The Effect of Litigation Financing on the Legal System: A Lesson from Australia

There are plenty of theories about how the more extensive use of third-party litigation finance could affect the legal system.  Some suggest that increased access to litigation funding could promote greater access to justice for less affluent parties.  Others predict that the creation of a investment market for legal claims can promote economic efficiency, particularly through more and fairer settlements.  Still others say that more litigation funding means more meritless lawsuits and overflowing dockets.

A recent study of the effect of litigation financing in Australia provides a practical test for the theoretical views of litigation finance.  Australia has had a robust market for investment in legal claims for over a decade, and data about its judicial system can provide some meaningful information about how litigation finance actually affects the legal system.  Two law professors have recently analyzed that data and reached the conclusion that more litigation financing can lead to a somewhat bigger burden for courts but also to fairer outcomes and better judicial decisions.

The study concluded that litigation funders appear to have an impact on the functioning of courts.  In Australian jurisdictions with a larger number of active litigation funders, there is a greater backlog in courts, fewer finalizations, and a lower clearance rate. Unsurprisingly, then, court expenditures also increase.

But there are good reasons to think that the net effect of litigation is positive, notwithstanding something of an increase in court congestion.  Even when the cost of litigation to parties and the courts increases, there can still be an overall social benefit if these longer and more numerous cases produce more economically efficient results.  Moreover, once defendants recognize that plaintiffs have more access to financial resources and are more likely to litigate, those defendants should be more likely to agree to a settlement at an economically efficient value.

Another benefit of litigation funding is that it seems to produce more cases that generate published opinions.  The Australian data showed that funded cases both cite and receive over twice as many references as unfunded cases. This data suggests that litigation funding is helping to promote influence judicial opinions.  In other words, litigation funding is not just generating more value for plaintiffs and investors, it is making better law.

Topics:  litigation finance, legal reform , third-party funding, litigation costs, legal costs, law reform, Australia

 Works Cited:

David S. Abrams & Daniel L. Chen, A Market for Justice: A First Empirical Look at Third Party Litigation Funding, 15 U. Penn. J. Bus. L. 1075 (2013).