4974 at [41].
189
Jackson Final Report, Ch. 11, at para.2.4.
190
Oft-discussed at conferences, e.g., “The Future of Third Party Litigation Funding: Regulatory Challenges and
Assessing the Impact of Civil Justice Reform” (Westminster Legal Policy Form, London, December 12, 2013). See
too: Hodges, Peysner and Nurse, Litigation Funding: Status and Issues (Research Report, January 2012), at pp.62–68;
and Mulheron and Cashman, “Third Party Funding of Litigation: A Changing Landscape” (2008) 27 C.J.Q. 312 at
314–318.

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320 Law Quarterly Review [Vol.131

become mandated, given that the EC has recommended that transparent approach
at the outset of a collective action. Finally, with no imminent prospect of the Arkin
cap being legislatively removed, in spite of that Jackson Report recommendation,
the interaction between the Arkin principle, and an opt-out class action, will
undoubtedly give rise to some difficult legal issues on a case-by-case basis.
More than 30 years ago, the Ontario Law Reform Commission noted that costs
and funding was “the single most important issue” of class actions reform,
determining “whether this procedure will be utilized at all”.191 More recently, Sir
Rupert Jackson commented that, in respect of collective actions and costs/funding,
the “objective … must be (as always) to achieve a proper balance between the
interests of claimants and defendants”.192 With the prospective introduction of the
Competition Law Class Action in the UK, it is foreshadowed that Parliamentary
and/or judicial focus upon the complexities of Third Party Funding canvassed in
this article will become both necessary and inevitable in English jurisprudence.

191
Report on Class Actions, Ch.17, at p.647 (albeit not with any detailed discussion of Third Party Funding).
192
Jackson Preliminary Report, Vol.1, Ch.38, at para.6.6.
Comparative law; Costs; Funding arrangements; Group litigation; Private enforcement; Success fees

(2015) 131 L.Q.R. April © 2015 Thomson Reuters (Professional) UK Limited and Contributors