How to Buy a Piece of a Lawsuit and Impoverish a Country

This article originally appeared on Inside Climate News, a nonprofit, nonpartisan news organization that covers climate, energy and the environment. Sign up for its newsletter here.

When a foreign mining company sued Greenland in 2022, the government’s lead lawyer thought he was prepared. Paw Fruerlund had handled similar cases before, and he believed the law and facts were on his side.

When he arrived at one of the first hearings, however, Fruerlund stared across the table at 12 corporate lawyers from two firms representing his opponent, an Australian company called Greenland Minerals. There were so many, they spilled across two rows of seating, Fruerlund recalled. He fretted that his own three-person team, now greatly outmatched, might strain the budget of Greenland, a semi-autonomous nation of mostly Indigenous Inuit people.

Within months, the company’s lawyers were contesting even basic issues, like which languages emails could be written in, dragging out the case’s timeline.

One reason could be that Greenland Minerals isn’t paying its own legal bills. Instead, the company struck an agreement with Burford Capital, a litigation financier, to pay those fees.

Litigation finance is a multibillion-dollar sector devoted to funding lawsuits and corporate legal departments. In an arbitration case like Greenland Minerals’, these “third-party funders” generally agree to take a 20 to 50 percent cut of any award or settlement in exchange for assuming legal costs. If the company loses the case, the funder gets nothing. But the best funders report win or settlement rates of 75 percent or higher across the various forms of litigation they finance.

Companies like Burford have been betting on cases like Greenland Minerals’, where foreign investors sue governments before ad-hoc panels of arbitrators, since the 2000s. The arbitrations are part of a system known as investor-state dispute settlement, or ISDS, which is built into thousands of international investment agreements and contracts that give foreign businesses formidable rights. 

The arbitrators hearing the cases are generally corporate lawyers, and the system typically operates without precedent or appeals. Corporations can use the system when governments take actions that affect their investments, like seizing assets, canceling contracts or hiking taxes, yet some companies have won cases despite having violated domestic laws, human rights or environmental protections. 

A rush of third-party funding into ISDS over the past 15 years coincided with a sharp spike in the number of claims filed, leading critics to charge that Wall Street is driving the increase. Now, with fossil fuel companies beginning to file claims when governments phase out their products, many politicians and environmental advocates worry the system is acting like a brake on climate action.

Yet the role of litigation finance in ISDS has gone virtually unnoticed by the public even though governments’ taxpayers are footing the bill for the system’s awards and settlements — more than $110 billion so far. The majority of cases are brought by investors from wealthy countries against developing nations. 

Greenland Minerals filed its claim with a panel of arbitrators after the nation’s parliament enacted restrictions on uranium mining, prompted by concerns that the company’s rare-earth mine would contaminate the landscape with radioactive elements mixed in with the ore. The company has said it could seek up to $11.5 billion if Greenland refuses to allow its operation to proceed, a figure roughly six times greater than the government’s spending last year. 

Some funders argue their financing helps cash-strapped companies access justice when governments expropriate the businesses’ only assets. They are bringing a market solution, they say, that levels the playing field between small investors and governments. 

In the case of Greenland Minerals, however, the company could have afforded to pay its legal bills but sought funding anyway, said Daniel Mamadou-Blanco, managing director of its parent company, Energy Transition Minerals. The company wants the ongoing arbitration to proceed as quickly and efficiently as possible, Mamadou-Blanco said.

Burford Capital declined interview requests for this article and did not respond to detailed written questions.

While litigation funders make the same sort of bets in other legal systems, ISDS is uniquely attractive: It is set up specifically for foreign investors to file cases against governments, not the reverse. The rules of the system are widely perceived to be business-friendly. And the awards are often enormous. The amount listed in the Greenland claim is orders of magnitude more than the $150 million the company has invested, for example, thanks to the ability to seek “lost future profits.” 

Insiders say third-party funding in ISDS is widespread. But because funding arrangements are rarely disclosed, it is impossible to know how many of the claims filed each year receive outside financing. 

Using public records and the legal platform Jus Mundi, Inside Climate News identified scores of funded claims, including some challenging democratically enacted regulations. Many of these cases push the limits of what the ISDS system was originally designed for: stripping politics out of disputes and encouraging foreign investment by protecting those businesses from the most egregious forms of government overreach, like expropriation. 

“I see it as pouring kerosene into a fire,” said Lisa Sachs, director of the Columbia Center on Sustainable Investment, about third-party funding in ISDS. “It just adds even more perversity and insane incentives and players to a system that is already so corrupted and problematic.”

Now, funders are looking ahead to what could be a new frontier for litigation finance. In November, Burford released a survey of corporate general counsels that found that governments’ transition away from fossil fuels is widely expected to increase litigation, including investor-state arbitrations. Burford, the report said, is ready to help. 

A ‘wealth extraction mechanism’

Paying for another person’s lawsuit had been banned in many countries since the Middle Ages, when lords used their wealth to manipulate justice systems and drum up litigation. But restrictions on the practice relaxed around the turn of the century.

The 2008 financial crisis proved to be a watershed moment. Hedge funds, pension funds and other institutional investors searching for alternatives to volatile financial markets began plowing billions into litigation-funding companies — and generating outsize profits. 

Burford, the largest publicly listed litigation finance firm, reported a 26 percent gross internal rate of return over 15 years ending in September. This measure of the company’s annual performance is roughly double the S&P 500’s return for the same period, according to James Hollier, a portfolio manager at Silver Beech Capital Management, an asset manager invested in Burford.

“That is a higher return combined with a longer track record than almost any other private investment I can think of,” Hollier said.

ISDS can be especially appealing. While a claim might cost several million dollars and take years to pursue, awards can run into the hundreds of millions or billions of dollars. And unlike other defendants, governments generally cannot hide behind bankruptcy to avoid paying a debt. 

Over the course of the 2010s, litigation finance firms poured more and more money into ISDS claims, according to several funders and lawyers. That same period also saw a sharp rise in the number of investor-state claims, with 85 filed in 2015, more than twice as many as five years earlier, according to data compiled by the United Nations. 

The size of ISDS awards skyrocketed, too: Over the past decade, the average award has reached $256 million, 10 times higher than it was from 1994 to 2003, according to UN data. 

Funders say that if they are driving up the number of cases, it is because they are backing worthwhile claims that might not otherwise be pursued for lack of funds. They say they decline to back the vast majority of requests they receive, weeding out bad claims along the way, and have a strong incentive to keep litigation costs low. Several funders and advisers also said the sector has been backing fewer claims in recent years than in the 2010s. 

“We would not stay in business if we funded speculative claims,” said Susan Dunn, director of the Association of Litigation Funders of England and Wales and the founder of U.K.-based Harbour Litigation Funding.

In some cases, funders back claims where the company in question has no cash because their assets were seized, said William Kirtley, a lawyer who handles investor-state claims for small- and medium-size businesses. In a funded case against Egypt, for instance, a Finnish iron ore developer won $115 million after he was sentenced to 15 years of hard labor on false charges.

“Like any tool, it can be used for good or bad,” Kirtley said. 

Critics argue that these defenses ignore problems with the ISDS system. Because investment treaties and contracts grant rights to businesses but not states, they argue, it is inherently biased against governments. 

“It’s taking a very flawed system and exploiting all of its flaws for the benefit of speculative finance,” said Frank Garcia, a professor at Boston College Law School who has studied ISDS. 

Garcia and other critics say funders influence which claims are pursued and how they are litigated. While funders generally say they do not steer cases, they clearly play a role. Tenor Capital, which has funded claims against Venezuela, Peru and Colombia, among other nations, has taken board seats on the companies it backs. Burford has said in its regulatory filings that “we routinely consult on litigation strategy, participate in choosing arbitrators and expert witnesses, comment on draft pleadings, assist in the creation of the damages theory and consult on potential settlement, management of spending and performance against budget.” 

Then there are fears that foreign governments could be funding companies’ claims for geopolitical purposes. The largest investor in Burford’s asset management business is an unidentified sovereign wealth fund, for which the company has created dedicated investment vehicles. The funder has said it makes its investment decisions internally and its investors are not involved.

And because governments’ treasuries foot the bill for awards, Garcia likened third-party funding in investor-state claims to a “wealth extraction mechanism” that transfers money from taxpayers and public coffers in developing countries like Colombia and Romania to financial firms in New York and London.

That transfer has proved to be extraordinarily lucrative. While ISDS is only one of many forms of litigation that the finance sector backs, last year Burford cited an award in one case to report a more than 600 percent jump in net income, to $718 million. That same year, according to a securities filing, the company’s co-founders each received more than $11 million in compensation, including long-term incentive awards.

With few regulations and little oversight, funders have pushed litigation finance into ever more creative and complex instruments, packaging cases into portfolios to spread risk much like banks have done with mortgages. In some cases, funders might offer a law firm what is effectively a line of credit. In others, they say they help corporate clients turn their general counsel offices into profit centers, converting legal claims into cash by monetizing pending lawsuits. 

As executives and investors have profited, someone is paying the bill. And in the case of ISDS, that someone is often the taxpayers of small or developing nations.

‘Our backyard’

The Arctic town of Narsaq is in southern Greenland, where grassy plains and cloud-rimmed mountains rise from the surrounding iceberg-dotted fjords. Most of the 1,400 or so residents are Inuit, and their economy has long relied on the health of the land, running on a combination of fishing, hunting and sheep herding. 

“Our forefathers’ way to live is that they respected nature,” said Mariane Paviasen, a Narsaq resident. “They knew that if someone is destroying nature, the consequences will be that we will not be able to live in the land. So that’s very important to us, that we keep our land as clean as possible.”

When Greenland Minerals arrived in 2007, Paviasen didn’t see the company as a threat. Greenland, a self-governing Danish territory, had a ban on uranium mining at the time. But the prohibition quickly emerged as a problem for Greenland Minerals’ Kvanefjeld project. The rare earth minerals like dysprosium and neodymium that they were seeking, used in technologies such as electric vehicles, could not be extracted without also removing radioactive elements as a byproduct. So the company set about lobbying and working with the government to repeal the prohibition. In 2009, that included bringing on former Greenlandic prime minister Lars-Emil Johansen as chairman of the company’s board. 

By 2013, the government repealed the ban, an act done “specifically to enable the development of Kvanefjeld,” according to Energy Transition Minerals, the mining firm’s parent company. 

Rather than accepting defeat, Paviasen dug in. She had been conducting online research into how uranium mining had affected Indigenous communities around the world, and learned the projects had wrought devastation in the Navajo Nation, aboriginal communities in Australia and communities in African nations, among other places. 

Paviasen had to do this research, she said, because neither the government nor the company gave locals enough information about the project or its potential consequences. 

“We needed to understand what is happening in our backyard,” she said.

Paviasen recalled one meeting held by the company that she attended along with a handful of other women. Through an interpreter, the group voiced fears about the toxicity of the project and what the influx of hundreds of foreign male workers would do to their small town. A company representative brushed off those concerns, Paviasen recalled, and insisted that mining would help the community develop “properly.”

Greenlanders have fought for centuries to break free of Denmark’s colonial rule. Even after Greenland lost its colonial status in 1953, its people have suffered injustices, including the forced adoption of children into Danish families and forced sterilizations. Greenland has regained some of its sovereignty, but the nation of 57,000 remains reliant on Denmark for financial support. Now, Paviasen said, her country risks trading subjugation by Denmark for dependence on mining companies.

Paviasen and other Narsaq women formed the “Uranium? No” organization, which grew into a national movement focused on educating Greenlanders about the environmental and health risks associated with uranium mining. They warned people about diseases like lung cancer and contamination in water that could last thousands of years. 

In April 2021, when Greenland Minerals was still seeking its exploitation license, Paviasen’s movement forced snap elections. Anti-uranium parties prevailed and Paviasen was elected to the parliament. The new government tightened limits on uranium extraction, effectively blocking Greenland Minerals’ project.

The company filed its request for arbitration the following March, asserting that it had complied with all legal requirements to obtain an exploitation license and thus had a right to receive that license even with the new restrictions. It carried out several public consultations, it said, and shared technical reports in Greenlandic. The government’s denial of the license amounted to expropriation, the claim said. 

Mamadou-Blanco, with the firm’s parent company, said the government had invited Greenland Minerals to the country and encouraged it to spend a significant amount of money developing the Kvanefjeld project. When Greenland Minerals was on the verge of getting its final license, he said, “we’re told there’s a change of law and what we should do is simply pack up and go.”

Mamadou-Blanco said the company’s aim with the ISDS case is to get the government to allow it to proceed with the Kvanefjeld project. While Burford is providing funding, it has no role in litigation decisions, he said. 

Over time, arbitrators have interpreted corporate rights in ISDS more expansively, allowing companies to claim “indirect expropriation” when governments enact stricter regulations. The effect is to cap environmental and health protections so that any rollbacks — such as Greenland’s 2013 lifting of its uranium mining ban — can’t be reversed without the risk of massive penalties. 

Inside Climate News identified similar instances where litigation funders have backed cases challenging governments’ environmental regulations, including two claims filed following Colombia’s restriction on mining in a sensitive ecosystem that is also a massive carbon sink. Another funded case was brought in response to the scuttling of a gold mining project in Costa Rica. The country’s Supreme Court had found the project violated citizens’ constitutional right to a healthy environment. And a deep sea mining company, backed by a funder, filed a claim against Mexico after the government denied a permit out of concern for the environment and local fishing communities. In that case, the funder will receive most or all of the $37 million award. 

Funders argue that claims like these are “meritorious” because many of them prevail. Critics say that argument misses the point. 

“Third-party funders are still profiting from the financing of claims against governments that have engaged in good-faith conduct taken in the public interest,” said Columbia’s Sachs. Such cases, she said, shouldn’t be brought in the first place.

Paying polluters and their financiers

In the coming years, as governments try to rein in fossil fuel use and investors mobilize what could be trillions of dollars for renewable energy projects, the number of investor-state disputes is expected to soar. Governments could face hundreds of billions of dollars in ISDS claims over phaseouts of oil, gas and coal projects, according to one estimate. Disputes over wind and solar projects are sure to rise, too. 

In its legal finance outlook this year, Burford identified a rise in arbitration cases in Latin America, “especially in sectors impacted by the nationalization of lithium projects, market volatility around oil, gas and liquefied natural gas prices, and the $1.7 trillion of investment in energy, mining and construction connected to the global energy transition.”

Fossil fuel and mining companies have filed more ISDS claims than any other industry. For many politicians, advocates and legal experts concerned about climate change, the question now is whether litigation finance might drive yet more claims as governments enact climate policies.

In what could be a preview, a tribunal in 2022 ordered Italy to pay more than 190 million euros to a British oil company after the government denied an application to drill offshore. When it filed the claim in 2017, Rockhopper Exploration turned to Harbour Litigation Funding, which counts pension funds and Ivy League endowments among its largest investors, according to Dunn, Harbour’s founder. The arrangement left Rockhopper free to spend its money on its other main project, an oil field off the coast of the Falkland Islands, where it is hoping to drill. After the award was announced in May 2022, Rockhopper said its share would “make a material contribution” toward developing the Falklands field.

The company could have afforded the case on its own, Dunn said, but “didn’t want to spend what money it had on the claim.” 

Yet the story didn’t end there, and neither did the financial arrangements. Italy moved to have the tribunal annul the award, a tactic that rarely works but can delay payment by years. Harbour lost patience and sold its stake for an undisclosed amount to another, unidentified financier.

“We decided that was all going to take too long,” Dunn said. “So we were very happy to be bought out.”

Rockhopper declined to comment.

Outside of ISDS, funders have often been on the other side of environmental cases, backing claims against major polluters in national courts. 

Harbour financed a class-action lawsuit against the operator of an oil project off the coast of Australia that affected 15,000 Indonesian seaweed farmers. A case against mining giant BHP, for a catastrophic dam collapse in Brazil in 2015, also received funding. And in 2010, Burford backed an Ecuadorian lawsuit against oil giant Chevron for mass contamination of the Amazon rainforest. (The funder later canceled its finance agreement, citing evidence that the lawyers it was backing committed fraud.) 

The U.S. Chamber of Commerce is one of the most vocal critics of third-party litigation funding in those types of cases, where businesses are the defendants. The industry alliance has said funding can increase the cost and duration of litigation and allow profit-driven entities to influence legal decisions. 

However, a chamber spokesperson declined to comment when asked by Inside Climate News about its stance on third-party funding in ISDS cases, where companies are plaintiffs and the ones receiving the funding. 

‘Heads I win, and tails I do not lose’

How many ISDS claims receive third-party funding? The simple answer is no one knows.

Jim Batson, chief operating officer at Westfleet Advisors, which connects law firms with funders, estimated more than half of “high-stakes” claims receive funding — financiers generally back claims only when the award is expected to run into the tens of millions, at least. Another adviser who declined to be named said he wouldn’t be surprised if 60 percent of claims are funded.

Developing countries, which are often on the receiving end of claims, have been particularly outspoken during ongoing ISDS reform talks at the United Nations about wanting to regulate or ban the funding sector from investor-state disputes. An official representing Nigeria, which has faced at least seven ISDS claims, questioned “why a total stranger who has suffered no injury should be allowed to benefit from the injury caused to others?” Argentina, Burkina Faso, Kenya and Uruguay have also spoken out. 

Yet sweeping changes appear unlikely. The World Bank and some other institutions that facilitate ISDS arbitrations have instituted rules requiring parties to disclose to arbitrators whether they’ve received funding. That information does not need to be made public.

Funders have argued against the rules, saying oversight is unnecessary because there are no indications of conflicts or other problems. It is impossible to verify that assertion, however, because the information needed to do so is in the possession of the funders, who won’t release it. Those same companies are tight-lipped even with their own investors about which cases they back, and some boast about the proprietary datasets they have amassed from confidential case information. 

“We put that data to use in our investment process,” Burford’s co-founder and chief executive, Christopher Bogart, said on a recent podcast, “which is neither publicly available, nor replicable.” 

Public disclosure of that data would reveal whether funders are repeatedly steering cases toward particular arbitrators, for instance, or if there are financial connections between funders, arbitrators and expert witnesses, suggesting potential conflicts of interest.

The ISDS system, which allows the company bringing the claim to select one of three arbitrators overseeing its case, lacks strict ethics rules. A lawyer acting as an arbitrator in one case can serve as legal counsel in another and an expert witness in a third. It’s as if a judge in a U.S. court also represented companies as legal counsel in other cases. 

A few arbitrators have broken with their notoriously insular peers to raise concerns about litigation funding. They have been punished for doing so, as in the case of arbitrator Gavan Griffith, who in 2014 wrote that third-party funding was like the “gambler’s Nirvana: Heads I win, and Tails I do not lose.” The statement underscored that funders can profit from cases but are not required to cover governments’ legal costs if the claim is unsuccessful. Griffith told Inside Climate News that he lost arbitral appointments because of his comments and was made “public enemy No. 1” in the sector. 

This year, arbitrator Philippe Sands balked at the “jaw-dropping” legal tab — $33.3 million — of a mining company challenging an environmental regulation, and suggested third-party funding may have added to the costs. The funder in the case stood to capture 51 percent of the award and had also taken a seat on the company’s board. Sands expressed “the most serious concerns” about such financing arrangements. Soon after, in a separate case, another mining company tried to get Sands removed as an arbitrator by arguing that he was biased against the financiers. 

Like many aspects of investor-state arbitrations, the role of firms like Burford is often disconnected from the communities that are affected by the outcome of claims. Paviasen, the Greenlandic activist and politician, was not even aware that Greenland Minerals was relying on a third-party funder until speaking with Inside Climate News.

“It’s sad for the company and sad for the other company who was willing to help,” Paviasen said about the claim. “It shows that they don’t have respect for local people.”

She said people at Burford should visit Greenland. “Come to Narsaq and talk to us; feel us,” Paviasen said. “Then maybe they can have a human feeling.”

Inside Climate News contributing writer Jake Bolster contributed to this report.