Litigation Funding: Terms, Costs and Client Advice

How Litigation Funding Works

A litigation funding agreement identifies the claim, the costs covered and the funder’s return. The funder assesses the proposal before committing money. Approval of funding does not establish that the claim will succeed or that every expense is covered.

A non-recourse recovery-share arrangement makes the agreed funder return depend on recovery. Read the unsuccessful-case provisions to establish whether that protection extends to funded legal costs and any adverse-cost liability. An adverse-cost order requires payment of another party’s costs.

A litigation funding loan creates a repayment obligation under its own terms. Interest, repayment dates and security can remain relevant even if the case fails. A product described as litigation funding for individuals therefore needs the same contract analysis as a commercial proposal. The applicant’s status alone does not identify the financial arrangement.

Keep the alternatives distinct. Legal aid depends on the relevant assistance scheme. Insurance responds under its policy, including cover and exclusions. A solicitor’s conditional fee arrangement governs payment for legal services. None of those labels establishes the terms of a separate third-party funding agreement.

In Campbells Cash and Carry v Fostif, the High Court rejected the argument that the funding features before it necessarily constituted abuse of process. The case concerned New South Wales proceedings. It does not approve every funding contract or remove the need to assess control and enforceability in the relevant jurisdiction.

Assess the Claim for a Funding Decision

Assess commercial litigation funding against the amount realistically recoverable, the legal merits and the cost of reaching recovery. A pleaded loss is an allegation. A funding proposal needs the evidence and assumptions that support it.

Prepare a funding pack that lets the decision-maker test the claim without reconstructing the file:

• Set out the parties, proposed causes of action, limitation issues and procedural position in a short claim chronology.
• Attach a transaction schedule with source references, the alleged loss and adjustments for money already recovered.
• Identify adverse documents, disputed assumptions and missing records. Explain how each could change liability or quantum.
• Describe the defendant’s apparent ability to pay, competing claims to assets and likely enforcement steps. Separate established assets from untested leads.
• Budget by stage, including experts, disbursements and enforcement. State the expected duration and what could extend it.
• Show the client’s net receipts across plausible recoveries, including an early settlement and a longer contested proceeding.

For a financial claim, connect each disputed transfer to the alleged legal wrong. The economic loss assessment explains how to distinguish a transaction amount from a supportable loss. Use the commercial litigation case plan to connect evidence gathering with the next procedural step.

Where bank statements drive the claim, FinTrace saves the legal team hours of manual statement review. Its forensic bank-statement analysis service provides a searchable Excel ledger and a findings report with direct PDF filename and page references. Those references give the funding pack direct access to the transaction evidence.

Funding for an individual can concern a commercial claim or an estate dispute. Assess ownership of the claim, authority to instruct and enforceability of the proposed arrangement. For an insolvency matter, identify the officeholder’s powers and any approvals before treating the proposal as ready to sign.

Read the Agreement for Control and Downside Risk

Read the litigation funding agreement as a set of payment and decision rights. Mark the clause answering each question and compare any offer summary against that wording.

Cost overruns can create a funding gap. For example, an agreed budget might stop before an expert completes a revised report. Establish who pays before authorising the extra work. A funder’s refusal to extend its budget does not explain whether the client remains liable under the solicitor’s retainer.

Early termination requires a separate calculation. Identify accrued fees, existing indemnities and any funder entitlement from a later recovery. Then compare those obligations with the court’s orders. A promise between client and funder does not itself rewrite an order made against a party.

Treat the funder’s capacity to perform as part of the assessment. Request evidence supporting its payment and indemnity commitments, including the entity giving each promise. A contractual promise to meet adverse costs has a different practical value from security already provided.

Model the Recovery Waterfall

The recovery waterfall is the contractual order for distributing recovered money. Calculate it from cash received, then apply each deduction in the order the agreement specifies.

Separate No-Win-No-Fee Costs From the Funder’s Return

There is no single percentage that no-win-no-fee lawyers take from every recovery. A conditional costs agreement determines when legal fees become payable. An uplift adds to those fees on the agreed successful outcome. Disbursements are separate expenses, and a third-party funder’s return comes from its own agreement.

For a NSW costs agreement, the Law Society’s conditional-costs guidance explains an uplift of up to 25% of legal costs, excluding disbursements. That is a percentage of costs, not the client’s recovered damages. Disbursements can remain payable even if the claim fails, depending on the agreement.

Section 183 of the Legal Profession Uniform Law (NSW) prohibits a law practice charging legal costs calculated by reference to the award or settlement. The NSW Law Society’s Costs Guidebook distinguishes that prohibition from a permitted conditional fee. Identify the applicable jurisdiction and any proceeding-specific rules before adopting a charging model.

The separate funder charge below is fictional contractual remuneration. It is not a solicitor’s contingency fee or a statement that one percentage is lawful for every proceeding.

Calculate the Client’s Net Recovery

This fictional example uses invented terms to demonstrate the arithmetic. It is not a funder quotation or a market rate. Assume costs are reimbursed first, followed by a funding charge of 25% of gross recovery. The client receives the balance.

Costs below include all assumed legal costs and disbursements, with any applicable tax already included. Ignore interest, separate costs recoveries and tax on the client’s receipt.

The quoted 25% funding charge does not mean the client keeps 75%. Under these assumptions, the client keeps 50% of settlement proceeds or 40% of trial proceeds after both deductions.

The trial recovers $400,000 more but leaves the client only $100,000 more. The extra cost consumes $200,000 and the larger funding charge consumes another $100,000. Duration and the risk of losing also affect the decision, even though this table does not price either.

Changing the percentage base changes the result. At 25% of recovery after cost reimbursement, the fictional trial charge would be $162,500 and the client balance $487,500. That is $87,500 more for the client than the gross-recovery formula. Read the definition of proceeds before inserting any percentage into a spreadsheet.

Add a separate unsuccessful-case scenario showing every surviving client obligation. If the contract contains a minimum return or competing priority, model that term explicitly. A waterfall that allocates more cash than the assumed recovery needs a shortfall explanation and a named bearer of that shortfall.

Advise on Conflicts and Court Requirements

Give the client advice on the funding contract that remains independent of the funder’s commercial interests. Identify relationships between the funder and legal team, any referral benefit and any competing duties. Arrange separate advice where your own position prevents independent advice on the agreement.

The Australian Securities and Investments Commission (ASIC) addresses applicable conflicts-management obligations in Regulatory Guide 248. Its scope depends on the scheme or arrangement and the relevant exemption or licensing position. The guide addresses funding terms and relationships between funders, lawyers and claimants. Identify which provisions apply to the proposed structure.

Before sending the funding pack, decide what can be disclosed and to whom. Review privilege and restrictions on use of the documents. Agree confidentiality, permitted recipients and the handling of unsuccessful applications before releasing sensitive material. Do not assume a confidentiality clause resolves every privilege issue.

Court requirements depend on the proceeding. For example, the Federal Court’s Class Actions Practice Note sets funding-agreement disclosure requirements and addresses settlement approval. Those provisions concern class actions and must not be applied indiscriminately to a single commercial claim.

For a liquidator’s proposed long-term agreement, assess section 477(2B) of the Corporations Act. ASIC’s insolvency guidance identifies approval routes through the court, committee of inspection or creditors. The test includes agreements whose term or performance obligations may extend beyond three months. Record the applicable route and approval before execution.

Finish the advice with the actual offer, the net-recovery scenarios and the available alternatives. Explain whether self-funding, a narrower claim or an available insurance or fee arrangement changes the client’s decision. Record the client’s instruction on the identified exposure, settlement rights and distribution terms before accepting the funding offer.