what is it?

Litigation funding is the contribution to the costs of litigation by non parties. Through litigation funding, legal costs and disbursements for the litigant are paid by the funder and any adverse costs orders are also met by the funder in return for a percentage of any settlement monies (usually 25-45%). Funding is generally available to parties in litigation who have a prospect of recovery. The benefit of funding is that the funder will contribute to the costly process of litigation and seek to reduce litigation risks by:

1.     conducting due diligence

2.     obtaining budgets from the lawyers as to costs and caps on fees

3.     monitoring the proceedings as they progress

4.     providing assistance to the lawyers as requested

Should the plaintiff be unsuccessful, the funder receives nothing and must bear both the plaintiff’s costs as well as any costs orders made against the plaintiff.

historical ban on litigation funding

Until recently, the courts have traditionally frowned on litigation funding outside of insolvency matters. Courts were prepared to use the law of champerty and maintenance to rule that litigation funding in matters other than insolvency was illegal.  In some instances, the courts considered that litigation funding was against public policy and as a result unenforceable.

In recent times however, the judicial mood to litigation funding has changed. Driven primarily by the access to justice there is a growing trend towards an acceptance of litigation funding. Firstly, champerty and maintenance have been abolished as crimes and torts in most Australian States including NSW, the ACT, South Australia and Victoria. Secondly, the courts are reviewing arguments based on public policy and now seem to be more accepting of litigation funding as a general principle.

funding in australia

There are a number of companies in Australia which offer to fund litigation in return for a share of the proceeds if the litigation is successful. Funding agreements with these companies typically provide that the plaintiff will pay nothing if it loses. Litigation funding is a valuable resource where for example a person or company has a good claim but inadequate funds, cannot provide security to meet a sufficient security for costs order, or wishes to diversify the financial risk associated with litigation or is concerned about being exposed to pay the other side’s costs.

Unlike the position in the United States and Canada where lawyers can act on a contingency basis (that is, for a percentage of the proceeds if successful), the Australian lawyer (and his or her British cousin) is not entitled to operate along these lines. Whilst the “no win, no fee” business model is certainly in operation in Australia, this is on a conditional rather than contingent basis and only allows the lawyer to collect his or her fees out of the proceeds, albeit with the possibility of an uplift of up to 25 percent (although, query what is being uplifted if nothing is being paid in the event of a loss: one either pays nothing or the full amount, there is never the possibility of paying the costs at the standard rate!).

In broad terms, the logic between the position in Australia is, with respect to our North American cousins, sound given the apparent conflict of a litigation lawyer having a commercial interest (other than on a time spent basis) in the outcome, both from the client’s and the court’s perspectives.

From the client’s perspective, it is not difficult to conceive that a lawyer is susceptible to giving tendentious advice if there is either a quick buck to be had for an expeditious settlement, or a keenness to run the matter rather than compromise in circumstances where a plaintiff wishes to extricate him or herself from the litigation by way of clarification, it is easy to appreciate that the litigation lawyer’s position clearly differs from the transaction lawyer’s as the latter’s entitlement to a share of the proceeds will generally amount to a concert of interest rather than a conflict of interest on the premise that a rising tide floats all boats.

Additionally, and perhaps more importantly, given that lawyers are first and foremost officers of the court, this perhaps places them in an invidious and irreconcilable position insofar as they will be simultaneously an instrument of the court and an interested party with a biased and self serving view. This has the potential to compromise those court processes in respect of which the court relies on the integrity of the lawyers (discovery, preparation of witnesses, to name but a couple).

Conversely, advocates of the contingency fee agreement cite the access to justice point, particularly in the absence of a comprehensive legal aid system which would otherwise deprive potential litigants with meritorious claims from obtaining their just desserts.

So without contingency fee arrangements available which enable some lawyers to consider taking on the significant risk of funding litigation for the promise of a significant percentage of the proceeds of litigation, what is an impecunious or risk averse claimant to do where such an arrangement does not exist, such as in Australia or the United Kingdom.

The emergence of litigation funding has gone some way to fill the breach.

There has been something of an evolution, if not a revolution, in litigation funding in Australia in recent years with the traditional concerns with maintenance and champerty being eroded as the business of litigation funding by non-parties for profit receives encouragement from recent court decisions.

Initially, only liquidators, administrators and receivers under Australian Corporations Law were afforded an explicit right to assign the fruits of litigation in return for litigation funding. Litigation funding provides a means for impecunious litigants to obtain access to justice. The balance struck by courts between concerns about champerty and maintenance, and the problem of high litigation costs denying parties’ access to justice, has increasingly shifted in favour of the latter.

Beyond its obvious appeal to the impecunious plaintiff, litigation funding also offers a risk management tool for plaintiffs wishing to lay off downside litigation risks in return for a percentage of potential returns. In the recent case of QPSX Limited v Ericsson Australia Pty Ltd [2005], the funded party was not an impecunious plaintiff, but rather a “…sophisticated, well resourced commercial [corporation] …” the court not only identified the commerciality of this arrangement but also the added benefit of the funders ensuring the litigation was conducted in an efficient manner by setting budgets and auditing the lawyers’ fees.

The case of QPSX Pty Ltd v Ericsson Australia Pty Ltd arose as a result of a litigation funding arrangement entered into between technology commercialisation company QPSX Limited and Insolvency Management Fund Ltd (“IMF”), a publicly listed company which provides funding of legal claims and other related services. IMF agreed to fund QPSX’s litigation against Ericsson for breach of contract in return for royalties of 24 percent of any settlement and 17 per cent if settlement occurred before trial.

Ericsson applied to stay the proceeding as an abuse of process on the basis that under the funding arrangement, IMF had the power to control or influence the direction of the litigation in ways that would serve its own financial interests. The Federal Court of Australia refused to stay the proceeding as Ericsson had not shown that IMF was inappropriately interfering in the case. Rather, the Federal Court considered that the arrangements between QPSX and IMF had been organized in a way that allowed QPSX to maintain effective control of the litigation. QPSX’s obligation to pay IMF a percentage of the court-awarded damages did not amount to any power to control or influence on the part of IMF.

This funding arrangement was upheld as an acceptable mechanism to allow access to justice and a legitimate resource and risk allocation business strategy for a party in litigation.

recent decisions

So far in Australia the majority of authorities in relation to litigation funding have arisen out of applications to strike out proceedings on the basis that the funding itself was an abuse of process.

The Clairs Keeley (a firm) v Treacy and Ors [2005] matter and subsequent appeals relate to a class action in the West Australia Court of Appeal where the plaintiffs in the first instance were seeking to recover money lost as a result of property developments. There are three Clairs Keeley decisions. The plaintiffs in the original action were five of a number of investors who claim to have suffered loss as a result of a finance brokers scandal in Western Australia. The investors entered into funding agreements with IMF.  Unbeknownst to the plaintiff there was a fee agreement between the funder and the law firm. The defendants sought to stay the proceeding on the basis that the funding arrangements were champertous and offensive to public policy.

The proceeding was stayed on the ground that they were being unjustifiably maintained and an abuse of process. The court found that, irrespective of the terms of the funding agreement, in reality there should be a “de facto assignment” of the plaintiffs’ action to IMF. Rather than merely funding the action on the basis of a commission, IMF would have control over the action and would be running the action for its own benefit. There was also concern that under the arrangement the plaintiffs would not need to undertake risk and cost benefit analyses because they bore no financial risk and could only gain from the litigation.

The court found that plaintiffs’ solicitor was not sufficiently independent of the funder or alive to the possibility of abuse of conflict between the plaintiffs and the funder. The plaintiffs had no interest other than to profit from the dispute and the fee agreement negotiated between the funder and the lawyers placed their interests in a conflict with that of their clients.

In Clairs Keeley No 2, the court would have lifted the stay had it been satisfied that the solicitor for the funded parties were sufficiently independent and alive to the potential conflict of interest between its clients and the funder. Further the court found that the plaintiffs had made a fully informed decision to proceed with the funder and the law firm.

Later in Clairs Keeley No. 3, the Plaintiffs, funder and the law firm were finally able to satisfy the Court of Appeal that the proceedings no longer constituted an abuse of process and the stay was lifted. The effect of this was to allow litigation funding arrangements to continue.

In Fostif Pty Ltd v Campbells Cash & Carry Pty Ltd [2005], the plaintiff who is a retailer of tobacco products launched an action on behalf of approximately 2000 retailers against the defendant wholesaler seeking recovery of allegedly illegally collected state-based tobacco excises. The claims were instituted with the active encouragement and financial support of the funder. The plaintiffs were externally funded by a third party. Under the funding arrangements, the litigation funder undertook to pay all costs in return for a fee of one-third of any judgment or settlement monies. The funder also sought to locate as many of the potential plaintiffs to join in the class action.

The Statute of Limitations on such claims expired shortly after proceedings were issued. Hence the only option available to the tobacco retailers who had not made a claim was to opt into the Fostif proceeding, thereby conferring an effective monopoly on the funder. Opting in required an acceptance of the terms of the funding and other arrangements. Under the arrangements each client agreed to instruct the solicitors already retained and to extend to the funder the right to give instructions on the clients’ behalf. The defendant wholesaler argued that the funding arrangements amounted to trafficking in litigation and gave rise to an abuse of process.

At first instance the NSW Supreme Court stayed the proceeding as a representative proceeding on the basis that:

1.     it was, or was likely to lead to, an abuse of process

2.     it was contrary to public policy

3.     it was unjust to the defendants and constituted trafficking in litigation

However, on appeal, the New South Wales Court of Appeal held on public policy grounds that the funding arrangements did not give rise to an abuse of process. On the contrary, without those arrangements, class members were unlikely to have any recourse to the courts.

Interestingly, the court in Fostif rejected the more cautious approach of its West Australian counterparts in Clairs Keeley, apparently rejecting an interventionist role for the court (and all the more so by defendants who might have an ulterior motive in having the plaintiff’s claim struck out), save where the arrangements between the funder and the plaintiff would result in actual or likely corruption of the court’s processes.  Special Leave for appeal in Fostif has been granted and the High Court will settle this issue in the coming months.

It is fair to say, though, that the business model of litigation funding is, to an extent, not particularly understood outside the legal fraternity, and only then to a limited extent. Consequently, many corporations are not availing themselves of a potentially useful middle ground between embarking on potentially expensive and unwieldy litigation, or abandoning what might have been a “nail on” success rather than expose themselves to ongoing costs, not to mention the potential for adverse costs orders. This also provides a middle ground to the legal profession between turning down an apparently meritorious case and taking it on a “no win no fee” basis, given that contingency fees are not allowed in Australia.

Subject, of course, to the High Court upholding the decision in Fostif, the way has been paved to allow access to legal resources for not only for impecunious plaintiffs, but also risk averse corporations wishing to lay off their downside when seeking to pursue a claim.

This publication represents a brief summary of the law applicable as at the date of publication and should not be relied on as a definitive or complete statement of the relevant laws.

contact us

simon theodore partner commercial litigation t +61 3 9252 2523 e stheodore@vic.gadens.com.au jamie richardson senior associate commercial litigation t +61 3 9252 2539 e jrichardson@vic.gadens.com.au