Reading time: 6 minutes

The private litigation funding industry in Australia has grown in recent years, providing businesses with a channel to secure funding for large and complex claims. There are presently around 25 active litigation funders in the Australian market, including domestic and overseas funders. Increasingly, litigation funders are a viable option for SMEs with a legal claim that is likely to succeed. This article will explain: 

  • how third-party litigation funding works; and 
  • the advantages and disadvantages for SMEs considering engaging a funder.

How Do Litigation Funders Work?

Litigation funders provide the funding required for legal action in exchange for a portion of any settlement payment or court-awarded proceeds. Put simply, they ‘invest’ in good claims by:

  • paying the cost of the litigation;
  • accepting the risk of paying the other party’s costs if the case fails; and
  • taking a cut of the payout in the event the claim succeeds or settles.

Why Do You Need Litigation Funding?

Going to court is expensive. Even straightforward claims can set you back tens, if not hundreds, of thousands of dollars in legal fees. For many SMEs, this cost is simply too high, especially if you are up against an opponent with deep pockets who can afford to drag out proceedings. 

In the context of commercial disputes, your business is unlikely to qualify for legal aid or any kind of government support. In practice, this means that SMEs are frequently ‘locked out’ of litigation despite having a good claim.

Is It the Same as ‘No-Win, No Fee’?

Litigation funding is not quite the same as ‘no-win, no-fee’, which typically refers to the business model where law firms fund claims themselves. However, the logic is similar: if they think your claim is strong, they will: 

  • take on the risk of financing the litigation; and 
  • take a cut if you win or settle. 

Law firms that provide ‘no-win, no-fee’ services usually only offer them in a narrow range of categories, such as: 

  • personal injury;
  • motor vehicles;
  • public liability;
  • workplace/employment claims; and 
  • professional negligence claims.

Third-party funders can often provide more flexibility, both in terms of: 

  • practice areas; and 
  • bespoke funding packages. 

Engaging a third party funder also means you can utilise your law firm of choice.

How Do SMEs Engage a Funder?

If you are in a commercial dispute and you think that you have a strong claim, the first step will be to speak to a solicitor, who will essentially act as a broker with the funder. Your solicitor will: 

  • prepare a detailed summary of the estimated legal costs and timeline of the case; and 
  • present it to the funder. 

In turn, the funder will consider the merits of financing your claim from a commercial point of view. This means they will consider: 

  • whether the claim has reasonable prospects of success; and 
  • its risk as an investment.

If the funder agrees to finance your case, you will need to enter into two agreements; namely, one with: 

  • the funder; and 
  • your solicitor. 

Each of these will be conditional on the other.

Funding Agreement 
Litigation Costs Agreement 
The funding agreement is between: 

  • you (the plaintiff); and 
  • the funder. 

Your solicitor will negotiate this agreement on your behalf. The key terms will include:

  • your overall budget and timeline, including its application (i.e. how much money will be paid towards solicitor fees, counsel fees, insurance against adverse costs orders, security for costs and indemnities);
  • the sum payable to the funder on a successful outcome, as well as other fees such as ongoing management fees;
  • the extent that the funder has a say in the proceedings (or veto power); and
  • how the agreement can be varied or terminated.
This will be between: 

  • you; and 
  • your solicitor. 

You may want to seek independent legal advice before entering into this agreement. It will be a tailored version of your solicitor’s standard costs agreement, with specific clauses relating to the payment and funding, such as:

  • the ‘non-conditional’ fees charged by your solicitor (i.e. fees that will be usually be covered by the funder’s budget);
  • speculative fees (i.e. work that goes beyond the funder’s budget, which will not be charged if the case fails); and
  • uplift (i.e. if the case is successful, your solicitor may receive a higher overall payout based on speculative costs they incurred, which serves as an incentive for your solicitor to work on the case even if the funding budget does not cover the entirety of the claim).

What Are the Advantages of Litigation Funding?

There are many advantages to engaging a third party funder, including:

  • greater access to the courts, given that litigation funding opens the door for SMEs who have a strong claim but do not have a large internal budget set aside for legal fees;
  • budget certainty, as you are essentially offloading your legal risk, which enables you to focus on moving forward with your actual business; and
  • levelling the playing field because funding will enable you to fight your claim on its merit, rather than facing a well-resourced defendant who could drag the case out strategically until you have no option but to compromise.

What Are the Disadvantages of Litigation Funding?

While litigation funding is often a great solution, there are some downsides, such as:

  • greater complexity, given that litigation itself is complex and it can take a lot of work to arrange the budgetary implications of litigation funding and reach a balanced three-way agreement between you, your solicitor and your funder;
  • lack of control, as once a funder is onboard, they will want close involvement with the case (effectively veto power), which can limit your control over the proceedings;
  • limited availability because you need to have a legitimately strong claim to get anywhere with litigation funding. Even if you think you have a strong claim, litigation funders are unlikely to fund cases that they consider uncommercial based on their own criteria.

Is Litigation Funding Regulated?

The litigation funding industry has been under scrutiny recently. In 2020, the Australian Government conducted a formal inquiry into the industry and began taking steps to regulate it. From 22 August 2020, operators of litigation funding schemes will generally need to hold an Australian Financial Service Licence and each scheme will need to be registered.

Key Takeaways

The increase of third party litigation funding in Australia in recent years opens the door to SMEs who may have previously been locked out of litigation altogether. If you think you have a strong claim, litigation funding is an option worth exploring. However, you should talk it through with your solicitor before proceeding, to ensure you understand the risks involved with bringing on a third party. If you have a large claim that you want to explore and would like help approaching litigation funders, contact LegalVision’s litigation lawyers on 1300 544 755 or fill out the form on this page.

Webinars

Construction Contract Essentials

Thursday 12 August | 11:00 - 11:45am

Online
Understand how construction contracts are drafted and how to protect your construction business.
Register Now

Startup 101: Understanding Cap Tables and ESOPs

Thursday 19 August | 11:00 - 11:45am

Online
Cap tables and employee share option plans are essential for fast-growing startups. Learn more with this free webinar.
Register Now

Expanding to NZ: Structuring Your Business For Success

Thursday 26 August | 2:00 - 2:45pm

Online
Launching a business in New Zealand? Understand how to structure your business for success with this free webinar.
Register Now

About LegalVision: LegalVision is a tech-driven, full-service commercial law firm that uses technology to deliver a faster, better quality and more cost-effective client experience.

The majority of our clients are LVConnect members. By becoming a member, you can stay ahead of legal issues while staying on top of costs. From just $119 per week, get all your contracts sorted, trade marks registered and questions answered by experienced business lawyers.

Learn more about LVConnect

Need Legal Help? Get a Free Fixed-Fee Quote

If you would like to receive a free fixed-fee quote or get in touch with our team, fill out the form below.

  • 2020 Excellence in Technology & Innovation – Finalist – Australasian Law Awards 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice – Winner – Australasian Lawyer 2020 Employer of Choice Winner – Australasian Lawyer
  • 2021 Fastest Growing Law Firm - Financial Times APAC 500 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year - Australasian Law Awards 2021 Law Firm of the Year - Australasian Law Awards
  • Most Innovative Law Firm - 2019 Australasian Lawyer 2019 Most Innovative Firm - Australasian Lawyer