Third party litigation funding in Australia affords claimants a potential avenue of recourse in instances where:
- They are unwilling or unable to fund litigation personally;
- Funding cannot be obtained through creditors; and
- Solicitors refuse to hold their fees or undertake work on a speculative basis.
The Assessment Process
Litigation funders are usually provided with all relevant information so that they may make an informed decision as to whether they will fund the case.
Legal opinions are also often obtained to assist in determining the matter’s prospects of success.
It is important to acknowledge that litigation inherently involves some amount of risk, so these opinions are by no means definitive.
How Funders Take on Risk: The Model
Most litigation funding agreements contain provisions requiring the compulsory acquisition of After the Event insurance cover (ATE) that indemnifies the funder against adverse costs orders if the litigation is unsuccessful. This protects the funder against the risk of paying the other side’s legal costs.
In the event of an unsuccessful outcome in Court, the funder essentially pays for the insurance out of their own pocket. The funder will forfeit their investment and treat it as a loss.
In the event of a successful outcome, the claimant will bear the cost of the premiums. The funder will be reimbursed for any costs incurred throughout the litigation and receive an additional return on investment (Success Fee).
This Success Fee is usually calculated as either:
- A percentage of the case profits; or
As a multiple of the funder’s initial investment.
Success Fees can often constitute between 20 percent and 50 percent of a claimant’s award.
Is the Funding Model Fair?
While this model reduces the amount of funds that are to be returned to the claimant in the instance of a successful outcome, third party litigation funding is predominantly sought in cases where it is the only way a claim may be brought.
Making a smaller recovery is more beneficial to claimants than failing to bring an action at all. In cases where claimants have the means to bring their own action but do not wish to take on any risk, a litigation funder may agree to fund the case.
Overall, litigation funders facilitate access to justice by affording a greater breadth of options to potential claimants.
The participation of litigation funders in class action claims has become increasingly controversial.
Former Attorney General George Brandis is championing for the regulation of litigation funders after they have been criticised for imposing high fees and allowing law firms to do the same.
An example of high fees can be seen from the Black Saturday bushfire victims class action, where Maurice Blackburn received close to $100m in legal costs and administration fees out of an $800m award afforded to the victims.
Litigation funders tend to take on an appreciable amount of risk and expect compensation in the event of a successful outcome. New laws may be imposed in this area that regulate this more thoroughly.
Potential claimants should be aware of this alternative method of funding for legal action where other options are limited.