Australia is the birthplace of legal finance, but it has evolved significantly from its roots in class actions and insolvency proceedings. Increasingly, large businesses are using legal finance as a corporate finance tool to fund and de-risk their commercial litigations and arbitrations.
Use of legal finance in Australia
Although views of legal finance in the region are heavily influenced by views of class actions, today legal finance is used to finance a variety of commercial claims such as international commercial arbitration, investment-treaty arbitration, contract disputes, competition claims, intellectual property and asset tracing and enforcement.
Although use of legal finance among Australian companies is growing, because of the industry’s origins in class actions more education is needed. As awareness and understanding of the category grows, it’s likely that legal finance will become a routine tool used by businesses in the region to manage the cost and risk of high-value commercial disputes.
Specific rules for legal finance in Australia
In the arbitration context, the Australian Centre for International Commercial Arbitration (ACICA) published Arbitration Rules and Expedited Arbitration Rules that came into effect in April 2021. One of the most important headlines from these rule updates was that third-party funding costs can be recovered by a party or awarded by an arbitrator as part of the “costs of arbitration” if the arbitrator determines that such costs are reasonable. That’s especially significant given that Rule 51.3 provides that arbitration costs are borne by the unsuccessful party, subject to the arbitral tribunal’s discretion. The existence of that rule, as well as increasing case law permitting the recovery of reasonable funding costs as part of the costs of arbitration, mean that law firms should be advising their clients about the use of legal finance. Specifically, if a client is entertaining the idea of legal finance for an arbitration, that client can now use funding to remove not only the downside cost of legal fees, expenses and adverse costs, but also third-party funding costs that would otherwise be paid out of any award in a successful case. That’s a significant advantage for any business looking to pursue (and fund) a meritorious claim without having to use their balance sheet to unlock the value of such a claim.
Regulations relating to the funding of class actions in Australia have come and gone in recent times and also been subject to court scrutiny. While uncertainty remains over key aspects relating to the funding of class actions relating to:
- The role law firms can play in funding class actions
- The court’s powers to grant common fund orders
- The court’s powers to permit class closure
- How courts will treat competing class actions in carriage disputes
- The factors courts will take into consideration when approving class action settlements
These issues do not impact the funding of corporate claims where a company negotiates a legal finance agreement with its preferred provider. Nonetheless, the shifting regulatory landscape and a number of recent cases before Australian courts provide a cautionary tale about the importance of choosing large and reputable legal finance providers. Furthermore, where companies have legal disputes that are transnational or multijurisdictional in nature, it is all the more important to choose a global legal finance provider with deep experience and operations across those jurisdictions.
An Australian financial services company was engaged in SIAC arbitration (English law) relating to a payment default by a real estate company under a Facility Agreement concerning the construction of a property development.
Burford made a commitment to fund the case on a non-recourse basis, meaning that only upon a successful resolution of the claim would Burford earn its return, while the company preserved its upside. In case of loss, the company would owe Burford nothing, protecting it against downside risk. Burford enabled the company to pursue the arbitration while retaining meaningful upside. As a result, the company was able to bring its claim, which it did not have the ability to do without legal finance.