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

Third-party litigation funding is permitted in Australia, however, not without complexity.

Maintenance and champerty are obsolete as crimes at common law (Clyne v NSW Bar Association (1960) 104 CLR 186, 203) and maintenance and champerty have been abolished as a crime and as a tort by legislation in New South Wales, South Australia, Victoria and the Australian Capital Territory. In Queensland, Western Australia, Tasmania and the Northern Territory, the torts of maintenance and champerty have not been abolished. Notwithstanding legislation, it remains the position in all Australian jurisdictions that general principles of contract law, pursuant to which a contract may be treated as contrary to public policy or as otherwise illegal, are not disturbed. This means that a third-party litigation funding agreement could be set aside by an Australian court if it were found to be inconsistent with common law public policy considerations.

The High Court in Campbell’s Cash & Carry Pty Ltd v Fostif Pty Ltd (2006) CLR 386 (Fostif) considered provisions of the New South Wales legislation abolishing maintenance and champerty as torts. The High Court 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).

Importantly, Fostif did not consider the position in those Australian jurisdictions where the torts of maintenance and champerty had not been abolished.

In a joint publication by the Law Council of Australia and the Federal Court of Australia it was stated that:

In many cases, litigation funding has proven to be the lifeblood of much of Australia’s representative proceeding litigation at federal and state level. Not all cases are funded by third-party litigation funders but a sufficiently large number of class actions have been funded in this manner that it has had a major impact of the sort of cases conducted.

The availability of funding has not been attributed to any overall rise in litigated matters, suggesting that litigation funding is being used cautiously in order to improve access to justice while bringing commercial gain and without encouraging vexatious or unmeritorious claims.

The available statistics about class action filings demonstrate that funded litigation is on the increase in Australia. Between June 1997 and May 2002, funded class actions comprised 1.7 per cent of all class actions. In the past five years, funded class actions compromised 46.2 per cent of all class actions. Further, 71 per cent of all shareholder class actions filed in Australia on or before 31 May 2017 were funded by commercial litigation funders.

Restrictions on funding fees

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

There is no legislation or regulation in Australia that limits the fees that funders can charge.

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 could set aside a litigation funding agreement where the funder’s interest constituted an equitable fraud in the sense that it involved 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. The High Court in Commercial Bank of Australia v Amadio (1983) 151 CLR 447 restated the principles relating to unconscionable conduct. A court may set aside a bargain 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. In those circumstances, the innocent party may be relieved of the consequences of the unconscionable conduct. In Kakavas v Crown Melbourne Limited (2013) 250 CLR 392 HCA 25, a gambling addict sought to avoid losses with a casino, arguing that the casino had taken unconscionable advantage of his vulnerability. The Court in rejecting his claim ruled that inequality of bargaining power was relevant, but not essential to establish unconscionability and that a party must rely upon standards of personal conduct known as ‘the conscience of equity’. The High Court drew a clear distinction between the equitable principles of unconscionable conduct and undue influence.

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 regarding 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. In a number of recent cases the courts have made so-called ‘common fund’ orders, both as part of a class action settlement and also at an early stage of proceedings. 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. Its purpose is to equalise the distribution of damages so that unfunded claimants must also contribute to the costs of the claim, including the funder’s fee. It was observed in Money Max Int Pty Ltd (trustee) v QBE Insurance Group Limited (2016) 245 FCR 191 FCAFC 148 at [82]:

We expect that the courts will approve funding commission rates that avoid excessive or disproportionate charges to class members but which recognise the important role of litigation funding in providing access to justice, are commercially realistic and properly reflect the costs and risks taken by the funder, and which avoid hindsight bias.

Specific rules for litigation funding

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

Third-party litigation funders in Australia currently are not required to be licensed and are not subject to any form of prudential supervision.

In 2012, the federal government exempted a person providing financial services to a litigation scheme from all forms of regulation that apply to providers of financial services and credit facilities. However, the federal government has enacted a regulation that requires that providers of litigation funding services adopt and maintain adequate processes to manage conflicts of interest. Criminal sanctions apply for non-compliance with the conflict management requirements. The conflict management requirements are policed by the Australian Securities and Investment Commission (ASIC).

The purpose of the regulation is 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 regulation, but otherwise do not prescribe the required mechanism for compliance with the regulation. There is a requirement that providers of litigation funding maintain adequate practices and follow certain procedures for managing conflicts of interest. However, the regulation does 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.

The Federal Court Practice Note Class Actions (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 Victoria, Queensland and New South Wales.

On 7 September 2017, the Victorian Law Reform Commission (VLRC) published its review of current regulation of litigation funders and lawyers in Victoria. The VLRC Report suggested that as the Federal Court has done, the Supreme Court could also introduce practice requirements for litigation funders involved in class actions in relation to conflicts of interest.

In December 2017 the Australian Law Reform Commission (ALRC) was asked to consider a range of matters relating to class action proceedings and third-party litigation funders and in particular whether third-party funders should be subject to Commonwealth regulation.

The ALRC released a discussion paper in June 2018 that proposed that third-party litigation funders be required to obtain and maintain a ‘litigation funding licence’ to operate in Australia and that such licence should include requirements relating to adequate risk management systems, adequate arrangements for managing conflicts of interest, ensuring that the licensee does all things necessary to provide services efficiently, honestly and fairly and have sufficient resources (including financial, technology and human resources). See: Australian Law Reform Commission, Class Action Proceedings and Third-Party Litigation Funding, Discussion Paper No. 85 (2018).

The ALRC is due to provide its report and recommendations to the federal government by December 2018.

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.

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.

A practitioner (which includes a law practice) will have a conflict of interest when the practitioner serves two or more interests that are not able to be served consistently, or honours two or more duties that cannot be honoured compatibly.


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

See question 3 with respect to the regulation of conflicts of interest. Outside of managing conflicts of interest, there is currently no formal regulatory framework applying to litigation funders.

There are some specific examples where the terms of litigation funding agreements are subject to review by the courts. 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.

When reviewing a litigation funding agreement for approval, the court takes account of a range of factors, including:

  • • the liquidator’s prospects of success in the litigation;
  • • the interests of creditors;
  • • possible oppression in bringing the proceedings;
  • • the nature and complexity of the cause of action;
  • • the extent to which the liquidator has canvassed other funding options;
  • • the level of the funder’s premium and other funding terms;
  • • the liquidator’s consultations with creditors; and
  • • the risks involved in the claim, including the amount of costs likely to be incurred in the proposed litigation and the extent to which the funder is to contribute to those costs, to the costs of the defendant in the event that the action is not successful, or towards any order for security for costs.

The decisions involving approval of funding agreements demonstrate that the courts do not simply ‘rubber stamp’ a funding proposal put forward by a liquidator. The approval of the court is not intended to be an endorsement of the proposed funding agreement or the proposed claim, but merely a permission for the liquidator to exercise his or her own commercial judgement in the matter.

The case management of class actions commenced in the Federal Court and other state courts involving litigation funding require at or prior to the initial case management conference that each party 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.

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.