Despite the growth in class actions and the increasing popularity of litigation funding, many funders won’t be able to able to survive in the inherently risky business, Burford Capital managing director Craig Arnott told Lawyerly.
Arnott, who has over 20 years experience in commercial litigation and advisory work, predominantly in relation to antitrust matters, told Lawyerly that the current model of single case funding creates high levels of risk.
“You walk into court and there’s a chance that anything will happen. Good cases lose,” he said. “It’s inherently very risky because you’re risking that and you’re risking adverse costs.”
Arnott predicted there will be an increase in portfolio funding — in which funds are provided for multiple cases for the same client — as a way to manage that risk, but that many current funders fall below the capital requirements needed to offer this sort of service, Arnott said.
“What you’re seeing in the market is a lot of current interest. The reality is that in a few years’ time the risk will have bitten in a number of cases and some funders will find themselves exposed.”
“I’m not sure that all the funders will remain,” he told Lawyerly. “You have to ask yourself who will be around in five years?”
Arnott also said the current market, in which competition among litigation funders is putting downward pressure on rates, is not sustainable.
A recent report by the Australian Law Reform Commission found that the number of litigation funders in Australia has grown to 25. The number of funded class actions had also increased, growing from 49% of all class actions in the period from September 2013 to September 2016, to 63.9% between 2013 to 2018. In the final year of the commission’s investigation, 77.7% of all filed class actions were funded.
Both the ALRC report and a separate report by the Victorian Law Reform Commission were supportive of funders being both licenced and regulated. However, in a move which could affect how many law firms reach out to funders, both reports called for a ban on contingency fees to be lifted.
“[Litigation] funders are active participants in the Australian class action system. Commission rates are usually charged at about 30% of the settlement sum. While lifting the prohibition on contingency fees in class actions does not guarantee direct competition, it may put downward pressure on commission rates. There is also the possibility that introducing contingency fees will broaden access to justice for midsized class action claims,” the ALRC wrote.
Based in New York, Chicago and London, Burford has been involved in litigation funding since 2009.
Burford is currently funding a high-profile shareholder class action against wealth manager AMP in New South Wales Supreme Court, led by US litigation firm Quinn Emanuel. Four competing class actions have been filed against AMP, but the judge overseeing the Burford-funded case said Monday that his court was “the natural venue for resolution of all five matters” and invited the other firms to join the case.
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