Q&A with Paul Reidy: Legal finance in Australia

As a partner at Johnson Winter & Slattery, a leading independent Australian firm, Paul Reidy specializes in large-scale commercial and corporate litigation and class actions. Regularly listed as a leading lawyer in dispute resolution in Australia, Mr. Reidy’s experience in dealing with funded litigation gives him expert perspective on how the legal finance industry is changing the way lawyers and their clients think about dispute resolution in Australia.

 

From your perspective, what are the most salient trends and the most significant pressures impacting law firms in Australia today, particularly as they relate to the economics of law and the market for legal services?

The Australian legal industry has changed dramatically in the last ten years following the global financial crisis and the arrival of overseas firms and litigation funders.

It has also changed due to the expansion of in-house legal teams, which generally means in-house teams are now very sophisticated—this is partly as a result of increased pressure on general counsel to manage legal services and spend.

Traditionally, firms were able to price large matters by reference to their standard market hourly rates and invoice on a monthly basis. Companies now expect firms to offer more competitive pricing structures and cost a matter upfront, so they can assess risk and manage budgets during a case. In the litigation practice area, we’re offering more and more clients risk sharing structures whereby the firm carries a portion of fees pending an agreed successful outcome in the litigation, which assists the client to mitigate their downside risk.

Law firms are also expected to be innovative, savvy and focused on overall risk and returns metrics.

We also think the increased focus of in-house teams on managing lawyers, legal spend and litigation risks means that on the plaintiff side the market is ripe for the expansion of legal financing away from the traditional insolvency and class action spaces and into other areas.

 

Recent research by Burford suggests that clients’ need for innovation from outside counsel has increased dramatically in the last year—105 percent in Australia. In your experience, what kinds of innovation are clients asking for, and does legal finance have a role to play?

We would certainly agree with this research—Australian in-house legal counsel are constantly telling us that they’re seeking alternative commercial solutions to manage litigation risks. We see this primarily through alternative fee structures, utilizing in-house resources to reduce external legal spend, AI technology solutions or deploying legal finance as a way to mitigate litigation risk.

In-house counsel also want to understand and actively engage in claim strategies and pathways to resolution. Recently a large corporate client has also involved an internal facilitator to develop settlement profiles acceptable for that corporate.

We think that legal finance as support for plaintiff side claims run by companies is a very interesting prospect for managing litigation risk, since it allows in-house legal counsel to run claims without using companies’ working capital. We similarly think facilities that assist in mitigating downside (i.e. adverse costs) such as ATE insurance will increase in prevalence as companies look for ways to obtain certainty on the downside impact when embarking on large-scale litigation.

 

Litigation funding was “born” in Australia to address the need for outside capital in insolvency, and it’s familiar in the class action context. Given this long history, legal finance is thus relatively well-known in Australia, but arguably there are gaps in understanding that limit how lawyers here use it. Do you agree? From your perspective, what are the gaps in understanding—or misconceptions—that need to be addressed?

One of the key misconceptions is that legal finance is limited to circumstances where there is an absence of capital—for example the insolvency space or in class action proceedings. The reality is that legal finance can be deployed to fund any type of plaintiff claim, provided the litigation involves a monetary claim and there is commercially viable return from the investment (i.e. costs expended).

There are also misconceptions about the role of funders generally and still perceptions amongst some corporates that funders are tied to or focused on class actions. The key issue is to explain the alternative types of litigation finance and how they benefit the company. The reality is that for large corporates, if there is an appetite to run the litigation, they will probably deploy the required working capital. One of the most attractive benefits of legal finance is that costs factors of running a claim can be effectively mitigated by funding, which fundamentally changes the decision on whether or not to run the claim.

 

How has the legal finance industry changed in recent years, and how will it need to change in order to be more widely utilized across the spectrum of high-risk, high-value commercial litigations and arbitrations in Australia, as it is in the US and UK, for example?

We think the legal finance industry is in a real growth phase with the arrival of many international players including Burford. This and increased readiness by the courts to endorse legal finance, particularly in class actions, has led to increased competition around pricing claims.

While the Australian courts are mindful of returns made by funders, they’ve also unendorsed a “race to the bottom” in pricing for legal finance. They’re increasingly forming a view that funders need to be properly incentivized to continue to fund proceedings so as to ensure the claim is properly prosecuted in the best interests of the class.

To move forward and build corporate books funders must devote considerable time and effort to educate the market and continually look for new ways to support corporate offerings. The funders and lawyers just have to do more.

 

Do you have a sense of how corporates—GCs, heads of litigation and CFOs—perceive legal finance? Are law firms doing a good job of educating their clients about it as one way of managing legal cost and risk?

Law firms are trying but there is still a lot of uncertainty about funders and finance opportunities. The misconceptions about funders and class actions are also difficult to address.

GCs are nonetheless becoming increasingly interested in legal finance as an alternative for managing litigation risk when commencing a proceeding. The key concerns often communicated to us are around retaining control of the conduct of the matter and securing a return that is superior to utilizing working capital, particularly for larger corporates where there may be an opportunity cost in devoting working capital to litigation, but the funds are otherwise available. We think CFOs more generally understand the benefits of legal finance from the perspective of minimizing expenses and taking downside risks off the company.

Ultimately, we think law firms need to do more to advocate legal finance as an option, and we’re presently focused on educating clients on the key benefits of outside finance when embarking on litigation and the risks if they fail to do so.

 

How do you anticipate that legal finance will impact conversations with clients in the future?

It will become an everyday discussion; the question is just how far away we are from that point.

We expect nonetheless, that the use of legal finance will expand dramatically in the coming years, particularly with the entry of more international players such as Burford into the Australian market. Given the benefits, we think legal finance should be part of any conversation with clients concerning large-scale litigation, whether in the context of class actions, insolvency recovery claims or large-scale commercial claims being undertaken by a major corporate.

Corporates should also factor in the ability to utilize legal finance when assessing the risks associated with commencing and embarking on litigation.

 

 


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