Is third-party litigation funding permitted? Is it commonly used?

Third-party litigation funding is permitted in Australia and is commonly used in single-party, insolvency-related and class-action litigation.

The High Court of Australia, in Campbell’s Cash & Carry Pty Ltd v Fostif Pty Ltd (2006) CLR 386 (Fostif), held that third-party funding per se was not contrary to public policy or an abuse of process. The Court ruled that the fact that a funder may exercise control over proceedings and bought the rights to litigation to obtain profit did not render the funding arrangements contrary to public policy. The Court held that profiting from assisting in litigation and encouraging litigation could only be contrary to public policy if there was a rule against maintaining actions (which in New South Wales had been abolished). Concerns raised about the possibility of unfair bargains and the potential for litigation funding to distort the administration of justice were rejected. The Court ruled that where these concerns arose they could be adequately dealt with through existing doctrines of contract and equity (unfair contracts), abuse of process (rules of court dealing with the administration of justice) and existing rules regulating lawyers’ duties to the court and clients (conflicts, etc).

Fostif did not consider the position in those Australian jurisdictions where the torts of maintenance and champerty had not been abolished. In Murphy Operator & Ors v Gladstone Ports Corporation & Anor (No. 4) [2019] QSC 228, Crow J found, in the context of a third-party funded class action being conducted in the Supreme Court of Queensland, that the torts of maintenance and champerty had not been abolished but that provisions of the Civil Proceedings Act 2011 (Qld) regulating class action procedure lay down a regime that permits class action proceedings to be funded by a commercial litigation funder. That ruling was upheld on appeal, with the Court of Appeal concluding that the litigation funding arrangement was not contrary to public policy, and the litigation funder was not in a substantially different position from an insurer defending a claim. The Court reasoned that where maintenance offends against the law, it can be adequately dealt with through abuse of process principles: Gladstone Ports Corporation Limited v Murphy Operator Pty Ltd & Ors [2020] QCA 250.

The available statistics about class action filings show that in the period from March 1992 to March 2013, 15 per cent of class action proceedings filed in the Federal Court of Australia were funded. From 2013 to 2018, the percentage of class actions in the Federal Court that were funded grew to 64 per cent, with the number of funded actions filed in the final year of that period being 78 per cent. However, recent statistics demonstrate a significant decrease in funded class actions in recent years. A significant drop in funded actions was reported in the period from 2019 to 2021, with just 41 per cent of actions being funded. In the year ending 30 June 2022, this had increased slightly to 44 per cent.

The decline in funded class actions around 2019 may have been a result of the uncertainty surrounding the ability for the Court to make a common fund order, arising out of the decision in BMW Australia Limited v Brewster [2019] HCA 45. In recent years, the percentage of funded actions has likely remained lower as a result of actions taken in 2021 by the then-federal coalition government, introducing legislation that required funders to comply with certain regulatory regimes and seeking to introduce legislation that would regulate the amount of commission a funder could receive from a class action. The Labor government, now in power, has indicated it will not be proceeding with the proposed legislation, and the new approach by the Labor government may ultimately lead to a rise in funded class actions as greater certainty returns to the funded class action landscape. A further reason for the likely decline in the use of limitation funding in class actions is the increased use of the group-costs order regime in the Victorian Supreme Court. This regime provides law firms with the ability to charge contingency fees, with the result that plaintiff firms have increasingly opted to pursue class action litigation without the involvement of a litigation funder.

Restrictions on funding fees

Are there limits on the fees and interest funders can charge?

There is presently no legislation or regulation in Australia that limits the fees that funders can charge, although there have been calls for limitations to be placed on funding commissions or for a guaranteed statutory minimum return to class members. If a statutory minimum was imposed, fees and interest that funders can charge would obviously be impacted. While in the past 12 months draft legislation has been put forward that would impose a statutory minimum return, that legislation was not introduced and there is presently no indication that any such regulation will be put forward by the current Labor government.

The High Court in Fostif held that contract law considerations such as illegality, unconscionability and public policy may still arise in relation to a litigation funding agreement but there is no objective standard against which the fairness of the agreement may be measured. Accordingly, whether a particular clause in a litigation funding agreement may contravene public policy will be answered having regard to the circumstances of each particular case.

Theoretically, Australian courts can set aside a litigation funding agreement where the funder’s interest constitutes an equitable fraud, in the sense that it involves capturing a bargain by taking surreptitious advantage of a person’s inability to judge for him or herself, by reason of weakness, necessity or ignorance. Australian courts exercising equitable jurisdiction can set aside bargains where terms are harsh or unfair. A bargain may be set aside as unconscionable if one party, by reason of some condition or circumstance, is placed at a special disadvantage compared to another and the other party takes unfair or unconscientious advantage of that special disadvantage.

Prohibitions against unconscionable and misleading or deceptive conduct that may apply to dealings between litigation funders and funded litigants are also reflected in general consumer protection provisions in the Competition and Consumer Act 2010 (Cth) and provisions in the Australian Securities and Investment Commission Act 2001 (Cth).

The Federal Court Class Actions Practice Note (GPN-CA) requires disclosure to group members who are clients or potential clients of the applicant’s lawyers, the applicable legal costs or litigation funding charges in class action matters, and sets out the manner in which these arrangements should be communicated. The Court must also be provided with a copy of any litigation funding agreement. Disclosure of a litigation funding agreement to other parties to the litigation is also required, with the disclosure being redacted to conceal information that might reasonably be expected to confer a tactical advantage.

While not a means of formally limiting litigation funding charges, settlements in funded class actions (including the amounts allocated for the payment of a funder’s fee) are subject to approval by the court.

When it comes to the calculation of the funder’s fee, generally the Court will either make a ‘common fund order’ or a ‘funding equalisation order’.

A common fund order has the effect of binding all members of the represented group to the terms of a funding agreement, not just those who have executed the agreement. The purpose of the common fund order to equalise the distribution of damages such that unfunded claimants must also contribute to the costs of the claim, including the funder’s fee. In 2019, the High Court in BMW Australia Limited v Brewster [2019] HCA 45 (Brewster) held that common fund orders made prior to a settlement are invalid, however, the decision left open the question of whether such an order could be made on settlement or judgment. Since Brewster, while some judges have declined to make common fund orders at settlement based on the reasoning in Brewster (see, eg, Cantor v Audi Australia Pty Limited (No. 5) [2020] FCA 637) many common fund orders have been made in the context of a settlement approval (see Asirifi-Otchere v Swann Insurance (Aust) Pty Ltd (No 3) [2020] FCA 1885; McKay Super Solutions Pty Ltd (Trustee) v Bellamy’s Australia Ltd (No. 3) [2020] FCA 461).

Following the varying views expressed by different judges, the issue of whether the Court has power to order a common fund order at settlement or judgment was considered by both the Full Court of the Federal Court and the NSW Court of Appeal. In Davaria Pty Ltd v 7-Eleven Stores Pty Ltd [2020] FCAFC 183 and Brewster v BMW Australia Ltd [2020] NSWCA 272, both the Full Court and the Court of Appeal declined to answer those questions formally, as each concluded it was inappropriate to answer the questions when they were hypothetical (rather than an actual settlement being put to the Court for determination). That being so, both Courts gave indications that, in the right circumstances, and would involve an analysis of the orders sought, the settlement proposed to be entered into, and most centrally, the impact that this would have on group members. 7-Eleven Stores Pty Ltd sought special leave to appeal the Full Court’s decision to the High Court, but that application was dismissed. A 2019 report from Professor Vince Morabito stated that in the period from 1992 to 2018, the average percentage of settlement funds applied towards a funding commission in all funded settled class actions (which settlement was approved by the Court) was 26.87 per cent. Professor Morabito reported that the median percentage of settlement sums consumed by funding fees in all funded cases during the review period was 25 per cent.

There have also been some instances where the Court has declined to make a common fund order, but rather has made a funding equalisation order, which is an alternative method for distributing a funder’s commission among group members. A funding equalisation order provides for deductions to be made from the amounts payable to group members who did not enter funding agreements to spread the burden of the funding commission across the group members, and thereby ensure that group members receive proportionately equal shares of the settlement or judgment whether or not they agreed to the terms of the funding agreement. In the Crown Resorts class action (Zanran Pty Limited v Crown Resorts Limited), the funder sought a 25 per cent common fund order. Justice Beach instead imposed a funding equalisation order, as his Honour considered the funder would be adequately rewarded while being more beneficial to the group members. In the Estia Health class action (Wetdal Pty Ltd as Trustee for the BlueCo Two Superannuation Fund v Estia Health Limited [2021] FCA 475) a funding equalisation order was sought and approved, and as a result, the funding commission was to be distributed pro rata across all participating group members.

Specific rules for litigation funding

Are there any specific legislative or regulatory provisions applicable to third-party litigation funding?

In 2009, the High Court in Brookfield Multiplex Limited v International Litigation Funding Partners Pte Ltd (2009) 260 ALR 643 (Brookfield) held that in certain circumstances, a litigation funding scheme may constitute a managed investment scheme (MIS). Following this decision, in 2012, the federal Labor government provided a safe harbour for persons providing financial services to a litigation scheme from all forms of MIS regulation that apply to providers of financial services and credit facilities.

Subsequently, on 22 August 2020, the Corporations Amendment (Litigation Funding) Regulations 2020 (Cth) (Regulations) were introduced that had the effect of requiring third-party litigation funders in Australia to hold an Australian Financial Services Licence (AFSL) and comply with the MIS regime under the Corporations Act 2001 (Cth) if they advise about, deal in or operate a litigation funding scheme. This meant that when funding class actions and multi-plaintiff actions, third-party litigation funders were required to hold an AFSL or be an authorised representative of an AFSL holder. The AFSL and MIS regimes are overseen by the Australian Securities and Investments Commission (ASIC).

In October 2021, Justice Beach of the Federal Court of Australia held in Stanwell Corporation v LCM and Stillwater Pastoral Company [2021] FCA 1430 (Stanwell), that the Regulations do not apply to litigation funding schemes entered into before they came into effect on 22 August 2020, and the funding scheme in question was exempt from the amendments brought in by the Regulations and the MIS requirements. In the proceeding, Stanwell Corporation brought an application alleging that the litigation funding scheme relating to the class action constituted a financial product for the purposes of the Corporations Act 2001 (Cth), and was an unregistered MIS. The funder, LCM, brought a cross-claim seeking declarations that the Scheme did not have the features of an MIS and that LCM and Stillwater Pastoral Company had not operated a scheme with the MIS features. LCM also sought a referral to the Full Court of the Federal Court to challenge Brookfield. However, with the substantive issue of the proceeding already determined, Beach J did not make the declarations sought by the funder, declined to make the referral to the Full Court and, considering himself bound by the majority decision in Brookfield, dismissed the funder’s cross-claim. The funder appealed the decision to the Full Court of the Federal Court, arguing that Beach J ought to have made the declarations sought in the funder’s cross-claim. The appeal was considered to be a ‘convenient vehicle’ to review the Brookfield decision. In June 2022, the Full Court of the Federal Court unanimously held that litigation funding schemes are not MIS’ within the meaning of section 9 of the Corporations Act 2001 (Cth) and that the decision in Brookfield was ‘plainly wrong’.

The implications of this decision are that funded class actions do not need to comply with the MIS provisions of Chapter 5C of the Corporations Act 2001 (Cth). However, Parliament has yet to amend the Regulations to remove the classification of a ‘litigation funding scheme’ as a financial product. In September 2022, the federal Labor government announced the draft version of the Corporations Amendment (Litigation Funding) Regulations 2022 (2022 Amendment Bill) that proposes to provide litigation funding schemes with an explicit exemption from the MIS, AFSL, product disclosure and anti-hawking provisions of the Corporations Act 2001 (Cth).

However, until the 2022 Amendment Bill is implemented, litigation funders remain required to hold an AFSL to carry on the business of dealing in or providing financial product advice in relation to a litigation funding scheme the requirements in Chapter 7.9 of the Corporation Act 2001 (Cth) will apply to litigation funding schemes.

AFSL holders are required to abide by their licence conditions and the general conduct obligations under section 912A of the Corporations Act 2001 (Cth). AFSL holders authorised to provide financial services to retail clients are also required to become a member of an external dispute resolution scheme. ASIC has made the ASIC Corporations (Litigation Funding Schemes) Instrument 2020/787 to manage the transition to the new regulatory regime by providing relief in a number of areas of the AFSL regime that would otherwise be unsuitable for the structure of a litigation funding scheme.

Insolvency litigation funding schemes and litigation funding arrangements that remain within the safe harbour must adopt and maintain adequate processes to manage conflicts of interest. Criminal and civil sanctions apply for non-compliance with the conflict management requirements. The conflict management requirements are policed by ASIC.

The purpose of the Regulations was said to be to ensure that conflicts – ordinarily where the interests of funders, lawyers and claimants diverge – are appropriately managed by the litigation funder. ASIC’s Regulatory Guide 248 sets out ways in which funders can meet their conflict management obligations under the Regulations, but otherwise do not prescribe the required mechanism for compliance with the Regulations. There is a requirement that providers of litigation funding maintain adequate practices and follow certain procedures for managing conflicts of interest. However, the Regulations do not prescribe the content of the policy or the processes that a litigation funder must have in place to respond to a conflict of interest.

Separately, the GPN-CA requires that ‘any costs agreement or litigation funding agreement should include provisions for managing conflicts of interest (including of ‘duty and interest’ and ‘duty and duty’) between any of the applicants, the class members, the applicant’s lawyers and any litigation funder’. Similar practice notes operate in New South Wales, Queensland and Victoria.

Legal advice

Do specific professional or ethical rules apply to lawyers advising clients in relation to third-party litigation funding?

There are no specific professional or ethical conduct rules that apply to the role of legal professionals in advising clients in relation to third-party litigation funding or in funded proceedings. However, Australian legal practitioners are regulated by state-based regimes prescribing professional obligations and ethical principles when dealing with their clients, the courts, their fellow legal practitioners, regulators and other persons.

The interposition of a third-party litigation funder into the lawyer-client relationship raises ethical issues around conflicts, loyalty, independence of a lawyer’s judgement and confidentiality. Legal practitioner conduct rules in all Australian jurisdictions deal with each of these concepts. The conduct rules reflect a lawyer’s fiduciary duty towards his or her client and primary duty to the court.

While not explicitly required by legislation, it is increasingly common that lead applicants are provided with (or at least offered the opportunity to obtain) independent advice on the terms and effect of funding agreements, as well as to group members generally in the class action context in respect of the terms of funding agreements, prior to the commencement of any litigation. This can help to avoid any suggestion of conflict between the legal practitioner's duties.

In addition, the conduct of lawyers and third-party litigation funders has become increasingly scrutinised, and issues usually come to light in the context of applications for settlement of class actions. The legislation requires that any settlement of a class action must be approved by the court. Those powers provide a level of discretion in the courts to moderate the legal and other professional costs incurred in the conduct of the litigation, the third-party funder fees and interest, and to enquire into the probity of the funding arrangements.

An example of how the settlement approval process can expose allegations of ethical violations and professional misconduct arose in relation to the approval of the settlement of a class action commenced against Banksia Securities Limited in the Supreme Court of Victoria. At the instigation of a class member, the Court embarked on a wide-ranging enquiry into the integrity of the barristers, solicitors, client and funder relationships and the professional fees rendered.

Justice Dixon ultimately found that the funder, the barristers and the solicitors acting for the class members all engaged in egregious conduct in connection with a fraudulent scheme designed to significantly inflate legal costs and overcharge their clients. Dixon J considered that their conduct corrupted the proper administration of justice, misled the Court and damaged confidence in legal professionals and the expectation that they will act honestly. As a result of Dixon J's judgment, the funder, barristers and solicitors were ordered to pay damages to the class members of A$11.7 million plus costs of over A$10 million. Dixon J also ordered that the barristers be removed from the roll of persons admitted to the legal profession and, that the solicitors show cause as to why they were still fit and proper to remain on the roll. Dixon J also referred his findings to the Director of Public Prosecutions for any potential criminal investigation.

A feature of the Banksia Securities class action, which is also reflected in other recent cases, is the willingness of the court to appoint contradictors and independent counsel to represent the interests of class members in the settlement approval process. Further, the contradictor in the Banksia Securities class action took a more active role in the settlement approval trial including by cross-examining various witnesses.

The Banskia Securities matter received widespread publicity and was often cited by proponents of the Regulations as the reason why there needed to be greater oversight on the litigation funding landscape. Dixon J’s judgment has undoubtedly increased the scrutiny placed on lawyers, barristers and funders to act honestly and ethically in litigating the claims of the clients they represent. It also exposes the court’s willingness to protect the sanctity of the solicitor-client relationship by insisting on a clear delineation between the funder, the lawyers retained and the interests of the representative client and group members.


Do any public bodies have any particular interest in or oversight over third-party litigation funding?

ASIC, the Federal Court and state courts and the federal government all have an interest in and (or) oversight of third-party litigation funding, as do industry bodies such as the Association of Litigation Funders Australia (ALFA).

Until the 2022 Amendment Bill is enacted and the requirement for third-party litigation funders in Australia to hold an AFSL to carry on the business of dealing in or providing financial product advice in relation to a litigation funding scheme is removed, ASIC will continue to have a particular interest in and oversight of the third-party litigation funding space.

The courts maintain important supervisory roles in the case management of class actions, and in turn, third-party litigation funding where it is involved. For example, under the Federal Court’s GPN-CN (and the state-court analogues), at or prior to the initial case management conference parties are required to disclose any agreement by which a litigation funder is to pay or contribute to the costs of the proceeding, any security for costs or any adverse costs order.

Additionally, all settlements reached in class action proceedings must be approved by the court. Where a settlement involves a funder’s success fee being deducted from funds otherwise available to class members, those terms are subject to judicial scrutiny as to reasonableness and proportionality.

In a corporate insolvency context, it is common for a liquidator to enter into a funding agreement with a third-party funder to pursue recoveries on behalf of creditors. Under the Corporations Act 2001 (Cth), a liquidator is required to seek the approval of the company’s creditors or the court’s approval, where the terms of a contract that he or she enters into will last for more than three months. This means that in many cases where a liquidator enters into a litigation funding agreement, court approval is sought.

ALFA is comprised of litigation funder members and law firms who regularly operate in third-party funded litigation in Australia and together engage with government, legislators, regulators and other policymakers in relation to the regulatory environment for litigation funding in Australia. ALFA has produced guidelines representing a best practice framework for standards and behaviour to be observed by its members.