Not classy: lawfare will weaken the British economy
The recent explosion of class action lawsuits and third-party litigation funding in Britain is argued to be damaging the UK economy and its reputation for legal stability, often primarily enriching funders rather than compensating victims, says James Price
American cinema has long loved the class action lawsuit. Hundreds, maybe thousands of little guys ganging up to take on shady corporates. E pluribus unum, indeed. Erin Brockovich, Dark Waters, and my favourite, the dark and brooding Michael Clayton are all variations on a common theme.
Britain has got in on the action recently, as well. Mr Bates vs The Post Office was a smash hit and led to changes in the law. It even cameoed my old boss, Nadhim Zahawi, playing a more svelte and mostly believable version of himself in a pivotal select committee scene.
Whilst we can all enjoy these feel-good moments, the reality in Britain is that the explosion of these class action cases is doing more to damage our economy than it is to provide compensation to ordinary people.
An Adam Smith Institute paper, entitled ‘Judge Dread: How lawfare undermines business confidence in the UK’ warned last year of an explosion of cases, supported by a whole cottage industry (or perhaps that should be mansion) of third-party litigation funders (TPLF). The ASI warned that this has created a legal environment in which cases that should benefit consumers, instead line the pockets of those who fund the legal claims.
Enormous payouts
Since that paper came out, we have seen enormous payouts on, for example, car salesmen for slightly sharp sales practices that nevertheless allowed people to buy brand new cars. We have even seen the case of Mr Bates get settled with 80 per cent of the money going to the backers of the case, not the victims.
And just last week a judgment landed on the largest ever of these class actions in the UK, where BHP has been found liable for a dam collapse in Brazil which killed 19 people and caused extensive environmental damage. The action, claimed by the law firm bringing the case to be worth up to £36bn, was brought in London as the Australian miner was listed here at the time of the disaster (no prizes for guessing if they still are – thanks Rachel).
Now you may say that even if this case has little to do with the UK, this could be justice well served for ordinary Brazilians who had their lives ruined 10 years ago. But this case and its implications will not have gone unnoticed by any company considering investing in UK Plc.
One of our few current strengths as a jurisdiction is the stable, reliable and neutral legal system. But with a huge court backlog across all types of cases, and now this explosion of class action cases, Britain’s legal environs are seen more as liability than asset. It will then be ordinary Brits who end up paying the cost alongside BHP.
This was confirmed earlier this year by the Department for Business and Trade. In a call for evidence they quietly slipped out an absolutely staggering admission. It bears quoting in full:
“Since 2015, the opt-out caseload has grown significantly, with tens of billions of pounds in damages claimed and hundreds of millions of pounds spent on legal fees. This is far higher than estimated in the original impact assessment, which estimated the total cost to business to be £30.8m per annum (taking into account legal and associated costs, and the paying out of redress).”
More proof that the law of unintended consequences is the most powerful (and expensive) law in the universe.
Given the many other weaknesses in the British economy, it’s clear that this cannot go on. Even Labour’s embattled Chancellor, Rachel Reeves, agrees. She tried to intervene in the recent Supreme Court case over car sales compensation.
More broadly, what should be done? Sam Bidwell, the author of the ASI report, suggested regulating these third-party funding cases the same way that other investments are regulated, requiring blanket transparency and accountability. Britain should also put the ball back in business’ court (pardon the pun) when they fall foul of regulators. Introducing arbitration clauses as a feature of regulatory decisions wherein businesses might be expected to provide compensation.
The truth is, that in this as in so many other areas, British courts, business, and our everyday rights are being exploited. We have allowed much of this by assuming that to do otherwise would be bad for markets and investment. The opposite is true. Getting to grips with these cases would be a class action for the government to take.