Legal finance comes of age in Australia

Australia is the birthplace of litigation funding, where it emerged first as a necessary solution to the challenges of insolvent claimants and their representatives before becoming almost ubiquitous in the context of class action lawsuits. Following its beginning as a revolutionary, disruptive financing option for claimants, however, the evolution of funding in Australia largely stalled. As a result, the circumstances in which funding is used are still relatively limited compared to other similar common law jurisdictions such as the UK and US.

The Australian legal market has not, of course, stood still. Indeed, the market has become ever more competitive, and factors such as the continued growth of in-house legal teams, higher fixed costs and “NewLaw alternatives” are putting pressure on law firms to become ever more innovative and nimble, not only in how they serve clients but also in how they finance their businesses.

No wonder, then, that recent research demonstrates a growing appetite for a new model of litigation funding—or more properly, “legal finance”—in Australia. With the introduction of innovative funding models, the availability of capital in large-scale commercial matters and clarification around the role of funders, legal finance is coming of age in Australia.

And from our newly opened office in Sydney, Burford wants to show law firms and their clients how legal finance can transform the way they do business.

 

Growing appetite for legal capital in Australia

Since 2012, Burford has commissioned annual research to monitor global legal trends. The 2018 Litigation Finance Survey, which featured responses from 495 lawyers and corporates in Australia, the UK and the US, found that 83 percent of Australian respondents expected litigation funding to be increasingly important in the business of law. Additionally, among lawyers whose organizations have not used litigation funding, 72 percent of Australians reported being likely or very likely to make use of it in the next two years. Combined, these data points demonstrate an appetite in the Australian legal market for increased use of litigation finance and greater appreciation for its potential benefits.

 

Evolving funder landscape

Historically, the Australian litigation funding landscape has been dominated by a narrowly defined group of companies offering capital to back class actions. Given the transactional nature of the capital, funders have typically provided a narrower scope of offerings with more restrictive terms—including the stipulation that they be able to control litigation-related decision making.

It is, of course, a desirable outcome to users of litigation finance in Australia to attract global financiers and increase the supply of capital for litigation purposes, rather than relying on a small pool of domestic firms. As more finance providers like Burford enter the market, the way funders work with their clients—and the types of offerings they provide—will rapidly change to meet client demands.

 

How litigation funding becomes legal finance

As the definition of litigation funding expands to become more inclusive of all forms of legal finance, Australian lawyers and their clients can expect a number of changes:

  1. New financing options

Without question, the financing of class actions will remain a mainstay of the Australian funding industry (in fact, Burford is very publicly invested in the class action against AMP run by Quinn Emanuel Urquhart & Sullivan).

But going forward, there will be many other ways in which legal finance is used by law firms and litigants in commercial litigation and arbitration.

In 2017, Burford committed $1.3 billion to litigation, of which a relatively small amount was allocated to class actions. Instead, the vast majority of our capital was committed to high-value commercial litigations and arbitrations, including IP matters, contract disputes, competition claims, construction disputes, insolvency and even defense matters. In our experience, these are the types of high-risk matters that corporates prefer to finance off their books in order to preserve cash and create legal spend certainty, and that law firms wish to pursue without having to do battle with their clients over hourly fees.

In addition to financing a wide range of matters, Burford also offers an array of capital models. Financing can be provided on a single-case basis to pay legal fees and expenses, or across a pool of matters in the form of portfolio financing—which offers greater flexibility. When a law firm or company secures portfolio financing, the funds associated with the investment are immediately available for use in any of the cases of the portfolio (instead of being restricted to a particular case) and can even be used for business purposes beyond litigation. And because risk is diversified across multiple matters, the pricing tends to be more favorable.

  1. Different approaches to pricing

In the past, claimants seeking litigation funding for class actions have had to accept one-size-fits-all-style pricing from funders, but as legal finance evolves, that will no longer be acceptable. At Burford, how we price an investment is flexible to meet the needs of our counterparties. The cost depends on the risk appetite of the claimant and the law firm, in addition to all the circumstances and merits of the case. As more law firms and clients seek capital for the use in complex commercial matters, this approach to pricing will become the norm.

  1. Expectation of client service

As law firms and companies increasingly move away from transactional litigation funding to pursue strategic legal finance, there will be a growing demand for litigation finance firms to provide high-quality client service. In part, there will be an expectation for more transparency, so clients can have confidence that their funder of choice has the capital needed to sustain long-lasting, complex commercial cases. But there’s also an opportunity for funders to add value beyond simply providing capital. Burford performs all diligence in-house; collectively, our team of over 50 lawyers has reviewed thousands of matters—and our clients benefit from our ability to provide insights that drive more strategic decisions. Although we are thrilled for our clients to benefit from our expertise, we nevertheless remain very firmly of the opinion that control should remain with each client and their respective lawyers (and each funding agreement is written to reflect this).

 

Changes expected following 2018 ALRC report

Early in 2019, the ALRC is expected to release the results of its year-long inquiry into the litigation funding industry in Australia, with a particular focus on the role financiers will play in the class action space. If the potential proposed recommendations are implemented this could mean significant changes to the Australian legal landscape on the horizon.

Among the proposed recommendations was the licensing of litigation funders, the requirements for which were laid out in Proposal 3-2—these replicate the ongoing professionalization of third-party funders that is already naturally occurring in the market. Succinctly, a handful of litigation financiers are starting to behave more like proper financial services firms creating a divide with other players. The proposed licensing requirements will just reinforce this trend. Another proposed recommendation that could make a huge impact is Proposal 5-1—that solicitors acting in class action proceedings be permitted to enter into contingency fee agreements.

At Burford, we strongly favor these moves, but also advocate that the permission to work on a contingent basis be more broadly extended to encompass all other types of disputes. This would bring Australia in line with other leading jurisdictions over the world that have determined that contingency fee arrangements promote access to justice to the benefit of society at large.

The extraordinary financial risk that law firms assume in representing clients on a contingent basis renders third-party funding even more essential. Successful law firms will need a partner to help manage contingent risk in order to represent deserving clients who have meritorious but highly risky and expensive matters, which may indeed prove unsuccessful.

Although the proposed recommendation may not be enacted—it is likely that Australia will eventually accept contingent fee arrangements as it has proven to be a successful access to justice tool in other jurisdictions not just for class members but also for businesses. This will lead to an increased demand for litigation finance in order to cover the extra risk taken on by solicitors.


Additional reading

Disclaimer

This section of Burford’s website is intended for the use of Burford’s public investors and is required to be provided under AIM Rule 26. Burford also maintains a separate private funds business. Information presented here is not intended for the use of private fund investors, nor is it presented in the appropriate form for such investors. Moreover, Burford does not present this information as a solicitation of private fund investment, which occurs only through appropriate offering documents.