This week lawyers are delivering their closing arguments in the UK’s biggest ever class action lawsuit relating to a dam disaster in Brazil. The victims deserve justice, but the predatory business model of their funders does not inspire confidence, says Mark Hollingsworth
Litigation is risky, expensive and stressful. Just ask the 555 beleaguered subpostmasters whose lives were destroyed after being wrongfully accused of theft and fraud based on a catastrophically faulty IT system. In 2019 they sued the Post Office in the High Court and it should have been a victory which vindicated their case, restored their integrity and compensated them for huge financial losses. But it was a bitter-sweet triumph. The subpostmasters succeeded, and the humiliated post office agreed to pay them £58m. They were ecstatic but then came the devastating news. Their lawyers’ share was a staggering £46m and so the 555 plaintiffs only received £12m. This meant each subpostmaster only received on average £21,600 each – a pittance and not remotely close to what they deserved, given the suffering and hardship they had endured.
A major reason for this injustice was the subpostmasters’ use of a litigation funder rather than a firm of solicitors. On the surface a third-party funder is good news for the ordinary citizen who cannot afford expensive lawyers. They cover the high cost of the legal proceedings on behalf of companies and thousands of claimants. But these backers take a huge slice of the financial award and compensation – 80 per cent in the Post Office case. And so there is a growing unease about their activities and whether they deliver fair justice.
Backed by investment funds, third party litigation funders (TPLF) often encourage claimant firms and individuals to pursue risky and speculative cases which they may not have been inclined to litigate. The danger is companies are tempted to effectively gamble on massive ambitious lawsuits, backed by the TPLF who are happy to take the risk based on a projected multi-million-pound payday. After all, TPLFs are not altruistic agencies. “This is not an NGO though I know we look like one”, said Tom Goodhead, CEO of Pogust Goodhead. “We are here to make a profit. I am quite a free marketeer, and we are dealing with market failure to compensate for negative externalities”.
The class action boom
This class action boom also has a potentially damaging impact on the British economy. The risk of liability and being consumed by litigation is a disincentive to foreign investors. “I would argue the decline of stock market flotations in the UK is due to the threat of potential legal liability based on class actions”, a corporate lawyer told The Guardian. And some of the UK’s leading retailers are facing millions of pounds in damages based on class actions over equal pay supported by TPLFs.
For individuals who cannot afford lawyers the rewards do not always match the promises. Instead, the winners are often the law firms and their financial backers and the losers are the claimants. This was graphically illustrated last month by the outcome of a class action lawsuit against Mastercard. The millions of claimants were promised a reward of £14bn and so the case proceeded. But the reality was rather different – the compensation was £200m and 50 per cent was snaffled up by Innsworth Capital, the litigation funder. And so that left £100m for the claimants. That sounds exciting. But there were 46m legitimate plaintiffs and so they received the princely sum of £2.30p each.
Such cases have resulted in calls for new regulations as the UK now has 73 third party litigation funders – more than any other country. Reform is inevitable. “The UK today is moving towards an increasingly predatory claims culture”, said Seema Kennedy, a former corporate lawyer and Conservative minister and now executive director of Fair Civil Justice. “It is opaque, where regulation has struggled to keep pace and is in favour of funders and lawyers. The evidence from the US and other countries with an overly litigious system is clear – it is harmful to consumers, employers and the wider economy”.
Today the spotlight is on a £36bn claim in the High Court over Brazil’s worst environmental disaster. In 2015, 19 people were killed after a dam collapsed which triggered an avalanche of toxic waste that poured into several villages. It was alleged the Anglo-Australian mining giant BHP caused the disaster and the company already paid out £30 billion in reparations in Brazil. It also worked with the Brazilian government to provide redress in the jurisdiction where the tragedy occurred. But now 620,000 individuals and 2000 companies are also suing BHP in the High Court represented by the UK law firm Pogust Goodhead and their litigation funders, the US based investor Gramercy.
It is the biggest class action in UK legal history and this week lawyers for both sides deliver their closing arguments regarding liability. The Judge will produce his verdict later this year.
Pogust Goodhead’s business model is dependent on lengthy and lucrative litigation which can lead to windfalls. But their high-risk, high-reward strategy can also result in uncertainty and cash flow problems
But all is not well at Pogust Goodhead. Last month its chief strategy officer and chairman and co-founder Harris Pogust left the firm, redundancies were announced and its accounts which were due almost a year ago on 29 March 2024, have still not been filed at Companies House. And in 2023 the law firm required a £450m injection from their US investor.
Despite success in high-profile cases like a class action diesel claim against car manufacturers, Pogust Goodhead’s business model is dependent on lengthy and lucrative litigation which can lead to windfalls. But their high-risk, high-reward strategy can also result in uncertainty and cash flow problems.
No doubt the 620,000 claimants in Brazil are nervously waiting to see if Pogust Goodhead’s buccaneering approach to litigation succeeds. Hopefully – unlike the British subpostmasters – the victims of the dam disaster will receive the appropriate compensation. But the track record of litigation finders does not inspire confidence.
Mark Hollingsworth is the author of Londongrad: From Russia with Cash