As the country holds its collective breath ahead of next week’s Budget, it’s fair to say that business confidence in the UK is lower than the Treasury might like.

Last week, the Institute of Chartered Accountants in England and Wales (ICAEW) reported that business confidence had fallen to a 12-month low, while the Institute of Directors’ Economic Confidence Index shows business optimism at a two-year low. 

And while there are many reasons for flagging investor confidence in the UK, the recent expansion of US-style lawfare is surely one of the most pernicious. Over the past few years, we have witnessed an explosion in high-profile class action cases in this country, with businesses on the hook for billions of pounds.

What is a class action case?

For years now, class action cases have allowed multiple claimants who have suffered a similar harm to seek redress together. Traditionally, these cases were conducted on an ‘opt-in’ basis – claimants had to register their interest individually, and needed to prove that they had actually suffered harm.

But thanks to new rules passed by parliament in 2015, the UK has seen a marked increase in ‘opt-out’ class actions over the past decade – these are cases in which claims are brought on behalf of a large and speculative class of people, without the need to prove actual harm in each individual case. These cases can often involve hundreds of thousands of people, with businesses facing bills in the billions. 

All of this has been supercharged by the growth of third-party litigation funding, a lightly-regulated mechanism which allows investment funds to cover the cost of legal proceedings, in exchange for a large portion of the compensation. TPLF often gives litigant funders undue control over legal proceedings, and creates conflicts of interest for claimant firms, who are torn between their clients and their funders.

As such, the biggest beneficiaries of this class action explosion have not been individual claimants, but litigant funders. In many cases, the vast majority of compensation never gets into the hands of claimants – such as in the famous case of Mr Bates v The Post Office, in which 80 per cent of compensation was reportedly paid to litigant funders. This poses a serious risk to long-term trust in our legal system, particularly if cases are seen to be litigated for profit, rather than in the interests of justice.

This week, the UK’s biggest ever class action case is going through the courts, led by law firm Pogust Goodhead and funded by Gramercy. The High Court will consider a case against Australian mining firm BHP, which could be slapped with a £36bn bill to as many as 600,000 claimants, in relation to an ecological disaster in Brazil – despite the fact that BHP is already settling with the Brazilian authorities, providing redress in the actual jurisdiction where the tragic event took place.

For businesses worldwide, this sends a clear signal – invest in the UK, and risk falling foul of our ever-expanding class action regime. For businesses looking to test new products or systems, this is a particular disincentive – once again moving the UK to the back of the queue on innovation. As the Adam Smith Institute’s recent work on this subject highlights, we are now at risk of losing business to other jurisdictions with less litigious legal systems.

The UK’s class action boom is yet another disincentive to investing here, at a time when the country should be looking to maximise its appeal to businesses. A number of relatively small changes to our rules around litigant funding could create a fairer class action system, which ensures business confidence while still giving legitimate claimants an opportunity to seek redress. We don’t need to throw the baby out with the bath water – but we can’t continue along the path of ever-greater business liability, at a time when our economy sorely needs a boost.