Who can claim damages for competition law infringements

The funds' damages claim against several banks for forex manipulation

On 23 March 2022, the UK Court of Appeal handed down its decision in Allianz Global Investors GMBH & Others v Barclays Bank & Others [2022] EWCA Civ 353. Approximately 170 claimants (mostly investment funds) have brought an action for damages against a number of banks arising from alleged manipulation of the foreign exchange markets between 2003 and 2013. The European Commission had issued two decisions finding that certain aspects of the alleged conduct infringed competition law.

Defendant banks claim that the funds avoided their losses when investors made redemptions

The banks have denied liability (except in relation to the findings of infringement made by the European Commission) and further claim that the funds will have avoided losses or passed the losses on to investors who have withdrawn or redeemed their investment.

The banks’ argument was that during the claim period, each time an investor exited one of the affected funds, the redemption payment (valued at the "net asset value" of the fund) reflected any losses suffered by the fund as a result of the infringing conduct. As the NAV redemption value reflected the loss, the exiting, or redeeming investor in the fund effectively took on the losses suffered by the fund. In that sense, the fund itself avoided the loss because it was passed to its investors. This seems to be a recognition of raison d’être of investment funds; to be a passive or pass-through vehicle through which both gains and losses are, ultimately, borne by the participating investors.

The implication of the banks’ argument is that the Court would need to take account of each and every time an investor sought to redeem funds from one of the claimant funds to assess whether the funds themselves (which were structured either as companies, trusts or partnerships) suffered any loss. This would have required extensive disclosure from each of the funds going as far back as 2003.

The claimants argued the fund is the proper claimant and that investors into the funds do not have standing to sue for any losses they may have suffered.

The UK High Court concluded that investors who had made redemptions from the claimant funds would have standing to commence their own proceedings against the banks for losses suffered as a result of the infringing conduct, meaning the Court would need to take account of losses passed on to them when assessing the losses suffered by the claimant funds. This judgment was appealed to the Court of Appeal.

Court of Appeals confirms investor do not have a separate claim to the funds

Redemptions do not result in funds having avoided their losses

The Court of Appeal noted that the basis for an award of damages is to compensate for losses naturally flowing from the breach. For any subsequent transaction (ie the redemptions) to be relevant to reduce the loss flowing from a breach (avoiding the loss), it must arise out of the consequence of the breach and in the ordinary course of business.

The Court of Appeal considered that redemptions occur through pre-existing contractual arrangements between investors and are independent from the losses suffered by the fund due to any infringement. The Court of Appeal also noted that redemptions, which are capital in nature, have no bearing on a fund’s profit and loss and are therefore not undertaken in the funds ordinary course of business.

On that basis, the Court of Appeal concluded that:

• Funds structured as trusts: only the fund trustees on behalf of the trust had a cause for action and not the beneficiaries (investors);
• Funds structured as companies: the reflective loss principle means that investors do not accrue a separate right of action once they redeem their investments. Only the company itself could bring a claim against the defendant banks; and
• Funds structured as limited partnerships: it was common ground that only the general partner can commence proceedings as causes of actions are partnership assets. The Court of Appeal rejected the banks’ argument that limited partners suffered a distinct loss on redemption to that suffered by the partnership.

English Courts are not required to create new rights to ensure investors have a separate cause of actions

The banks also argued that because duties under Article 101 are owed to all individuals (including redeeming investors), as a matter of EU law the Court must allow investors to claim losses they have suffered on redeeming their investment at an amount lower than if an infringement had not taken place.

The Court of Appeal rejected this argument, noting that English law determines how the rights of shareholders, beneficiaries and limited partners are to be protected. This is done by protecting those rights by action through the entity who suffers the loss rather than the individuals.

Conclusion

As redeeming investors from funds structured as trusts, companies or partnerships do not suffer a separate or distinct loss from that suffered by the funds, the banks’ contention that redemptions resulted in the funds avoiding or passing on their losses to redeeming investors was struck out. Consequently, the case will proceed without the need for (i) detailed disclosure of every redemption in relation to each of the funds covering a period from 2003 onwards and (ii) each redemption does not require a separate assessment of whether the funds avoided losses through redemptions.

The decision provides clarification on the necessary requirements for defendants to plead an avoided loss or pass-on allegations:

• In order for pass-on and avoided loss claims to be pleaded, the subsequent conduct or action of the claimant resulting in the alleged avoidance of loss must arise as a consequence of the alleged breach and as part of a claimants’ ordinary course of business.
• Redemptions from investments funds arise separately and independently from any losses suffered by a fund as a result of anticompetitive conduct and therefore do not need to be accounted for when the fund commences proceedings to recover any damages.
• In contrast, investors who have redeemed their investment from a fund which has suffered a loss as a result of anticompetitive conduct are unable to separately recover any reduction in the value of their investment as a result of any infringements.

Authors: Steven Vaz, Partner; and Hayden Dunnett, Associate