News

Litigation funding – the pros and cons
Tuesday 12 September 2017

Litigation funding is an important financial product that has become increasingly available for commercial claims in Australia over recent years. Dispelling some of the common myths about litigation funding, this article looks at the pros and cons, demonstrating that there are significant pros, and cons that can be turned to advantage.

Size – funding is only for large class actions or insolvency matters

This has certainly been the experience in Australia, where funders have been very active and effective in such actions.

However, litigation funding is now available for smaller commercial claims. Firms such as Augusta are prepared to fund claims of most sizes, with the spend ranging from $20,000 to $1,500,000.

The result is that clients such as small to medium enterprises (SMEs) that may have the means to finance their own litigation can instead use their cash resources to focus on generating revenue.

Oversight – some litigation funders become actively involved in the conduct of the matter

While most funders have a depth of litigation knowledge, it can cause concern for both litigant and lawyer, who may feel a loss of control over strategy and key decisions, and result in the impression of “too many cooks possibly spoiling the broth”.

The solution is to look for a funder whose model does not involve active oversight. At Augusta, once satisfied that the claimant’s legal team has sufficient expertise and experience, it takes a hands-off approach, but remains available to discuss the merits and strategies of a claim with the legal team and claimants, as and when required.

Price – a key consideration in any service contract

Funding can be expensive, and is viewed as often more suitable to class actions or insolvency, with funders charging between 30% and 50% of the gross award or settlement.

The key for both clients and advisers is to find a pricing model that acts as an incentive to resolution rather than as a spur to contest. An example is Augusta’s multiple of money invested. It is easy for all to understand at the outset, and in most cases, means a better outcome for the claimant than if a percentage of gross recovery were levied.

For example, the claimant can achieve 75% of the settlement amount (an additional $510,000) under the Augusta approach as illustrated below.

 

Settlement Trial Win
Traditional Augusta Traditional Augusta
Revenue 2,000,000 2,000,000 3,260,000 3,260,000
Less legal costs  200,000  200,000  400,000  400,000
Less success fee*  810,000  300,000 1,350,000  800,000
Balance to Claimant  990,000 1,500,000 1,510,000 2,060,000
% of Claim 33% 50% 50% 69%
% of Settlement 49% 75% n.a. n.a.
Augusta multiple 1.5x 2.0x

*45% of the damages; Settlement amount of $2m; Trial Award of $3m (plus 65% cost award).

Downside protection – can the funding mechanism indemnify the claimant for adverse costs and / or provides security for costs

The concern here is whether the funder is able to deal with these common cost liabilities and what effect this may have on the claimant’s risk profile.

Key to dealing with this is the financier’s balance sheet strength and its understanding, use of and relationship with the ATE insurance market (and the rating of the insurer’s it deals with). This will be of interest to those lawyers who value the ability of a financier to be able to shoulder the work that is associated with securing ATE insurance, which can be more arduous than securing finance for the claim.

The finance application process – what is required, what does it cost, how long does it take

Time is money and time spent on a long, involved and unsuccessful finance application can have a large impact on both the claimant as well as the lawyer if they are working on a deferred fee basis.

Critical to any involvement with the sourcing of finance is having a clear understanding of what is going to be required as far as documentation, counsel opinions, experts evidence etc (all of which can add to the cost at the outset), what process the financier will undertake to assess the claim and how long this will take.

One way to alleviate the impact of the costs associated with preparing a claim for the financing is to look for financiers, such as Augusta, who recognise the cost of doing business and who are prepared to meet the reasonable solicitors and counsel costs if the funding is accepted.

Alignment of Interests – Funders do not have a direct interest in the case

While it is true that funders are not part of the dispute, and as such do not in that sense have an interest in its outcome, the fact that they are putting their cash at risk ensures that interests are aligned with those of the claimant.

 

Now consider some of the clear pros for litigation funding.

Firstly, litigation financing is non-recourse to the claimant. This makes it easier to assist a claimant who has cashflow constraints such as limited means, a need to tie his funds to the business, or perhaps someone who is risk-averse and does not want to contemplate shouldering his own and the opposing costs if the claim for whatever reason fails.  

Secondly, and perhaps less obviously, a financier’s pre-funding legal review process means that the case is examined by additional sets of trained eyes. That can provide a claimant with additional assurance on the strength of his position – for example, in funded cases Augusta has enjoyed a +90% success rate.

Thirdly, in terms of basic resources, funding can level the playing field in cases where a well-provisioned defendant might have held the upper hand.

Finally, from a practising lawyers’ perspective, there are many positives. Litigation funding can bring in new business from clients that may not have pursued a case, restart a case which may have stalled due to financial fatigue by claimant, it improves cash flow by securing quicker payments and reduces drawdown on costly overdrafts, the legal review process provides professional reassurance, and reduces the negativity of litigation risk for clients.

A finance model such as Augusta’s tackles the core concerns about litigation funding, unlocks the benefits and provides lawyers with a product that can meet their client’s needs.

Augusta Ventures has been funding all size commercial litigation claims since 2014. To date it has funded 113 matters investing $50million+ into cases. If you have a commercial or insolvency claim that would benefit from funding please call us on +612 8311 0555.