Opinion Justice

Investing in litigation – how to profit from potentially lucrative lawsuits

Third-party litigation funding involves specialised companies investing in lawsuits on behalf of people who cannot afford legal representation, with the sole aim of winning a substantial share of the compensation awarded. This practice has prompted the European Parliament to investigate the matter.

Published on 31 March 2023 at 17:23

The European Union is currently grappling with corruption scandals. But this has distracted attention from a more dangerous problem: the world’s wealthiest using legal loopholes to manipulate European courts. 

Paris of course is no stranger to corruption. While the recent focus has been on French lobbying laws and whether they are fit-for-purpose, less attention has been paid to a more insidious form of influence-peddling: third-party litigation funding (TPLF), where private interests invest money to fund legal claims.

In September 2022, EU parliamentarians approved a resolution calling for robust regulation of TPLF, warning that “litigation funders involved in legal proceedings may act in their own economic interest, rather than in the interest of claimants.” 

While third-party litigation has been hailed as a boon for claimants who otherwise could not afford legal representation, funders will only fund claims where they believe they can reap substantial profits. According to a parliamentary report in Australia, where TPLF was invented, funders can sometimes make up to 500 percent returns on investment, while claimants often end up as "the biggest losers" with reduced compensation after the funders take their share.

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But this means, according to the European Parliamentary resolution, that funders “may seek to control the litigation and demand an outcome that pays them the greatest return and in the shortest amount of time.”

Who are these funders? No one really knows their specific identities, but they comprise major investors, banks and hedge-funds who in invest in claims through litigation funding firms that do the work of assessing and deciding on which claims to fund, and then raising the funds.

As such, TPLF has become a rapidly growing global market, worth an estimated €40-€80 billion, fueled by venture capitalists seeking lucrative returns. 

This poses a massive danger to EU legal systems, which are meant to deliver justice rather than profits.

National security matter

At a time when French workers are protesting on the streets against pension reforms which benefit giant insurance firms but penalise ordinary citizens, the failure to regulate TPLF could create unforeseen challenges.

The US Chambers of Commerce recently warned that TPLF could even pose a direct threat to national security, by allowing opaque foreign interests to manipulate the rule of law outside democratic checks and balances.

The European Justice Forum, based in Brussels, echoed these concerns with a joint statement on behalf of a network of European businesses urging the EU to "promote access to justice while at the same time protecting all parties from opportunistic litigation, increasingly fueled by third party litigation funding (TPLF)." 

Perhaps the clearest indication of the threat posed by TPLF can be found in the largest arbitration case ever heard in Spain, resulting in the second-largest arbitration award on record against the government of Malaysia. The case resulted in French bailiffs turning up outside the Malaysian embassy last week seeking to enforce a seizure order to confiscate several Malaysian government-owned properties in Paris. It previously led to the seizure of assets in Luxembourg owned by Malaysia’s state-owned energy firm, Petronas.

The case of the Sultan of Sulu

The case traces back to February 2022, when Spanish court-appointed arbitrator Dr Gonzalo Stampa awarded $14.92 billion to the heirs of the late Sultan of Sulu, a remote area of the Philippines, siding against the government of Malaysia.

The legal dispute arises from a colonial-era 1878 agreement that granted the British North Borneo Company access to a territory that the late Sultan of Sulu claimed jurisdiction over. After the British Crown later bought the company, the territory became known as Sabah and is now part of Malaysia, which emerged as an independent sovereign nation in 1963. 

The entire case rests on how the Spanish arbitrator interpreted the 1878 agreement between the long-vanished Sultanate and the British North Borneo Company, which Stampa concluded was basically a commercial lease agreement. The problem is that there are strong reasons to conclude this colonial-era agreement was never suitable for legal arbitration, given fundamental realities.

Although the 1878 treaty assumes that North Borneo was legitimately ceded to the Sulus by the Brunei Sultanate, this is disputed by historians. Sir Stamford Raffles, a British colonial official best-known for his founding of modern Malaysia and Singapore, as well as Bruneian historian Jamil al-Sufri, Philippine historian Cesar Adib Majul and British historian Leigh R. Wright, all conclude that Brunei’s Sultan never conceded North Borneo to the Sulu in the first place. Which means that the 1878 agreement cannot be relied upon.

Later documents – Spain’s Madrid Protocol of 1885 recognising British rights to the territory, and the renewed 1903 version of the Sulu treaty with the British - also indicate that the territory was ceded, not leased

All of which suggests that the foundational premise of Stampa’s award is invalid, offering no legitimate route for arbitration. These questions are matters of complex colonial history. The idea that a lawyer from a former colonial power can singlehandedly ‘resolve’ this dispute by unilaterally determining what regional nations and historians are still debating to this day, and to do so in such a way that violates the sovereignty of one of ASEAN’s most influential members, is astonishing. 

By seeking to enforce it, French courts are complicit in resurrecting a defunct colonial-era agreement which has no place in the modern world.

Even more astonishing is that Stampa is currently facing criminal prosecution by the Spanish authorities for contempt of court in refusing to abide by Spanish court orders annulling his appointment as arbitrator and the validity of his award.

That French courts will continue to consider this case – in effect brought through what Spanish prosecutors believe to be criminal means – against a sovereign developing nation, in itself raises all sorts of questions.

Millions of dollars invested

The Sulu case was enabled by millions of dollars in third-party investments organised by the litigation financing firm Therium, which will take the lion's share of proceeds.

Therium's involvement behind-the-scenes is significant because the firm was criticised by the US Chambers of Commerce for exploiting TPLF clauses to control lawsuits. Therium's track record, the report suggested, reveals how TPLF "threatens to reduce a justice system designed to advance the interests of the parties and to adjudicate cases on their merits to a litigation system effectively controlled by and in the service of third parties, who are interested solely in profit." 

Brussels policy analyst Pieter Cleppe points out that Stampa has a longstanding relationship with the Spanish law firm which represents the claimants, B. Cremades & Asociados. The firm’s founder, Professor Bernado M. Cremades, mentored Stampa for thirteen years after he finished his law degree, and they even co-authored a book together about commercial arbitration. And in November 2021, one month after Stampa relocated the seat of the arbitration from Madrid to Paris, Cremades hosted Stampa in Kuala Lumpur as a speaker at a legal conference on international arbitration. 

“Obviously, the world of arbitration law is small, but some may wonder whether a close relationship between judge and party constitutes a conflict of interest that could undermine the impartiality of the arbitrator”, observed Cleppe.

This case is therefore a poster-boy for how TPLF can enable highly questionable and potentially even criminal interference in the rule of law, in a way which endangers national interests and geopolitical stability. TPLF has essentially allowed unidentified venture capitalists to use the EU courts to rubber-stamp a resource grab against a sovereign state in a former colonial territory, based on dubious interpretations of obsolete colonial-era documents. 

This dangerous precedent could tear apart Europe’s trading relations with ASEAN at the worst possible time of global recession, which in turn would have negative repercussions on European economies. 

This case could be just the beginning of profit-oriented claims abusing EU court systems. And this is happening contrary to French public will, given that 57% of French citizens surveyed support the introduction of new TPLF safeguards, with a further 23% wanting TPLF to be abolished entirely – only 8% are happy with business-as-usual.

Proper regulation of TPLF is therefore an urgent priority. The European Commission should move faster to evaluate and implement the European Parliamentary transparency resolution’s recommendations. Giant law-firms will, of course, be upset. But the credibility of the entire EU court system is at stake, and along with this, the continent’s economic standing.


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