Why clients have a right to know about litigation funding

  • Posted By: Aptum Admin
  • November 4, 2020
  • 4 Minute(s) to read
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In the UK, advising clients about litigation funding options is part of a plaintiff lawyer’s professional obligation by law, in order for clients to make informed decisions about financing their litigation.

Beyond the general requirement to provide “clear and timely advice” as per the Australian Solicitors’ Conduct Rules – which is not enforceable by a third party – Australian lawyers are held to no such standard. But we should be.

Litigation funders themselves are facing regulatory evolution 

Following an inquiry into the litigation funding industry earlier in 2020, the Australian government recently announced that litigation funders will be subject to greater regulation. One of the requirements will be to hold an Australian Financial Services License (AFSL). This standardises compliance with a host of desired behaviours such as providing financial advice efficiently, honestly and fairly, placing client interests above all other parties and maintaining risk management systems.

Now, more than ever, litigation funders will be regulated to support a clients’ best interests, and clients stand to benefit from understanding how.

Here, we discuss how the mindset around litigation funding can evolve by standardising the type of behaviour we should all expect from lawyers.

What do clients stand to learn from transparency around litigation funding?

Realising the opportunity

Being able to share legal risk with a litigation funder is an opportunity clients often don’t know they have. The thinking stops at the problem of not being able to afford to take legal action. When there isn’t enough cash flow to manage litigation costs, litigation funding provides an opportunity to share the investment and realise the value of the claim.

But even clients with a good claim and the available cash flow – but without knowledge of risk sharing options – can devalue the investment opportunity of their litigation. There can be a dispirited view to simply use the legal spend on other needs of the business over concerns of losing the claim and having to pay the other party’s legal costs. A misunderstanding that the business must shoulder all the risk leads to conflict being swept under the carpet and the investment opportunity of the claim being foregone.

More than just ‘all or nothing’

Most commonly, litigation funding is a way for clients to share the risk of the outcome by having a third party (or funder) cover some or all of the legal costs. In exchange, the funder receives a percentage of the damages awarded as a reward for taking on the risk.

Though it isn’t all or nothing. Having all of the legal costs covered by a third party funder is not the only way to reduce risk.

Disbursement-only funding covers only the costs incurred by lawyers in preparing a case. For example, fees for court filings or barristers’ fees. Such an arrangement may be better suited to clients who want to minimise initial costs in exchange for a smaller risk reduction. The same can be said for a blended arrangement, where a combination of third-party funding and a client’s legal spend is used to pursue a claim.

There are also insurance products to limit the risks of litigation. Adverse costs insurance protects against the pursuit of a case that is unsuccessful and having to pay the other party’s legal costs.

Lawyers can provide value not only by advising clients of these options, but of the most appropriate funding option for the situation at hand.

Filtering out flimsy claims

Before funding a case, litigation funders do a lot of due diligence. They will look at cases carefully, review the legal merit and the likelihood of success before determining whether or not to invest. They will also assess the costs involved in running the case to ensure they are proportionate to the damages awarded.

In effect, assessing a case for funding acts as a filter for plaintiffs. Clients place an amount of trust in a lawyer that they believe a claim is winnable. Preparing a case for funding prevents charging forward without strategy, and informs clients in the process. It is another level of assurance that litigation will provide a worthwhile return on investment.

What behaviour does litigation funding inspire in a lawyer?

Aligned interests

The relationship that funders have with lawyers is similarly influenced by trust. Alongside the merit of the claim, litigation funders also base their decisions on who the lawyers are, how the firm operates and their past performance in comparable claims. Lawyers are further motivated to get a result in funded matters to maintain trust in the relationship.
Since litigation funders in Australia are set to prioritise the client’s interests by law, having them monitor proceedings offers a check on the work of lawyers. Funders are not heavily involved in a matter once funds are invested and pleadings are completed, though they do ensure the case is being run as described for the client.

The better professional

The role of a lawyer is to resolve the problem of the client. Complete focus on the objective. Full transparency needed. All options considered.

For clients, outcome and price are the two most common concerns. The current guideline for pricing in Victoria to provide a ‘reasonable and proportionate’ estimate leaves room for uncertainty in the client’s corner. Proportionality dictates that the price should not exceed the expected benefit. But what is reasonable?

A more professional approach is for clients to also understand and be able to compare pricing options. What are the implications of a price or funding agreement? What are the boundaries? What are the unknowns? What is an appropriate level of risk for the claim at hand? Sometimes litigation funding won’t be a viable option, but this should comprise the advice a lawyer is obliged to give.

Clients expect a lawyer to know the intricacies of the law, and how to navigate the process for them. It makes little sense that there is a duty to know, but not a duty to tell.

Contact Aptum to discuss the options for sharing risk in your dispute.

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