No Licensing of Litigation Funders in Australia
There are many proposals for regulating the litigation funding business and many different models for regulatory regimes. One model calls for treating litigation funders like consumer lenders, subjecting them to certain financial requirements and requiring them to be licensed. In Australia, where litigation funding is a well-developed and respected enterprise, a call for this kind of regulation was recently rejected.
The question of licensing recently was presented to Australia’s High Court, in a dispute arising from a litigation funding agreement between a funder and a mining company that was pursuing a contract claim. According to that agreement, the funder had the right to terminate the funding agreement and receive an early termination fee if there was a change in control for the mining company. The mining company contended that it did not have to pay the early termination fee and that it could rescind the funding agreement. According to the mining company, the funder was required to be licensed under an Australian statute that applied to financial services businesses. In the mining company’s view, because the funder lacked a license, its funding agreements could be invalidated.
The crucial question for the mining company’s argument was whether the funder was engaged in the “business of providing financial services,” which was the determinative statutory concept. Answering this question involved a complex exercise in statutory construction. In particular, the High Court had to apply a broad general definition of “financial services” and some specifically defined inclusions and exclusions associated with that general definition.
The High Court decided that the statutory licensing requirements did not apply because the service that the funder offered fit into one of the specific exclusions from the definition of “financial services.” After the court examined the terms of the funding agreement, it concluded that the agreement created a “credit facility” because it involved the deferral of payment to the credit provider and a financial accommodation. Thus, the High Court held that litigation funders did not have to be licensed and that the mining company would have to pay the termination fee.
By exempting litigation funding companies from licensing requirements, Australia has chosen to take a laissez-faire approach to litigation funding. Such an approach will make investment in litigation funding more attractive and will increase access to justice. In addition, it will promote the growth and development of the litigation funding industry, allowing it to find its natural role in the marketplace. American jurisdictions would do well to follow suit.
Topics: litigation finance, legal reform, third-party funding, litigation costs, lawsuit loans, non-recourse financing, consumer protection, law reform, licensing, consumer regulation
Works Cited:
Centre for Law, Markets & Regulation, High Court Excludes Litigation Financing from Licensing Regime, available at https://clmr.unsw.edu.au/article//high-court-excludes-litigation-funding-from-licensing-regime
