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Access to Justice for Developing Countries: Third Party Funding for Sovereigns in WTO Disputes

October 4, 2017

Access to Justice for Developing Countries: Third Party Funding for Sovereigns in WTO Disputes

Guest Post by Mauritius Nagelmueller, who has been involved in the litigation finance industry for more than 10 years. Access to justice remains one of the prevailing issues within the WTO Dispute Settlement Body (DSB), especially for developing countries. To enforce the promise of a fairer trading system, developing country participation in the DSB must be improved, given that relationships between WTO members are predicated on power dynamics, rather than adherence to the rule of law. Third party funding has provided access to justice for claimants with meritorious claims, but with limited financial capacity in the private sector, as well as in investor-state disputes. The industry is also capable of leveling the playing field in the DSB, as it can be utilized by developing countries to finance a WTO dispute. An expansion of the current third party funding business model to include financing sovereigns in WTO disputes would create a win-win situation, by allowing developing countries to bring claims which they otherwise could not afford, and by granting third party funders the opportunity to adopt a more neutral stance towards sovereigns by providing their services in support, rather than in mere contention (as is the case today). And demand is significant, given that most obstacles to developing country participation in the DSB are related to costs, such as high-priced experts that must be brought on to account for a lack of expertise, the fear of economic pressure from the opposing state, and the lengthy proceedings which often place a strain on a developing country’s resources (member states estimate a time frame of 15 months from the request for consultations to the report of the Appellate Body. A period of at least 6 to 14 months should be added to this, as a reasonable period for the implementation of recommendations. Although this time frame is short in comparison to other international procedures, the financial hardship for developing countries can be fatal). The costs of initiating a dispute of medium complexity in the WTO are in the region of $500,000, however legal fees can sometimes exceed $10,000,000. In many cases, developing countries are forced to rely on the financial support of local industries affected by the dispute. This begs the question, why hasn’t there been an influx of third party funders into WTO dispute resolution? There are two chief concerns which seem to keep funders shying away. The first involves the typical remedies in WTO disputes, which regularly circumvent a direct financial compensation that the funder could benefit from. Still, complainants seek monetary benefits, be it through concessions (the losing country compensates the winning country with additional concessions equal to the original breach), or retaliation (the winning country withdraws concessions in that amount). A simple solution to this issue is for the winning party to provide a share of those benefits to the funder. One possibility is to assess the level of harm caused by the illegal measure challenged in the dispute, and accept that as a basis for the compensation of the funder. If the WTO Panel decisions are implemented, and the disputed measures that were found to be inconsistent with the WTO are withdrawn, a certain value of trade is not affected by those measures anymore and can be realized again. Affected industries, or the affected country, can set aside part of the gain to compensate the funder. In the case of compensation or the suspension of concessions, the complainant gains from increased tariff revenue, and is able to compensate the financing entity from a portion of the same. In any event, financial benefits of a winning party can be measured, and any compensation for the funder will represent only a minor percentage of the gained value of trade. The second main concern surrounds the area of enforceability, and whether WTO mechanisms would allow financing agreements. But those would have to be enforced in local courts, and the WTO DSB technically cannot rule on non-WTO agreement issues. However, there are provisions that allow the DSB to engage in arbitration if the parties both agree. A practical solution would therefore be to include an arbitration or dispute settlement provision in the financing agreement that operates outside of the DSB. Based on the aforementioned demand, as well as the practical solutions which can mitigate possible concerns, it is clear that external funding of WTO disputes can provide a flexible, independent and powerful alternative for developing countries to increase access to justice, as well as for developed countries to “outsource the risk” of a WTO dispute. It’s only a matter of time before third party funding makes its way into the WTO. ** A version of this article first appeared in International Economic Law and Policy Blog
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Commercial

Legalist Expands into Government Contractor Lending

By John Freund |

Litigation funder Legalist is moving beyond its core offering of case-based finance and launching a new product aimed at helping government contractors manage cash flow. The San Francisco-based firm, which made its name advancing capital to plaintiffs and law firms in exchange for a share of litigation proceeds, is now offering loans backed by government receivables.

An article in Considerable outlines how Legalist’s latest product is designed to serve small and midsize contractors facing long payment delays—often 30 to 120 days—from federal agencies. These businesses frequently struggle to cover payroll, purchase materials, or bid on new work while waiting for disbursements, and traditional lenders are often unwilling to bridge the gap due to regulatory complexities and slow timelines.

Unlike litigation finance, where returns are tied to legal outcomes, these loans are secured by awarded contracts or accounts receivable from government entities. Legalist sees overlap in risk profiling, having already built underwriting systems around uncertain and delayed payouts in the legal space.

For Legalist, the move marks a significant expansion of its alternative credit offerings, applying its expertise in delayed-cashflow environments to a broader market segment. And for the legal funding industry, it signals the potential for funders to diversify their revenue models by repurposing their infrastructure for adjacent verticals. As more players explore government receivables or non-litigation-based financing, the definition of “litigation finance” may continue to evolve.

Commercial Regulatory Issues

Funders’ Hidden Control Spurs Calls for Litigation‑Funding Transparency

By John Freund |

Litigation funding contracts are usually sealed from public view—but recently disclosed agreements suggest they often grant funders much more power than commonly acknowledged. A batch of nine contracts submitted by Lawyers for Civil Justice, a corporate and defense‑oriented group, to a judicial panel considering a proposed federal rule to mandate disclosure reveals funders in some instances reserve the right to reject settlement offers, choose or even replace counsel, and take over lawsuits entirely.

An article in Reuters explains that one example involves a 2022 contract between Burford Capital and Sysco Corp, in which Sysco is forbidden to accept a settlement without the funder’s written approval. Another case shows a contract with Longford Capital treating a change of counsel as a “Material Adverse Event,” again requiring funder consent. These terms reveal control far beyond the “passive investor” role many funders claim.

Currently, many funders argue that because their agreements do not always alter case control in practice, full disclosure of the contracts is unnecessary. But defenders of transparency say even the potential for control—whether or not exercised—can materially affect litigation outcomes, especially in settlement negotiations.

There is increasing momentum toward mandatory disclosure. Over 100 corporations, including those in tech, pharma, and automotive sectors, have urged the U.S. Advisory Committee on Civil Rules to adopt a rule requiring disclosure of funder identities and control rights. Several states (like Kansas, Louisiana, Indiana, West Virginia) have also put disclosure requirements into law. In Kansas, for instance, courts may review full funding agreements in private, while opposing parties receive more limited disclosures.

Case Developments Commercial

LCM Exits Gladstone Class Action; Writes Off A$30.8M

By John Freund |

Litigation Capital Management has pulled funding from a long-running Australian class action brought by commercial fishers against the state-owned Gladstone Ports Corporation, opting to cut its losses and reset capital allocation. The funder said the case has now settled on terms that provide a full release between the parties and a payment to the defendant toward costs—covered in full by after-the-event insurance—pending court approval in late October.

An announcement on Investegate details that LCM will write off A$30.8 million, equal to its cash invested, and has launched a formal strategic review with Luminis Partners. Management attributed the exit to portfolio discipline following adverse outcomes and noted preparation issues and aspects of expert evidence that, in the company’s view, no longer supported the case theory.

LCM is pursuing two potential recovery avenues: a costs assessment it says could recoup a portion of legal fees paid, and a prospective claim against the original solicitors for alleged breach of contract and negligence. Beyond this case, LCM flagged near-term milestones: an expected judgment within roughly three weeks in a separate UK commercial litigation co-funded alongside Fund I (A$20.6 million LCM capital at stake), and a decision soon on permission to appeal an April 1 arbitration loss.

Full-year FY25 results will be presented on October 1, when management plans to update investors on strategy and portfolio priorities.