High Court Criticises Financial Motives Behind Representative Action – England And Wales

Why should I read this?

The High Court has struck out a representative action relating to more than a million claims for flight delay or cancellation compensation on two grounds. First, the representative claimant ("Ms Smyth") did not share the "same interest" as the class as required under CPR 19.8. Secondly, Ms Smyth's dominant motive for the claim lay in the financial interests of its backers (her employer), and not in the interests of consumers.

The judgment is significant because it explores the boundaries of representative actions under CPR 19.8, potentially influencing how similar claims are handled in the future. Further, the court's examination and critique of the claimant's funding arrangements could also impact how future group claims are financed and managed, especially considering the Civil Justice Council's ongoing review of the third-party litigation funding.

Background

Representative claims

Group litigation or class actions in England and Wales can be brought through various procedural mechanisms, including representative actions in the High Court under CPR 19.8. This rule allows a claim to be pursued by one person (the "representative claimant"), on behalf of others (the "class") if they share the "same interest". Judgment in the claim will be binding on the class without the need for any individual class member involvement.

Where the "same interest" test is satisfied, the court has a discretion whether to allow it to proceed as a representative claim.

The "same interest" test has been the topic of senior judicial authority in recent years. In 2021, the Supreme Court in Lloyd v Google held that the phrase "same interest" should be interpreted purposively in light of the overriding objective and the rationale for the representative procedure. Earlier this year, the Court of Appeal in Commission Recovery Ltd v Marks & Clerk LLP, held that the CPR 19.8 procedure is applicable only to issues genuinely common to the class, meaning that they do not necessitate examining the individual circumstances of claimants. This can lead to a "bifurcated" approach where common issues are addressed at an initial trial and individual issues are determined at a later stage.

The facts

Ms Smyth, acting as a representative claimant, brought a representative action under CPR 19.8 seeking compensation pursuant to EU Regulation 261/2004 (the "Regulation") for passengers whose flights with British Airways and easyJet (the "Defendants") were cancelled or delayed by three hours or more between December 2016 and August 2022. Many airlines (including the Defendants) maintain a portal through which passengers may claim the compensation, free of charge. Alternatively, some passengers choose to pursue small claims through the County Court.

Ms Smyth, after a cancelled flight, chose to pursue a representative action over utilising the portals/small claims procedure. The claim was funded by her employer, Mr John Armour, an Australian residing in Monaco. It was noted that previous activities by Mr Armour had led to intervention by the New Zealand Financial Markets Authority. The court (Master Pester) had previously considered the funding arrangements, allowing Ms Smyth to deduct an aggregate sum equivalent to 24% of any compensation recovered by her on behalf of the represented persons in the action to meet legal and funder fees. This sum was estimated to be in excess of £70 million, against an estimated claim value of £319 million.

The Defendants challenged the constitution of the claim as a representative action and the role of Ms Smyth as the representative claimant on several grounds:

• The "same interest" test was not met as there was no common issue among the proposed class members. Ms Smyth attempted to combine millions of individual passenger claims, each with distinct issues regarding compensation entitlement under the Regulation. She sought to narrow the class until only uncontested claims for compensation remained, which the Defendants argued was an improper use of CPR 19.8, creating a mandatory compensation scheme that Parliament had chosen not to implement
• Conflicts within the class rendered a representative action inappropriate, failing the same interest test
• Proposals for payment raised insuperable problems; and
• Discretionary reasons included:
• • Passengers entitled to compensation under the Regulation already had access to a free, easy-to-use direct claims procedure or the small claims court procedure, by which they could achieve full compensation without deductions. The Regulation intended individual claims, not an automatic compensation scheme;
  • The proposed representative action would impose significant administrative and cost burdens on the Defendants, including data protection issues; and
  • The real motive behind the claim was Mr Armour, who, together with the claimant's legal team stood to recover almost a quarter of the eventual compensation pot. Mr Armour, the "antithesis" of a consumer champion could improperly influence Ms Smyth, his employee.

Ms Smyth countered that:

• There was widespread lack of awareness of rights and transparency by the Defendants. The claim benefited those unaware of their rights or for whom the compensation process was too complex
• The same interest test was met, with no conflict of interest, only divergent interests;
• CPR 19.8 allowed re-amending the class definition as necessary;
• Ms Smyth was a suitable representative with no evidence of inappropriate control by Mr Armour; and
• Ms Smyth's funding arrangements were not disclosable, and deductions had been court-approved.

What did the court decide?

Master Davison, sitting in the High Court, struck the claim out and directed that Ms Smyth may not act as a representative claimant. His reasoning included:

• Lack of "same interest"
• • The test for "same interest" asks whether there is a "common issue" (or more than one), the resolution of which would benefit all represented parties. Ms Smyth's opening and broad class definition: essentially all those passengers who had suffered disrupted flights, was simply a high-level description which presented numerous, widely diverging interests requiring individual determinations – there was no same interest or anything close
  • Refining the class via a multi-step process to leave only indisputable claims would require successive amendments which the court found improper. The represented class should be clear at the outset; and
  • Ms Smyth's proposal was seen as a new remedy "lying somewhere on the margins between a representative action, a mandatory injunction to the airlines to pay undisputed claims, and early (or event pre-action disclosure)". This was found to go "well beyond a flexible, purposive interpretation of CPR 19.8" .
• Lack of transparency: Aside from her cancelled flight and perceived lack of consumer rights awareness, Ms Smyth did not adequately explain her motivation and suitability for assuming the role of representative claimant or the funding position. This troubled Master Davison who considered her dominant motivation was the financial interests of the backer (her employer), and not the interests of the proposed class, who would be subject to a deduction from any compensation awarded at a level the Master considered to be excessive and disproportionate.
• Funding arrangements:
• • At a separate hearing, Master Pester had confidentially approved Ms Smyth's recovery of nearly a quarter of any compensation pot received for funding fees and legal costs. Master Davison found that this had "not been subject to any kind of market testing" and was disproportionate because the work fell mainly on the Defendants and there was no sliding scale based on the amount recovered. He also considered that it would potentially have been better for it to have been dealt with by him in the context of the broader application;
  • The availability of funding from Mr Armour, who could influence Ms Smyth was also questioned, as was her potential future financial benefit from the claim; and
  • As the claim was struck out, the court did not need to consider Ms Smyth's authority to receive compensation on behalf of the represented class and to make deductions from that compensation. However, Master Davison noted that in the Court of Appeal decision in Commission Recovery v Marks & Clerk LLP and anor [2024], Nugee LJ had observed that it is "not immediately obvious how [the class representative] can obtain a money judgment on claims that do not belong to it". Master Davison did not think directing the Defendants to make payments to the represented parties would be appropriate as it would burden the Defendants and put them in a difficult position with their customers. He did not interfere with Master Pester's decision but noted the principle relied on was of uncertain breadth and reach and would be better dealt with in a case where the claim was permitted to proceed as a representative action.

Comment

• The judgment is likely to mean that any future group actions for flight delay or similar statutory compensation provisions will struggle to get off the ground. Applying the Overriding Objective, the court found that this representative action would not promote access to justice when alternative remedies are easily accessible, low-cost and provide definite outcomes. Master Davison concluded that a representative action would impose significant cost burdens on all parties and as constituted, would resolve few, if any disputed claims. The court also recognised that Parliament had chosen not to implement an automated compensation scheme.
• The case serves as a helpful reference for defendants challenging representative claims and the "same interests" test. The court emphasised that while in some circumstances the class of represented persons may fluctuate organically, the represented class should be clearly defined at the outset, with no grounds for successive redefinitions to overcome known defects.
• While the Civil Procedure Rules do not require a representative claimant to be a 'consumer champion' or have prior litigation experience, they must effectively promote and protect the interests of all the members of the represented class. Prospective representative claimants should explain their motivations and ensure that their interests are aligned with the class and that some additional financial gain is not their dominant purpose. The financial motives and power imbalance were so central in this case that even if Ms Smyth had been a known consumer champion, the court will likely have reached the same conclusion.
• Although the Civil Procedure Rules do not mandate disclosure of funding agreements or arrangements, given the concerns of the court about the financial motivations of the representative claimant, whilst the decision may not immediately change the position, Defendants will understandably be inviting the court to consider such agreements and further, to consider the true motives of the representative claimant. The Civil Justice Council are currently conducting a review of third-party funding in the UK and their recommendations are due to be published in the Summer of 2025. This review was commissioned in light of the Supreme Court decision in PACCAR (see our briefing for further information) but in light of this decision, and high profile comments in the media by inter-alia, Alan Bates following the Post Office Inquiry, it is expected that the report will include recommendations on the funding of mass consumer claims including representative actions.
• Finally, the case illustrates how courts continue to interpret and adapt existing rules to manage the rise in group litigation. Deciding and agreeing on (if possible) the mechanism to be used is crucial, and even then, may be rejected by the court. This judgment is considered helpful to organisations facing group litigation threats, reflecting the court's robust approach and its apparent desire to see group actions genuinely deliver access to justice for consumers where that might otherwise not be possible in accordance with the overriding objective rather than an opportunity for funders to make money.

We will wait to see if the case is appealed.

Originally published September 12, 2024

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.