What is litigation funding?

Types of litigation funding

There are several types of litigation funding, including:

Third party funding

This is when someone who is not involved in a dispute provides funds to a party to a dispute in exchange for an agreed return. Normally, the funding will cover costs such as legal fees and expenses.

No win no fee funding

This is a cost agreement where payment is contingent on a successful outcome. The litigant is informed of the legal merit of the case, the likely costs to prepare and run the case, and the risks of paying the other party’s costs if the claim is unsuccessful.

Conditional fee arrangement

This is any arrangement where a solicitor’s fees will depend on the outcome of the litigation. This type of arrangement was once prohibited because the solicitors were given a direct financial interest in the outcome.

After the event insurance

This is a type of insurance policy which covers legal costs incurred during proceedings. This type of insurance is subject to an agreed limit of indemnity.

Damages-based agreement

This is a contingency-fee funding agreement similar to a conditional fee arrangement in that the lawyer’s fee depends on the outcome of the case.

Adverse cost insurance

This insurance means that if a case is unsuccessful, and the insured party is ordered to pay the other party’s costs, the insurer will cover these costs. If a case is successful, the cost of the insurance will be deducted from the compensation paid.

Disbursement-only funding

This is available for personal injury claims and only through selected, approved law firms which have a guarantee agreement with Legal Funding Australia. The agreement makes the firm a guarantor of the funding loan.

Regulation of litigation funding

An operator of a litigation funding scheme will generally need to hold an Australian Financial Services licence, and the scheme will need to be registered as a managed investment scheme. The operator must also:

• hold adequate professional indemnity insurance;
• hold adequate financial resources, including minimum net tangible assets;
• nominate responsible managers to uphold standards;
• pay annual ASIC fees; and
• be a member of the Australian Financial Complaints Authority (AFCA).

The Association of Litigation Funders of Australia provides (non-mandatory) Best Practice Guidelines for its members to use when developing standards, policies and procedures.

A Parliamentary Joint Committee on Corporations and Financial Services report, “Litigation funding and the regulation of the class action industry” was handed down in December 2020. It identified areas of concern in litigation funding, including:

• 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).

The government responded in the report in October 2021, and recommendations have yet to be implemented.

How Gibbs Wright Litigation Lawyers can help

Discuss your legal rights and obligations regarding your litigation funding matter or dispute with Gibbs Wright Litigation Lawyers today during a no-obligation consultation.