Trending Now
  • High Court Refuses BHP Permission to Appeal Landmark Mariana Liability Judgment 
Commercial Regulatory Issues Special Features

Price Control to Ensure the Affordability of Litigation Finance?

December 1, 2021

Price Control to Ensure the Affordability of Litigation Finance?

The following post was contributed by Guido Demarco, Director & Head of Legal Assets of Stonward. In March 2021, the European Parliamentary Research Service published a study on Responsible Private Funding of Litigation. This study was later supplemented by a draft report prepared by the European Parliament’s Committee on Legal Affairs in June 2021. Both documents, the study, and the draft report, contain certain recommendations to regulate litigation funding and criticize the economic costs that these funds impose on their clients by referring to them as “excessive”, “unfair” and “abusive”. Specifically, on the issue of fees, the study suggests setting a 30% cap on funders’ rates of return, while the draft report recommends that LF agreements should be invalid if they foresee a benefit for the claimant equal to or less than 60% (unless exceptional circumstances apply). In other words, a cap of 40%. While this might be viewed as a logical measure to make litigation finance more affordable, what needs to be considered is that the funders’ expected return is simply a consequence of the risks and costs that arise from litigation, not the other way round. The costs Let us take the case of a foreign national, ‘Citizen Kane,’ who makes an investment in the energy sector in Ruritania[1]. Let us imagine that a bilateral treaty between Mr. Kane’s country of nationality and Ruritania protects Citizen Kane’s investment. The Republic of Ruritania suddenly indirectly expropriates Mr. Kane’s business without due compensation. To claim damages, Mr. Kane will start an arbitration through the International Center for Settlement of Investment Disputes (ICSID). The total cost of the dispute will depend on the complexity and the duration of the case, including the number of pleadings, experts, hearings, and the time incurred by the attorneys. Only the first advance to ICSID can be circa $150,000. If Citizen Kane estimates damages of $30 million, the costs of such a dispute could easily amount to $3 million or more. In investor-state arbitration, the mean costs for investors are about $6.4m and the median figure is $3.8m. The mean tribunal costs in ICSID arbitrations is $958,000 and the median $745,000.[2] Therefore, after years suffering arbitrary measures and pursuing fruitless disputes in local courts, Citizen Kane will now have to invest an additional circa $3 million to file a claim for damages with a completely uncertain outcome. Even if Citizen Kane wins, Ruritania may not be willing to follow the award voluntarily, and he will have to incur more expenses to enforce the judgment. The risks Aware of the prohibitive costs of litigation, Ruritania may play the long game, unnecessarily prolonging the dispute to financially drain the claimant while expecting a future administration will be in office to foot the bill down the road. This might be challenging even for a financially healthy company, as litigation costs are often considered an expense on the profit and loss statement and therefore CFOs are increasingly looking for alternatives to preserve working capital for the company’s main activity. How long will the proceeding take? What will be the final amount of the damages awarded? Will the other party voluntarily follow the award? What if, in the end, I lose? These questions have no exact answers because the answers depend on third parties, including how a judge or tribunal interprets the law and the facts of case, as well as the performance of experts and lawyers in pursuing the claim. The litigation budget and estimated damages will play a key role in the investment decision, together with the merits of the case, liquidity, and reputation of the respondent, as well as the reputation of the law firm chosen by the client. Analyzing the risk is not easy, considering the latest figures that show that investors prevail in only 47% of cases, and that the median amount of damages claimed vis a vis damages awarded is 36%. However, the main factor in determining risk is the structure of non-recourse litigation finance loans. This is not just a typical loan, but a mechanism to transfer risk. It is normal that the greater the risk assumed by the funder, the higher the return expected. Conclusion Limiting a funder’s expected return will not reduce financing costs for clients, and therefore will fail to make litigation more affordable, which is the aim of the EU’s regulation proposal. Funders will not grant funding if they perceive the risk/reward of a case is not worth the given circumstances. However, a cap on the return could have a direct effect on the number of cases taken up by funders – which is already low – since there will be cases in which the combination of factors described above will not make the investment worthwhile, considering the risk tradeoff. Unfortunately, there is a cost floor shared by both large and small cases, and complex claims like Citizen Kane’s expropriation case would be made all the more challenging to finance. A cap could therefore limit Mr. Kane’s litigation options. Should funders charge any profiteering fee? No, but a cap to the fees may not be the solution. In the end, the direct beneficiaries of the proposed regulation could end up being certain states such as Ruritania, which act as defendants in arbitration or judicial cases, rather than the individuals that the EU is attempting to protect. Ironically, states finance their legal firepower with taxes, the same taxes that Citizen Kane has paid for years to the Republic of Ruritania. [1]  Ruritania is a fictional country used as a setting for novels by Anthony Hope, such as The Prisoner of Zenda (1894). Jurists specialising in international law and private international law use Ruritania when describing a hypothetical case illustrating some legal point. [2] 2021 Empirical Study: Costs, Damages and Duration in Investor-State Arbitration, British Institute of International and Comparative Law and Allen & Overy, available at: Costs, damages and duration in investor-state arbitration – Allen & Overy.

Commercial

View All
Announcements Case Developments Commercial

High Court Refuses BHP Permission to Appeal Landmark Mariana Liability Judgment 

By John Freund |

Pogust Goodhead welcomes the decision of Mrs Justice O’Farrell DBE refusing BHP’s application for permission to appeal the High Court’s judgment on liability in the Mariana disaster litigation. The ruling marks a major step forward in the pursuit of justice for over 620,000 Brazilian claimants affected by the worst environmental disaster in the country’s history. 

The refusal leaves the High Court’s findings undisturbed at first instance: that BHP is liable under Brazilian law for its role in the catastrophic collapse of the Fundão dam in 2015. In a landmark ruling handed down last November, the Court found the collapse was caused by BHP’s negligence, imprudence and/or lack of skill, confirmed that all claimants are in time and stated that municipalities can pursue their claims in England. 

In today’s ruling, following the consequentials hearing held last December, the court concluded that BHP’s proposed grounds of appeal have “no real prospect of success”. 

In her judgment, Mrs Justice O’Farrell stated:  “In summary, despite the clear and careful submissions of Ms Fatima KC, leading counsel for the defendants, the appeal has no real prospect of success. There is no other compelling reason for the appeal to be heard. Although the Judgment may be of interest to other parties in other jurisdictions, it is a decision on issues of Brazilian law established as fact in this jurisdiction, together with factual and expert evidence. For the above reasons, permission to appeal is refused”. 

At the December hearing, the claimants - represented by Pogust Goodhead - argued that BHP’s application was an attempt to overturn detailed findings of fact reached after an extensive five-month trial, by recasting its disagreement with the outcome as alleged procedural flaws. The claimants submitted that appellate courts do not re-try factual findings and that BHP’s approach was, in substance, an attempt to secure a retrial. 

Today’s judgment confirmed that the liability judgment involved findings of Brazilian law as fact, based on extensive expert and factual evidence, and rejected the defendants’ arguments, who now have 28 days to apply to the Court of Appeal.  

Jonathan Wheeler, Partner at Pogust Goodhead and lead of the Mariana litigation, said:  “This is a major step forward. Today’s decision reinforces the strength and robustness of the High Court’s findings and brings hundreds of thousands of claimants a step closer to redress for the immense harm they have suffered.” 

“BHP’s application for permission to appeal shows it continues to treat this as a case to be managed, not a humanitarian and environmental disaster that demands a just outcome. Every further procedural manoeuvre brings more delay, more cost and more harm for people who have already waited more than a decade for proper compensation.” 

Mônica dos Santos, a resident of Bento Rodrigues (a district in Mariana) whose house was buried by the avalanche of tailings, commented:  "This is an important victory. Ten years have passed since the crime, and more than 80 residents of Bento Rodrigues have died without receiving their new homes. Hundreds of us have not received fair compensation for what we have been through. It is unacceptable that, after so much suffering and so many lives interrupted, the company is still trying to delay the process to escape its responsibility." 

Legal costs 

The Court confirmed that the claimants were the successful party and ordered the defendants to pay 90% of the claimants’ Stage 1 Trial costs, subject to detailed assessment, and to make a £43 million payment on account. The Court also made clear that the order relates to Stage 1 Trial costs only; broader case costs will depend on the ultimate outcome of the proceedings. 

The costs award reflects the scale and complexity of the Mariana case and the way PG has conducted this litigation for more than seven years on a no-win, no-fee basis - funding an unprecedented claimant cohort and extensive client-facing infrastructure in Brazil without charging clients. This recovery is separate from any damages award and does not reduce, replace or affect the compensation clients may ultimately receive. 

Case Developments Commercial

Homebuyers Prepare Competition Claims Against Major UK Housebuilders

By John Freund |

A group of UK homebuyers is preparing to bring competition law claims against some of the country’s largest housebuilders, alleging anti competitive conduct that inflated new home prices. The prospective litigation represents another significant test of collective redress mechanisms in the UK and is expected to rely heavily on third party funding to move forward.

An announcement from Hausfeld outlines plans for claims alleging that leading residential developers exchanged commercially sensitive information and coordinated conduct in a way that restricted competition in the housing market. The proposed claims follow an investigation by the UK competition regulator, which raised concerns about how housebuilders may have shared data on pricing, sales rates, and incentives through industry platforms. According to the claimant lawyers, this conduct may have reduced competitive pressure and led to higher prices for consumers.

The claims are being framed as follow on damages actions, allowing homebuyers to rely on regulatory findings as a foundation for civil recovery. The litigation is expected to target multiple large developers and could involve tens of thousands of affected purchasers, given the scale of the UK new build market during the relevant period. While damages per claimant may be relatively modest, the aggregate exposure could be substantial.

From a procedural perspective, the case highlights the continued evolution of collective competition claims in the UK. Bringing complex, multi defendant actions on behalf of large consumer groups requires significant upfront investment, both financially and operationally. Litigation funding is therefore likely to be central, covering legal fees, expert economic analysis, and the administration required to manage large claimant cohorts.

Case Developments Commercial

UK Court Approves Final Settlements in Car Delivery Charges Class Action

By John Freund |

Final settlements have been approved in a long running UK class action concerning allegedly excessive car delivery charges, bringing closure to a case that has been closely watched by the group litigation and litigation funding communities. The approval marks the end of proceedings brought on behalf of thousands of motorists who claimed they were overcharged by car manufacturers and dealers for vehicle delivery fees.

An article in Fleet News reports that the High Court has signed off on settlements resolving claims that delivery charges applied to new vehicles were inflated and not reflective of actual costs. The litigation alleged that consumers were systematically overcharged, with delivery fees presented as fixed and unavoidable despite wide variation in underlying logistics expenses. The case was pursued as a collective action, reflecting the growing use of group litigation structures in the UK consumer space.

The approved settlements provide compensation to eligible claimants and formally conclude a dispute that has been progressing for several years. While specific financial terms were not positioned as headline figures, the outcome underscores the practical realities of resolving complex, high volume consumer claims through negotiated settlements rather than trial. The court’s approval confirms that the agreements were considered fair and reasonable for class members, a key requirement in representative and opt out style actions.

The case also highlights the important role litigation funding continues to play in enabling large scale consumer claims to proceed. Claims involving relatively modest individual losses often depend on third party capital to cover legal costs, expert evidence, and administrative infrastructure. Without funding, such cases would typically be economically unviable despite their collective significance.