Law & Order: IMF
The Law Council of Australia may allow lawyers to share in the claims awarded to their clients, otherwise referred to as contingency fees. Reimbursing lawyers with contingency fees, rather than nominal fees, will have important implications for litigation funders such as Bentham IMF (ASX: IMF).
By way of background, there are two factors which determine the profitability of a market for litigation funders:
- Contingency fees – are lawyers entitled to the proceeds of a successful case, or does the litigation funder pay them on an hourly basis?
- Payment of adverse costs – does the litigation funder have to pay the court costs of the other party if the case is unsuccessful?
In the Australian market, lawyers are reimbursed on an hourly basis and litigation funders must pay adverse costs. It is unclear if a move to contingency fees would be a positive or a negative for IMF. You see, removing the ban on contingency fees will grow the size of the funding pie, as lawyers will have a greater incentive to commence legal action. However, it may put pressure on IMF’s margins. It’s worthwhile exploring the implications of this move by examining markets that allow contingency fees, such as the United States and the United Kingdom.
The dynamics in the US market are markedly different to the Australian market. In the US, lawyers are entitled to a share of the proceeds, but do not have to pay adverse costs. This is why the US is such a litigious society – there is minimal downside to suing.
The UK market is very similar to the Australian market, given that they share a common legal system. In the UK, litigation funders must pay adverse costs, but lawyers are entitled to proceeds. IMF considers that the risk/reward ratio in the UK is comparable to Australia. However, UK legal fees are around three times greater than Australia, which is a greater disincentive to pursue litigation.
Both the Montgomery Fund and the Montgomery [Private] Fund hold shares in IMF.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
INVEST WITH MONTGOMERY
Aidan Ng
:
Hi there,
Class Actions and Litigation funding seem to be a relatively new development in Australia, unlike the UK or US. The landscape is still evolving and legislation changes like this threaten or provide opportunities for IMF.
Would like to hear from you how you would evaluate, deal with or factor the risks in your valuation of the company? Thanks.
P.S. it is very nice to see a discussion (from comments on your articles) on Bentham IMF.
Wayne A
:
I too don’t know if a move to contingency fees would benefit IMF, but it is unlikely to do much good for Australian society. Commission style incentives on legal settlements make no sense whatsoever and are rooted in simple greed. Like the recent kerfuffle over proposed FoFA ammendments highlighted, a fee for service is the way to go. It helps to ensure that the incentives for action are the correct ones.