Australia
Answer ... In broad terms, a funder will consider the following factors when evaluating a potential investment:
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Prospects of success:
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- the availability of evidence to establish each element of the alleged causes of action, causation and damages;
- whether the evidence is documentary or oral;
- any proportionate liability; and
- potential defences and evidence to establish them.
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Financial analysis:
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- the legal budget through to judgment;
- the timing of expenditures;
- the total funding sought;
- the likely quantum of the claims and any cross-claims;
- the cost and timing of security for costs;
- potential adverse costs;
- the defendant’s capacity to pay any award or settlement; and
- the likely time to resolve the dispute.
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Risk analysis:
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- whether the claims, if funded, will cause the funder to breach any portfolio concentration limits;
- the defendant’s legal team and attitude to settlement;
- the experience of the solicitors and counsel;
- the law firm’s capacity to run the litigation;
- group member demand; and
- whether the representative applicant can be expected to make commercially rational decisions, give evidence and see the case to conclusion.
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Proportionality:
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- whether the costs, including the funder’s returns, are proportionate to the claim quantum such that value will be delivered to the litigants and any realistic settlement approved by the court (if applicable).
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Litigation risks:
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- the jurisdiction;
- whether the litigation will raise any novel or undecided points of law;
- the risk or existence of competing class actions and funding models (eg, no win, no fee; group costs order); and
- witness risks.
Overall, the litigation funder will consider whether the litigation is commercially viable to fund, having regard to identified risks and returns.
Australia
Answer ... A litigant or litigant’s solicitors should consider the following when assessing a litigation funder:
- the expertise and experience of the funder’s personnel, including whether they have any prior experience in the law and procedure for which funding is sought;
- the financial resources and strength of the funder, and whether it is likely to have the endurance and financial capacity to see the case through to the end, having regard to its other funding commitments;
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the reasonableness (or otherwise) of the terms offered or negotiated, including:
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- the funder’s percentage;
- the amount of funding to be provided (eg, is it capped? Are the lawyers required to carry some of their fees? How will any security for costs be given?);
- the extent of the funder’s involvement in the litigation; and
- whether there are fair procedures for settling the litigation and resolving any disputes;
- the funder’s track record of success, including any previous experience that the solicitors or counsel have had with the funder;
- whether the funder enjoys a good working relationship with ATE insurance providers, which may assist in securing such insurance for the case;
- the funder’s compliance with all applicable regulations and clear procedures for managing any conflicts of interest;
- the funder’s independence from any other party that is likely to be involved in the litigation, including the lawyers and any claimants or witnesses; and
- the solicitors’ assessment of their ability to develop a strong, productive and collaborative relationship with the funder for the duration of the litigation.
Australia
Answer ... A typical process for concluding a funding agreement is as follows:
- Non-disclosure agreement (NDA): An applicant for funding will be asked to sign a NDA with the funder to ensure confidentiality and the free flow of information between the funder, the applicant and the applicant’s lawyers.
- Initial case assessment: The funder will review documents and other information provided under the NDA in an initial assessment to determine whether the case generally meets the funder’s criteria and has merit.
- Detailed due diligence: If the application proceeds, the funder will subject the case to a comprehensive due diligence to assess it against the extensive funding criteria referred to in question 5.1. The funder will utilise legal counsel to evaluate the claim’s prospects of success and will carry out its own financial, investment and risk analysis. If the case appears promising, the funding agreement will be negotiated with the applicant’s lawyers.
Due diligence typically takes some weeks to complete and the application may be rejected at this stage.
- Funding decision: The funder will likely have an investment committee that approves cases for funding. If, following the due diligence, the funder’s team believes that the case warrants funding, it will be put to its investment committee for decision. Investment committees often comprise highly experienced litigators, former judges and investment professionals.
- Signing of the funding agreement: If approved, the funding agreement will be offered to the applicant for signing. The funder may enter into a separate agreement with the lawyers governing the terms on which their costs are to be budgeted, billed and paid.
Australia
Answer ... The typical terms in a funding agreement include the following:
- Extent of funding provided: Whether the funder will pay all, or a proportion of, the legal costs and disbursements, including any cap on funding and whether funding extends to investigation costs, adverse costs, and security for costs.
- Funder’s returns: In the event of success, the funder’s entitlement to recoup its expenditures and a fee calculated either as a percentage of the funded party’s monetary recovery in the proceedings or a multiple of the funder’s outlays, in each case to be paid from recoveries only.
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Funder’s permitted involvement in the litigation: The funder may:
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- provide day-to-day instructions to the lawyers;
- be kept informed of developments in the litigation;
- approve any change to the lawyers or claims being funded; and
- participate in settlement discussions (see also question 7.3).
- Primacy of the lawyers’ duties to the litigant and conflict management: The lawyers’ duties owed to the funded litigant expressly take priority over any duties they may owe the funder and any instructions given by the funder may be overridden by the funded litigant’s instructions.
- Process for settlement: Any dispute between the funder and the funded litigant over whether the proceedings should be settled and, if so, on what terms will be referred to the most senior counsel acting for the claimants, whose decision on these issues is final.
- Termination: The funder may terminate the funding agreement on the giving of written notice and without cause, subject to the funder meeting all costs and adverse costs incurred to the date of termination; the litigant may terminate for breach of the agreement.
Australia
Answer ... Funders operate in a competitive market. The funder’s fees will be negotiated with the litigant’s lawyers and set out in the funding agreement. They cannot exceed this amount and the funding agreement will typically provide that, in any event, they cannot exceed any recoveries in the litigation, reinforcing that funding is non-recourse.
In funded class actions that settle, the funder’s return will be subject to court approval. The court may require the funder’s commission to be reduced, or the funder may decide to reduce its fees, to achieve a settlement or secure approval of a settlement.
Alternatively, the funder may seek a common fund order (CFO) on a class action settlement. A CFO is an order of the court providing that all group members pay a percentage, set by the court, of the settlement to the funder, irrespective of whether they have signed a funding agreement.
Unlike group costs orders, CFOs cannot be made at an early stage in the proceedings (BMW Australia Ltd v Brewster (2019) 269 CLR 574). Uncertainty remains over whether CFOs may be made on settlement or judgment. Judicial opinion is divided. For example, Justice Lee made a CFO entitling the funder to 25% of the gross settlement in Asirifi-Otchere v Swann Insurance (Aust) Pty Ltd (No 3) [2020] FCA 1885. But in Davaria Pty Limited v 7-Eleven Stores Pty Ltd (No 13) [2023] FCA 84 at [179] – [191], Justice O’Callaghan – relying in part on the reasoning of the majority of the High Court in BMW – held that the Federal Court lacks the power to make a CFO on settlement under either its statutory powers in the Federal Court of Australia Act 1976 (Cth) or its equitable jurisdiction.
There are no express statutory or regulatory restrictions or caps on funders’ fees. On a settlement approval in Hall v Pitcher Partners [2022] FCA 1524, Justice Beach said at [51]: “It is in the interests of group members that funders be given a commercial return commensurate with their capital outlays and risks.”
Australia
Answer ... Typically, a funding agreement will entitle the funder to terminate the agreement at any time on the giving of written notice (14 days’ notice is common). If invoked, the funder will not be required to pay any future costs, but will remain liable to meet any costs (including adverse costs) accrued to the date of termination. The funding agreement may provide that if the funded litigant goes on to recover damages or a settlement, the funder will be repaid its outlays from that recovery but will forgo its fee.
Any decision to terminate funding is a serious step by the funder, which may lose its entire investment and crystallise an adverse costs liability if the proceedings then fail. However, it is important that a funder be able to cease funding proceedings that it considers no longer enjoy strong prospects of success or for which the funding arrangements must be restructured (eg, on the consolidation of two sets of funded proceedings).
Australia
Answer ... There is no requirement for a court to approve a funding agreement in advance of litigation, other than in the case of liquidators, which are prohibited by Section 477(2B) of the Corporations Act 2001 (Cth) from entering into any agreement on the company’s behalf that may last more than three months without first obtaining:
- the approval of the court or the committee of inspection; or
- an authorising resolution of the creditors.
Section 477(2B) has led to the development of extensive jurisprudence on the principles to be applied by a court in approving a liquidator’s entry into a funding agreement (eg, see Robinson, In the matter of Reed Constructions Australia Pty Ltd (in liq) [2017] FCA 594).
The Australian Law Reform Commission (ALRC) has recommended that Part IVA of the Federal Court of Australia Act 1976 (Cth) be amended so that:
- funding agreements for class actions in the Federal Court would be enforceable only if approved by the court; and
- the court would be given express statutory power to reject, vary or amend the terms of such agreements (ALRC, Integrity, Fairness and Efficiency – An Inquiry into Class Action Proceedings and Third-Party Litigation Funders – Final Report (December 2018), Report 134, Recommendation 14).
Australia
Answer ... There are few reported decisions of funding disputes. Two cases arising from a funder’s post-termination entitlements (Chameleon Mining – see question 2.6) and obligations (Trafalgar West Investments Pty Ltd v LCM Litigation Management Pty Ltd [2016] WASC 159) were resolved in favour of the funders; while a dispute between funder International Litigation Partners and a claim by a representative applicant to A$1.2 million in expenses remains unresolved (Arasor).
The most significant dispute arose from the settlement of the Banksia Securities class action. Two group members challenged the funder’s and lawyers’ claimed A$19 million in fees and commission. The Victorian Supreme Court appointed independent counsel as a ‘contradictor’ to investigate. The court found that the lawyers and funder had engaged in egregious and fraudulent conduct and appalling breaches of duties owed to the court, and ruled as follows:
- Class counsel were struck off the roll of legal practitioners;
- Damages of A$11.7 million and indemnity costs were ordered to be paid to the claimants; and
- The matter was referred to Victoria’s director of public prosecutions for criminal investigation (Bolitho v Banksia Securities Ltd (No 18) (Remitter) [2021] VSC 666).
Banksia is an outlier in Australia’s well-functioning litigation funding market. In delivering judgment, Justice Dixon said that the process had demonstrated the capacity of the civil justice system to self-regulate funded class actions.
All litigation funding arrangements must:
- unambiguously spell out the rights and obligations of the funder, claimants and lawyers;
- ensure that the lawyers and funder remain independent of each other; and
- ensure that the lawyers scrupulously observe their ethical and professional duties owed to their clients and the court.
Australia
Answer ... A funder is obliged to fund any counterclaims arising from the funded litigation only if this is specifically negotiated and agreed in the funding agreement.