Malaysia's $15bn dispute reveals the challenges of unregulated litigation funding and the call for EU reform, writes Mary Honeyball, former MEP and former member of the European Parliament’s Legal Affairs Committee.
As an unregulated multi-million-euro industry, litigation funding risks changing the European legal landscape as we know it. It is in the spotlight after a report last year by German MEP Alex Voss of the EU parliament’s Legal Affairs Committee, which made clear that unregulated litigation funding puts the profit before the interests of claimants.
While arguments supporting the industry typically play up its role in facilitating access to justice, the reality is different, with third-party funders operating in a regulatory grey zone. According to industry analysts Slingshot Capital, the global market was worth up to €80 billion in 2021, and it is expected to grow further in the coming years.
Fewer than 10% of claims submitted to litigation funders typically get accepted, showing the intended beneficiaries – people who cannot afford to make ethical claims for justice – are not the ones benefitting. Through his own research, Axel Voss MEP found that in his home country, Germany, the number of litigation funders nearly doubled in the second half of 2021, showing how quickly the industry is growing.
No case highlights the need for stronger EU regulation of litigation funding than the $15 billion arbitration award against the Government of Malaysia in the Sulu case.
Bankrolled by Therium, a UK-based litigation funder, the case was brought against Malaysia by 8 individuals that claim to be the descendants of the Sultan of Sulu – a defunct Sultanate in what is now Eastern Malaysia. They were granted the $15 billion award in a French arbitration court in February 2022, over two times Malaysia’s annual health budget.
Malaysia is fighting the award across Europe, and it has widely been reported that the judgement was the result of forum shopping by the claimants` (shifting the proceedings from Spain to France). The Government argues that the award overlooks the immunity of a sovereign state from such proceedings.
No one knows how much Therium stands to gain from this case, as the nature of the funding agreement and the origin of the claim have remained secret, while Therium was not even mentioned in the final award. According to the European Parliament’s own estimates, as set out in its proposed recommendations to the European Commission, litigation funders outside the EU typically earn a return on investment of up to 300%. Should the claimants prevail, it is likely that the Sulu case would yield an astronomical rate of return.
But the question is – who specifically would profit if the arbitration award is enforced? Litigation funders don’t disclose who their investors are, and the origin of the claimants is also shrouded in mystery. Little is known about them, and their connection to the historic Sultan is also in question, given the Sultan died without heirs in the 1930s. They have no public profile but reportedly reside in the Philippines, according to the Financial Times.
What is clear is that this case harnesses colonial divides for financial gain. We are seeing today how European courts are unwittingly letting a profit-driven privately-funded enterprise hold a sovereign nation to ransom over these proceedings.
It is a clear proof point for the European Commission to update the regulatory landscape for litigation funding, ensuring clarity over financial arrangements of cases progressing through the courts. But while the Sulu file stands out, it isn’t an isolated case, as funders back claim for everyone from Indonesian seaweed farmers to fine art auction houses – as long as they believe they can profit.
As my former colleague Axel Voss MEP has rightly pointed out, this risks millions of European consumers becoming pawns in profit-seeking. I take great pride in the work undertaken by the European Parliament’s Legal Affairs Committee, which called for greater regulation of the sector to protect European consumers.
The measures put forward by Alex Voss MEP and the European Parliament’s Legal Affairs Committee are sensible, such as boosting transparency or limiting the percentage share of an award that funders can take. But, I call on the European Commission to go one step further with legislative action.
Growing conflicts of interest further exemplifies the problem. The only industry body which pertains to set standards for the industry is self-regulating the sector, consisting of the three largest litigation funders in Europe – Deminor, Nivalion and Omni Bridgeway. These funders are downplaying the need for regulation, describing it as “premature” while simultaneously opening up new offices across Europe.
The European litigation funding landscape today is completely unregulated, and the Malaysia Sulu case demonstrates its flaws. While Therium suggests that London's litigation financiers are primed to profit from the global downturn, the power remains in the hands of the European Commission, as it will shortly set out proposals which will shine a light on the sector.
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