Short Reads

Amended governance rules addressing third party funding for collective claim organizations

Amended governance rules addressing third party funding for collectiv

Amended governance rules addressing third party funding for collective claim organizations

22.03.2019 NL law

On 4 March 2019, an amended version of the Dutch "Claimcode" was published. The Claimcode is an instrument of self-regulation, created by parties who are active on the claims market.

Like the 2011 original, the 2019 Claimcode contains guidelines for the governance of organizations that pursue collective claims and settlements, aiming to ensure that claim organizations put the interests of the parties they represent (the "class") first. In addition to providing guidelines on the claim organization's board structure and on preventing conflicts of interest, the 2019 Claimcode introduces a possibility for claim organizations to negotiate and collect reasonable amounts for future representation, and provides guidelines on attracting third-party litigation funding.

Role of Claimcode in collective actioAmended governance rules addressing third party funding for collective claim organizationsns

In the Netherlands, claim organizations can pursue collective claims by filing class action lawsuits or by requesting judicial approval on collective settlements. In the course of 2019, new rules will be introduced that will significantly broaden the scope of collective lawsuits in the Netherlands by allowing claim organizations to seek compensatory damages on behalf of an entire class (read more).

Claim organizations can be denied standing in court if the court finds that they fail to sufficiently safeguard the interests of the class they represent. To assess this, courts have used the governance principles of the 2011 Claimcode as guidelines. Although claim organizations are not obliged to adopt the principles of the Claimcode, as they are self-regulating, non-compliance has in some cases been found to be a strong indication that the interests of the class were not properly safeguarded. More generally, the Claimcode is seen as providing guidance on assessing the representability and professionality of claim organizations. Indeed, certain principles of the 2011 Claimcode were codified in the new law on collective actions for damages.

Main changes to Claimcode 2019

The 2019 Claimcode upholds the principle that claim organizations and the people involved with them may only operate on a non-profit basis. However, in 2019 the Claimcode, this non-profit basis does not prevent claim organizations from demanding "market terms" compensation for costs incurred. It also stipulates that this compensation for incurred costs may include a "reasonable" extra amount which the claim organization can use for future representation of collective interests. Claim organizations may thus seek to create a "war chest".

Secondly, the 2019 Claimcode recognizes the increasing role of third party litigation funding in collective lawsuits in the Netherlands. It allows claim organizations to obtain third party financing from financially sound external funders. However, when engaging with litigation funders, claim organizations have to ensure that independence is maintained between (i) the claim organization (including its lawyers) and the external funder, and (ii) the external funder and the defendant in the collective lawsuit. Moreover, the claim organization must safeguard that the litigation or settlement strategy is decided solely by the claim organization itself, and is not influenced by the funder.

Furthermore, the 2019 Claimcode provides that the claim organization will have to disclose on a publicly accessible website (1) that it obtained third party funding for its activities, (2) who the funder is, (3) what arrangements have been made between the claim organization and the funder and (4) what, if any, percentage of the awarded damages or settlement will be paid to the funder. These disclosure requirements indicate that, for claim organizations, transparency concerning their funding is key.

Observations

As discussed, the amended Claimcode allows claim organizations to seek extra funds for their "war chest" in court and in settlements, and acknowledges that they may seek third party funding. It remains to be seen what the impact of these amendments will be.

The principles of the 2019 Claimcode do not clarify how to determine what a "reasonable" extra amount for future collective representation actually is. Ultimately, it will be decided by courts. Previously, courts have been hesitant to award claim organizations monetary sums that did not represent compensation for actual costs incurred. It is likely that the effect of the amendments on this practice will be limited, as the core principle of the Claimcode remains that claim organizations must operate on a non-profit basis.

Additionally, while the amended Claimcode allows third party funding, it seems aware of the potential issues that may arise when a non-profit organization is funded by a commercial litigation funder. In this respect, the Claimcode puts independence, financial soundness and transparency first. Claim organizations engaging with third party funders will have to be fully transparent to the public and to their (prospective) participants. This goes back to the core purpose of the Claimcode: ensuring that the interests of the participants of claim organizations are properly safeguarded.

However, its remains a concern that the Claimcode is an instrument of self-regulation, without a concrete legal basis. A 2016 study by Utrecht University concluded that adherence to the 2011 Claimcode had increased since a previous study in 2012, but was overall (only) 'mediocre'. Many claim organizations reviewed in the study did not adhere to one or more of the Claimcode's principles; some did not adhere to it at all.

It is uncertain to what extent claim organizations active in the Dutch market will adhere to 2019 Claimcode. Although the aforementioned studies identified the lack of incentives for compliance as a key shortcoming of the 2011 Claimcode, it is noteworthy that the amended Claimcode does not include any sanctions for non-observance.

Team

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