The hottest new trend in law and finance claimed its most high-profile victim yet earlier this month when a New York court ordered Argentina to pay a multibillion-dollar award. The twist: the winner won’t get a significant chunk of the money.
That portion will instead go to a giant investment firm called Burford Capital, a company that wasn’t a party to the case at all but nonetheless bet on the outcome.
The win is a major vindication for a strategy known as litigation finance, where experts scour the world for favorable cases, finance them, and take a massive payout if they win — often without ever having to disclose the fact that they were involved. It’s a strategy that has often targeted some of the world’s most vulnerable nations.
“Many of the well-known funded cases are brought against countries that aren’t well-resourced to defend themselves,” said Lisa Sachs, director of the Columbia Center on Sustainable Investment in New York, adding that because many of the funding deals are confidential, the industry’s effects are still a black box.
Originally developed to help victims finance expensive cases when they couldn’t afford the legal bills, litigation finance has a long history. Burford began operations in 2009, when law firms had trouble getting financing from traditional banks, and third-party funding in general exploded into the public view in 2016 when billionaire Peter Thiel financed a lawsuit for Hulk Hogan that bankrupted Gawker Media. Over the last decade or so, the industry has moved into an area of law called investor-state dispute settlement, where companies sue countries over perceived contract breaches.
The way it works is simple: a funder finds a case to bet on, either approaching a potential client directly or sorting through requests from law firms. The funder then uses its capital — often acting as a middleman for bigger investors — to pay legal fees, bring in its own lawyers, and sometimes intensively manage the case.
It’s a risky bet. A third-party funder typically only makes money if it wins and getting money from a nation that doesn’t feel like paying can be a whole new legal battle. But in the case of a win, the windfall can be huge.
For Burford’s win against Argentina’s state oil company YPF, the company estimates that the final payout will be between $5 billion and $8.4 billion plus interest. There are two plaintiffs in the case, Petersen Energía Inversora, SA, and Eton Park, both with funding from Burford. On a net basis, of the chunk taken by Petersen, Burford estimates that it will make about 35 percent of the award. For Eton Park, Burford will collect about 73 percent. A spokesperson for Burford declined to comment for this story. Representatives for YPF did not respond to calls and emails requesting comment.
The share of the award claimed by Burford isn’t unusual. Frank Garcia, a law professor at Boston College, says that cases can sometimes snag returns in excess of 600 percent of the initial investment. “The fact that a system can yield 300 percent to 600 percent returns on investment suggests that there’s something skewed about that system,” Garcia said. “There’s something that’s not working.”
Garcia says that the problems underlying third-party funding are supercharged issues with the world’s legal architecture. Resolving disputes between investors and states involves a complicated jumble of investment treaties, national laws, and international courts of arbitration, where such disputes often end up. (Burford’s Argentina claim wasn’t resolved in an arbitration body.)
According to data gathered by the United Nations Conference on Trade and Development (UNCTAD), when arbitration claims are allowed to proceed on the merits and aren’t thrown out for jurisdictional reasons, investors win and are awarded damages 56 percent of the time. Those odds are also skewed to favor the rich. Most claims brought against developing countries and nations in Eastern Europe, Central Asia, and South America make up almost half of all respondents. Most claims, meanwhile, are brought by companies from the developed world, led by the United States, Netherlands, and the United Kingdom.
Sachs says that those numbers are probably undercounting reality. For one, many cases stay private between the two parties. For another, the mere threat of a claim can prompt a country to bow to investor demands. “Many of the problems with third-party funding are interwoven with the problems of the investor-state dispute settlement mechanism in general,” she said.
The one-sided nature of global investment has proved attractive to litigation funders. Long regarded as a long shot by both the financial and legal industries, the potential for victories like Burford’s has led to an influx of cash over the last few years. Westfleet Advisors reported that in 2022, litigation funders in the United States committed $3.2 billion to new cases, up 14 percent from the previous year. Market analysis firm CMI estimated that the global investment market was worth over $12 billion as of 2021 and will grow to nearly $26 billion by the end of the decade.
The boom leaves countries in the developing world open to lawsuits backed by extraordinary amounts of capital. Countries including Venezuela, Colombia, Romania, Tanzania, and Argentina have all had to face major cases underpinned by third-party funding over the last decade. Just last month, London-listed Panthera Resources Plc — which has gold and copper mining projects across West Africa and India — secured funding of up to $10.5 million for an arbitration case against India, where the company says it has run into “regulatory issues.”
Yet if litigation finance is expanding in popularity, just how popular remains unknown. Of the world’s major investor-state arbitration bodies, only the World Bank Group’s International Centre for Settlement of Investment Disputes (ICSID) requires that third-party funding be disclosed. Most of the time, such arrangements are kept private.
That’s led to the expansion of an industry almost entirely under wraps, one that’s lightly regulated and allowed to dictate its own terms. For most litigation funders, everything from how much can be charged to clients to whether they must act in client interests isn’t subject to regulatory oversight. As funders take on bigger roles in cases, sometimes with the power to act over the objections of the real claimants, critics say the claims can devolve into pure money-making enterprises.
“What everybody has suspected is that a lot of these agreements actually reach into the settlement mechanics of the case,” said Garcia. “In cases where you don’t have disclosure of the terms of the agreement, those same mechanics can be set up behind the scenes and nobody will ever know.”
Until the global investment environment is more favorable, Garcia said, he would back a complete ban on third-party funding for investor-state disputes. Failing that, he recommended disclosure requirements for funders. “There are grounds for guarded optimism,” he said. “More and more states are chafing under the way the system is going, and I think third-party funding is actually intensifying pressures for change.”
Defenders of litigation funding point to the roadblocks nations can throw up in front of investors: everything from going after the company domestically to dragging cases out over the span of a decade or more. Then, there’s the issue of sovereign immunity, a legal doctrine which can be used to shield assets from investors.
“At the end of all that, the state comes back and says well great, you got an award and you managed to survive, we’re still not paying, good luck,” said Viren Mascarenhas, a partner at Milbank LLP, who specializes in international arbitration. “When you think of the cost of the proceeding, and the length of the proceeding, and the sovereign immunity defenses when it comes to collection, those risks make these cases not particularly attractive to fund.”
Mascarenhas added that the issues investors can run into make it so that funders have to be very careful about the types of cases they invest in. For a company to throw money behind a claim, there’s a high threshold.
Still, those very barriers can sometimes leave countries vulnerable to certain types of cases. Sachs says that some of the highest returns with the surest chances are generally found in the management of natural resources.
“These funders have an interest in finding high risk, high reward claims as part of their portfolio,” Sachs said, adding that for raw material industries, things like community opposition, environmental review, and taxation can become problems for investors. “These are highly complex, highly political, highly impactful projects that necessarily involve the rights of other stakeholders. Funders do not seem to care about any of those things. They’re looking at these disputes as a potential multibillion-dollar revenue stream.”