What is Litigation Funding?

If you’re someone who’s currently in need of legal funding or just curious about it, this piece is for you.

What is litigation funding and how does it work?

Litigation funding is a legal practice that allows a third party that is unrelated to the lawsuit to provide capital to a plaintiff in return for a portion of any financial recovery from the same lawsuit. It’s also called legal financing or third-party litigation funding.

This practice levels the playing field in the legal system in Australia as it enables those who lack funding to litigate a claim.

The capital provided by a litigation funding firm is often used to pay for legal expenses like attorney’s fees, expert witness fees, and other court expenses.

It’s also often structured as a non-recourse investment, not as a loan. Meaning, that even if the funded lawsuit does not result in a financial recovery, the plaintiff still won’t owe anything.

Other Types of Litigation Funding

Litigation funding is not a one-size-fits-all type of set-up. The way things work will depend on the arrangement of the plaintiff, attorneys/law firms, investors, and the regulations that cover the practice.

Third-party funding

This is when a party not involved with the case pays for the legal fees and expenses of the lawsuit in exchange for an agreed return.

No win, no fee funding

This is one of the most common types of funding as it allows you to make a compensation claim with no financial risks involved. You only pay your lawyers if your claim is successful.

After the event insurance

These are insurance policies that normally cover the legal costs of a claimant or a defendant when the case is either lost at trial, abandoned, or settled.

These insurance policies are often purchased at the point when the solicitor begins a claim.

Adverse cost-insurance

This is a type of insurance that covers the costs of the insured party if the case is unsuccessful, and he or she is ordered to pay the other party’s costs.

On the other hand, if the case is successful, the cost of the insurance will be deducted from the compensation.

Damages-based agreement

This set-up is also called a contingency fee agreement. It means that the fee of the litigator will depend on the success of the claim, instead of an hourly rate. The litigator is often given a percentage of the damages that are awarded to the client.

Disbursement-only funding

This kind of agreement is often used in personal injury cases. And you may get this set up from only a handful of selected and approved law firms in Australia that have a guaranteed agreement with Legal Funding Australia.

Litigation Funding Regulations

Any litigation funding company should hold an Australian Financial Services License and the funding scheme that they operate must be registered as a management investment scheme as well.

Aside from these, the funding company must also:

  • Have adequate professional indemnity insurance
  • Hold sufficient financial resources
  • Assign responsible managers to maintain high standards
  • Pay annual ASIC fees
  • Be a member of the Australian Financial Complaints Authority

The Association of Litigation Funders of Australia also provided non-mandatory Best Practices Guidelines to the members of its association.

This guideline lays out the best things to do when developing standards, policies, and procedures.

Areas of Concern in Litigation Funding

According to a Parliamentary Joint Committee on Corporations and Financial Services report, these are only some of the key areas of concern in the said practice.

  • the participation of foreign litigation funders, which are not incorporated in Australia and so are subject to less domestic scrutiny (recommending the restriction of litigation funders to Australian law and jurisdiction).
  • the Federal Court’s constrained ability to regulate litigation funding (recommending litigation funding agreements be approved by the Federal Court, with the court to have the power to alter, vary or amend an agreement).
  • the lack of transparency about settlement agreements (recommending the mandatory publishing of specific information when a settlement is approved); and
  • solicitors, barristers and law firms having a financial interest in a litigation funder that is funding the same matters in which the solicitor, barrister or law firm is acting (recommending the uniform solicitors conduct rules be amended to prohibit this).

Seek legal advice from experienced litigation lawyers

If you need some help to fund your claims, it’s best to discuss legal funding matters with lawyers who are well-versed in litigation funding. This way, you can make the best decisions that will help win your case.