Can SMEs Engage Litigation Funders?

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.

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.