Class action lawsuits are corrupting our legal system

Class action lawsuits are corrupting our legal system

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• There is something profoundly flawed with the UK’s class action system

• The fundamental issue is that nobody really knows who is behind these cases

• Every pound spent defending a lawsuit is a pound not invested in innovation and jobs

British businesses are under siege. Not from rivals or regulators, but from American hedge funds and their proxies. 

There is something profoundly flawed with the UK’s class action system: it allows hedge funds in Connecticut to quietly bankroll lawsuits against British companies, while lawyers take home millions in fees, claiming they’re fighting for justice. It has created a legal free-for-all that is costing British businesses dearly.

That may sound hyperbolic, but it’s the reality, according to the Civil Justice Council’s (CJC) latest investigation. Their report exposed a system that has grown increasingly divorced from the interests of both victims and justice.

It couldn’t have been more timely. The UK is currently hosting the country’s largest-ever class action: the Australian mining company BHP is facing a £36 billion lawsuit brought by specialists Pogust Goodhead, on behalf of the American hedge fund Gramercy. 

Class actions are legal proceedings in which multiple claimants with claims that share common characteristics seek a remedy against the same defendant. When used correctly, there is an opportunity to highlight a corporation’s failings.

Legitimate suits, like those on behalf of sub postmasters wrongly prosecuted by the Post Office, seek retribution for genuine harm. Other claims, however, exploit the current system. Some even concern actions that occurred overseas, but are brought through the UK’s justice system due to the favourable landscape.

Once a niche tool for redress, class actions have ballooned in recent years. In 2023 alone, the claims involved totalled more than twice Britain’s entire defence budget: £123bn.

This is partly a consequence of the Consumer Rights Act (2015), which expanded class actions to include opt-out procedures. Previously, only opt-in was available, meaning individuals had to actively choose to join a lawsuit. The reforms introduced by the coalition government enabled any citizen to become a claimant, even without ever expressing an interest.

As a result, instead of R&D and business development, UK firms are investing in the expansion of their legal teams.

Nobody really knows who is behind these cases. Currently, there is no requirement to disclose the ultimate source of any litigation funding, allowing foreign actors to quietly influence proceedings with minimal transparency.

The CJC’s recommendations include additional safeguards against conflicts of interest and stricter rules to prevent funders from controlling litigation strategies and settlements.

One might expect such safeguards to be standard in any justice system. While there should be a mechanism to hold corporations to account when law is broken, the current system incentivises opportunistic lawsuits rather than fair outcomes.

Even when companies do settle, consumers don’t win. In Merricks v Mastercard, a collective action case that represented 44 million Brits, the final settlement was £200 million. This may sound sizable, but law firms and funders can take up to half of the pot, leaving the average claimant with little compensation. 

This process can take years, sometimes more than a decade.

Meanwhile, our legal system struggles under the weight of such mega-cases, most of which are neither urgent, nor in the public interest. Class actions were once a noble tool of redress, but today’s reality more closely resembles offshore hedge funds opportunistically targeting corporations through litigation.

There are two critical questions to be asked. Why are British taxpayers supporting civil courts and judicial infrastructure for these cases, and why are British courts being asked to settle claims funded by overseas investors? 

The CJC is also right to raise concerns about portfolio funding, where law firms and funders spread their risk by bundling claims together.

Class actions have their place. They offer a means of recourse to those wronged by large corporations. However, if allowed to continue in this way, it will become more than just an exorbitant cost of doing business. Every pound spent defending a lawsuit is a pound not invested in innovation and jobs.

The CJC has done its job. Now the Government must do its part. We need urgent reform, starting with sunlight on litigation funding and stricter conflict-of-interest rules. That’s not just good policy, it’s a necessity. 

Otherwise, we’re not regulating a legal system. We’re hosting a market, and a rigged one at that.

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