Clifford Chance

Are you curious about how litigation funding may influence the outcomes of collective action settlements? Recent developments highlight the significant role funders play in the legal landscape of England and Wales.

Background

While litigation funding has long been a feature in claims brought on behalf of group claimants, the growth of opt-out antitrust collective proceedings in the Competition Appeal Tribunal ("CAT") has shone a spotlight on the dynamics of litigation funding.

To recap, litigation funding involves a third-party funder agreeing to cover a party's legal costs (and bearing the risk of the other side's costs in the event they are unsuccessful) in exchange for a return on their investment if the claim is successful. It is also said to increase access to justice by allowing  claims, which would otherwise not be pursued on an individual basis, to be brought. This arrangement is formalised through a litigation funding agreement ("LFA").

Those arrangements have been subject to particular scrutiny in opt-out antitrust collective actions where the Supreme Court, in PACCAR Inc v Road Haulage Association Ltd [2023] UKSC 28, found that certain LFAs (those in which the funder's returns are based on a percentage of the damages awarded) are unenforceable. More recently, as we outline in more detail below, a public dispute between the funder and the class representative in the Merricks v Mastercard collective proceedings has demonstrated the potential conflicts of interest between class representatives and funders when seeking to reach a settlement. The Civil Justice Council ("CJC") is currently reviewing litigation funding, with a final report expected in summer 2025. It remains to be seen whether and, if so, what, broader regulation of the funding industry might be recommended.

Approval of Settlements in Collective Actions

For collective proceedings which have been certified on an opt-out basis, any settlement must be approved by the CAT (see rule 94 of the CAT Rules 2015). Common with class action regimes in other jurisdictions, the rationale is to ensure that there is judicial oversight to ensure that the interests of class members are properly represented in any settlement deal.

Applications for a settlement approval order are made to the CAT jointly by the class representative and the defendant(s) setting out the terms of the settlement, that the applicants believe the terms are 'just and reasonable' (often supported by an expert opinion) and how any sums are to be paid.

The CAT may approve a settlement where it is satisfied that the terms are "just and reasonable" taking into account all relevant circumstances including:

• The amount and terms of settlement and the payment of costs and fees
• The number of people entitled to a share of the settlement
• The likelihood of judgment being obtained significantly in excess of the amount of the settlement
• Any opinion by an independent expert
• How any unclaimed settlement amount is to be dealt with

The CAT does not require a perfect settlement but will look at the "range of reasonable settlements" available.^[1]

Conflicting Interests in Funded Claims

While the interests of funders, class representatives and the class will be aligned in bringing the collective proceeding, there is a real risk that their interests will not be aligned when class representatives seek approval for a settlement. This is particularly the case where a funder's return is based on a multiple of their initial investment and where that multiple increases the further advanced the litigation becomes, while mounting costs decrease the amount available to the class. In that circumstance the class representative may consider that settling at a relatively early stage for a lower sum is in the best interests of the class, whereas the funder may want to continue the litigation in the hope of achieving a higher return on their investment. This issue has recently been highlighted in the Merricks case, where a dispute arose between:

• the representative, Walter Hugh Merricks CBE, supported by his lawyers, and
• their litigation funder, Innsworth Capital.

Following the announcement of an in-principle settlement in December 2024, the firms acting for Innsworth and Merricks each made public statements which highlighted their diverging interests. Innsworth described the settlement as "low and premature" while Mr Merricks' solicitor claimed the funder's objections were  "unfortunate yet predictable," accusing Innsworth of "funder greed".^[2] He further stated, "While most litigation funders respect the boundaries of their involvement, Innsworth has repeatedly attempted to influence Mr Merricks' decisions to pursue litigation that could lead to far lower or no compensation for consumers". It has since been reported that the funder has brought arbitral proceedings against Mr Merricks.^[3]

Those public comments were followed by an application by Innsworth to intervene in the settlement approval hearing. At the hearing on 19 to 21 February 2025, the CAT approved the settlement.

In the 3-day hearing, Innsworth was allowed to make extensive submissions about the alleged weaknesses of the settlement. Innsworth's objections extended to key substantive points in the claim, with the funders questioning in particular whether Mr Merricks had sufficiently litigated a point around causation, as well as the timing of the settlement and whether the parties should have engaged in mediation. Innsworth also instructed external advisors to value the claim and criticised Mr Merricks for not having commissioned his own independent advice ahead of agreeing the settlement. Innsworth alleged that, in addition to failing to give sufficient value to the class, the settlement did not provide the funders with a fair return on investment by reference to the agreed LFA, a factor which they argued the CAT should take into account in exercising its discretion.

While those efforts ultimately proved unsuccessful, with the CAT finding that the settlement was "just and reasonable", the CAT emphasised throughout the hearing its active role in scrutinising the fairness of collective settlements, both in terms of the steps taken by the parties to reach a settlement amount and the amount itself. The extent of Innsworth's involvement as an intervener shows the impact that funders could have in the CAT's exercise of that discretion.

Further, the publicly aired dispute highlights the tension that can arise between a funders' financial interests in a claim, and those of the class representatives/class. In particular, funders may have a higher appetite for risk than class representatives, given that they will usually be funding a portfolio of claims which they can use to offset losses. Funders may also be less sensitive to legal costs and where those costs are high, they risk reducing the amount available for distribution to the class members.

While this settlement dispute is currently front of minds, it is not the first time that the precise role and responsibilities of a funder has been the interrogated by the courts. For example:  

• In Alex Neill v Sony Interactive Entertainment Europe [2023] CAT 73, which included the class representative's application for a collective proceeding order, the CAT examined the level of investment from the funder, their responsibility for adverse costs, and the enforceability of the arrangements given a previous arrangement was invalidated as a damages-based agreement. The CAT concluded that the case could proceed as a collective proceeding notwithstanding these issues.
  
• In Gutmann v First MTR South Western Trains Ltd [2022] EWCA Civ 1077, the Court of Appeal acknowledged the risks arising from funded claims. Green LJ stated, "There is a risk that the system perversely incentivises the incurring or claiming of disproportionately high costs" and that third-party funding, in some circumstances, "risks undermining important policy objectives." The Court of Appeal recognised that these risks are inherent to funded claimants, and that it is the CAT's responsibility  to manage those risks.

Future Considerations and Conclusion

While there has long been concern that funders are in the driving seat of these group claims, the recent developments in the Merricks case show there are limits to their control.

We await the CJC's report in summer 2025 to see how it addresses concerns about the role and impact of litigation funders in collective proceedings, including in relation to settlements. This evolving landscape will undoubtedly shape the future of group litigation and the balance of power in legal proceedings.

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[1] Competition Appeal Tribunal Guide to Proceedings (2015) at [6.124],

[2] https://www.lawyer-monthly.com/2024/12/innsworth-capital-challenges-mastercard-settlement-in-walter-merricks-case/; https://www.legalfutures.co.uk/latest-news/solicitor-blasts-greedy-funder-for-mastercard-settlement-opposition.

[3] Joint application for a collective settlement approval order at [67]: https://mastercardconsumerclaim.co.uk/Content/Documents/Joint%20application%20for%20a%20collective%20settlement%20approval%20order%20.pdf.