Did you read the last NDA you signed?

Did you read the last NDA you signed?
Author:
Jeremy Marshall
Senior Investment Manager - England

When was the last time you signed a NDA without reading it, simply assuming that it was the automatic barrier that you need to go through in order to get into a case? The Supreme Court has just given judgment in Harcus Sinclair LLP v Your Lawyers Ltd which had, at its heart, an NDA which was signed by the law firm partner who admitted that he hadn’t read it. The Justices had little sympathy for the partner – “for an experienced solicitor not to bother to read an agreement he was signing is plainly his own responsibility” – and the consequences of his failure have been significant both for his firm and its litigation funder.

The backdrop to the dispute is the litigation against Volkswagen following on from the emissions defeat device scandal. When the scandal blew up in 2015 everyone jumped on the case – whilst our funding interest initially centred around the institutional investors in Germany, many law firms focused on the consumer claims. Your Lawyers was one of those firms, recognising early on that there was a potential claim to be made. They didn’t waste much time – the scandal broke on 18 September 2015 and by 26 October 2015 their letter before action was out of the door. They issued a claim on behalf of a number of car owners in January 2016 and, by April 2016, had registered 4,000 owners through their website. Their aim was to seek a Group Litigation Order (GLO) and lead a large action.

In order successfully to litigate such a claim via a GLO, litigation funding was almost an inevitability – not simply because of the funding element for the claim itself but because of the need to fund the insurance protection to cover Freshfields’ costs if the action was unsuccessful. Your Lawyers recognised this and, to their credit, were willing to accept the advice of their broker that they needed to collaborate with another, more experienced law firm (they picked Harcus Sinclair) to increase their chances of success. In parallel, Harcus Sinclair had also considered the economics of a group action but had accepted early on that many thousands of claimants would be necessary to render a claim fundable. This was a perfectly fair assessment and one that we shared too. The economics were not easy without a very significant group and fragmentation of the groups was not ideal.

The initial proposition therefore was that Your Lawyers and Harcus Sinclair should consider a collaboration and Your Lawyers sent Harcus Sinclair a NDA in April 2016. The NDA was in a form that is very familiar to all funders and practitioners and included a non-circumvention clause within it – the crucial wording being that “The Recipient [Harcus Sinclair] further undertakes not to accept instructions for or to act on behalf of any other group of Claimants in the contemplated Group Action without the express permission of the Discloser (Your Lawyers).” The undertaking was expressed to last for 6 years (ie the applicable limitation period). The purpose behind this language was clear – Your Lawyers were willing to hand over their work product to Harcus Sinclair but did not want to find themselves pushed out of the action because Harcus Sinclair decided to go it alone. This did not seem an unreasonable position to take given that they knew, because of the advice of their broker, that their chances alone were more difficult and that Harcus Sinclair’s experience and connections in the funding community were better than theirs. It is an accepted fact that most funders are very influenced by which firm is involved in the actual litigation. To our minds, therefore, Your Lawyers were taking a calculated risk in opening up their litigation strategy to Harcus Sinclair and were entitled to protect themselves accordingly. Certainly, an objective reading of the judgment following the expedited trial of the action is suggestive of the fact that Harcus Sinclair had a much better relationship with its preferred litigation funder than Your Lawyers did.

What was clear, however, was that the NDA made no mention of the proposed collaboration and there was no certainty that any collaboration actually would materialise. The trial judge found that neither party had really applied their minds to what would happen if they didn’t join forces, Your Lawyers because they knew they had the protection of the NDA in their back pocket and Harcus Sinclair because the lead partner was in ignorance of the restrictions contained within the NDA.

As matters turned out, Your Lawyers were entirely correct in being circumspect, because Harcus Sinclair, whilst continuing loosely to collaborate with Your Lawyers, began building their own group and ultimately issued separate proceedings in October 2016, also seeking a GLO. So, far from collaborating, the two firms actually both issued GLO proceedings with the intention of acting as lead lawyers and so ended up against each other. To make matters worse, Harcus Sinclair ultimately entered into a collaboration with Slater & Gordon and the litigation funder declined to fund Your Lawyers. Your Lawyers were left truly out in the cold.

Your Lawyers did not take this turn of events lying down. They asserted that breaches of the NDA had occurred and, given that the fight as to who should be lead firm played out in the GLO application and that, by the time of the trial, in November 2017, Harcus Sinclair and Slater & Gordon acted for 43,000 car owners and Your Lawyers acted for 9,000, it was actually the interests of the underlying claimants that were being prejudiced.

The case of Your Lawyers was therefore that Harcus Sinclair was prevented, by the non-circumvention clause, from litigating the Volkswagen group claim without its permission. This argument was premised on the language of the covenant as well as the fact that the language constituted an undertaking given by a solicitor that could be enforced by the High Court’s supervisory jurisdiction.

As the case developed through trial, the Court of Appeal and ultimately the Supreme Court, the battle centred around the nature of the undertaking given and whether the undertaking needed to be construed literally by reference to the factual position as at the date of the signing of the NDA or whether it was permissible to consider a future state of affairs as contemplated by the parties when they signed the NDA.  The consequences were potentially far-reaching because of the fact that the NDA was entirely silent on the possible cooperation between the parties and, since Harcus Sinclair’s argument as to why they could avoid the consequences of the NDA was anchored in an argument about an unreasonable restraint of trade, it became crucial to determine whether the Court needed to consider the “trade” on the signing of the NDA (where there were a handful of claimants) or whether you could jump ahead in time to look at the consequences (when there were over 50,000). What was reasonable on day one may appear far less reasonable six months later – and certainly have greater significance.

Putting you out of your misery at this stage, the Supreme Court’s unanimous judgment was that it was legitimate, in construing the NDA, to have regard to the intended behaviour of the signatories to it or, to put it another way, that in determining the legitimate interests of a party one can take into account what the parties (objectively) intended or contemplated, consequent on the contract, at the time the contract was made as well as the contract terms. In consequence, when it came to an analysis of what legitimate interests of Your Lawyers were to be protected via the non-circumvention clause, it was appropriate to consider their future interests rather than simply the interests that existed on day one when the group action may never have got off the ground. Such an interpretation meant that the consideration of whether the restraint was proportional to the legitimate interest was also radically different – a NDA that lasted 6 years was less likely to be considered reasonable if Your Lawyer’s interests solely related to the few claimants that they had signed up at the time of the entering into of the NDA. The consequences to Your Lawyers were much more serious when thousands of claimants were on board and so it became more reasonable to seek wider protection.

As a consequence, the Supreme Court held that it was reasonable for Your Lawyers to protect its interests in the widest sense of the word such that they were entitled to contract to keep Harcus Sinclair out of the market for a 6 year period. The burden then shifted to Harcus Sinclair to argue that such a reasonable restraint was nonetheless against public policy, and it was inevitable that they were always going to have an uphill battle on that argument. Here, Your Lawyers could deploy arguments about the importance of solicitors honouring their undertakings and of course it didn’t help that the lawyer of Harcus Sinclair hadn’t read the critical clause in the NDA. Equally, there was no offence to justice because there were plenty of lawyers keen to litigate the case and so the public interest was never going to be prejudiced.

It is unclear at this stage how the case will now play out other than to note Harcus Sinclair will not be able to litigate the case for its clients. It follows that the litigation funder will not be able to fund Harcus Sinclair. The next steps of Slater & Gordon, formerly in collaboration with Harcus Sinclair, are uncertain and now of course Your Lawyers may itself continue to seek either lead claimant status or to forge a collaboration with Slaters.

Of course, it is tempting to observe that it is the clients of all the firms that have suffered the most. The emissions scandal broke in September 2015 and now, nearly 6 years on, the English legal system has finally decided who the lawyers should be who should litigate the case. In this respect, there is a worrying parallel with the carriage dispute that has just taken place in the Competition Appeal Tribunal (CAT) between two rival groups seeking to take lead status for the collective action against the banks in the FX cartel (if such an action is certified). In that case, as in this one, the clients’ interests arguably are subservient to those of the lawyers and, concerningly, those of the litigation funders. Our industry needs to be ready to face the charge that this infighting and jostling for position is ultimately prejudicing the very people whose interests – and claims - are at stake. Taking matters a step further, an additional point of concern arises out of the increasing commoditisation of group actions such that defendants can argue, with some justification, that cases appear to be developed for the benefit of the industry. This argument was made in Lloyd v Google (and unfortunately was given oxygen by the judge’s comments to much the same effect) and also featured heavily in the recent certification hearing of the boundary fare claims brought in the CAT.

Our approach to the funding of group actions, as indeed it is for the signing of NDAs, is to enter into them on the basis of the future and so to look ahead and to judge what the position will be once an action is up and running. Do we want to be in the middle of a dispute as to which firm is leading which action, or to be held responsible for a logjam in which the interests of the claimants are likely to be on hold pending the resolution of such matters? With law firms assembling groups, and seeking funding for the potential claims, the Your Lawyers’ scenario is not so uncommon and it is becoming increasingly clear that entrepreneurial firms and funders are circling around looking for claims. This unhealthy mix is generating a litigation culture that inevitably is going to lead to judicial reining in of such multiple initiatives, either because not every firm and funder can represent the lead claimant or because active case management cannot countenance different groups seeking to explain their differences when the reality is that a primary point of difference is the firms’ and funders’ own financial interests.

These recent cases are warning signs that need to be taken seriously by the industry and those who use it. It needs to be remembered that litigation funding is there for the clients and not the other way around.