By Dr Vinod Surana
What is Litigation Funding?
Litigation Funding, commonly referred to as Third-Party Funding (TPF), refers to the process of covering a party’s litigation expenses by a funder in return
, for a share in the litigation’s monetary award. Litigation funding can cover the costs of any kind of dispute resolution process, whether it is conventional legal proceedings, arbitration and/or mediation. Under Litigation Funding, all or part of the costs borne by one of the parties to the arbitral proceedings is funded by an individual who is not a party to a dispute and the litigation proceedings resulting therefrom. If the funded party is the claimant, the funder contracts to obtain a share of the proceeds in case the claimant wins the case. In contrast, if the funded party is the defendant, the funder usually contracts to receive a predetermined payment from the defendant and it might include an extra payment to the funder if the defendant wins the case. Typically, the value of legal claims is pre-determined even before the litigation reaches a conclusion. The third-party funder can be a bank, insurance company, hedge fund, a corporation or an individual.
There persists a common misconception that TPF is prohibited in India; however, both implicit and explicit legal provisions have noted otherwise. Confusion as to the permissibility of TPF might stem from the fact that, to date, there is no legislative instrument regulating TPF. In some states of India such as Maharashtra, Gujarat, Madhya Pradesh etc. the state governments have made amendments to Order XXV, Rules 1 and 3 of the Civil Procedure Code (CPC) to expressly recognise TPF and situations when such a financier may be made a party to the proceedings. Aside from such codified recognition of the practice, there is no embargo or restriction on third-party funding in India, as observed by the Supreme Court in the decision of Bar Council of India v AK Balaji [(2018) 5 SCC 379].
It is important to note the distinction between TPF and contingency fees, given that there is a strict policy against only the latter in Indian legal practice. As such, financiers must necessarily be “uninterested parties” to the extent possible in such an arrangement. This article offers a holistic analysis of litigation funding by exploring the pros and cons, including the practical challenges such an arrangement may face.
Reasons for the rising popularity of Litigation Funding – best law firms in india
Following are the reasons behind the rising popularity of Litigation Funding:
- Litigation is expensive and requires resources: Many factors contribute to the cost of commercial litigation: legal fees, research, depositions, interrogatories, motions, conferences, preparation of witnesses, hearings, subpoenas, appeals, as well as court fees, consultants, and investigation related expenses. Far too often, litigants seeking justice are unable to pursue their cases because of the high costs associated with litigation. Many plaintiffs who have a convincing argument continue to delay and eventually abandon legal redress. A great disparity of resources exists between average and affluent litigants, creating impediments to judicial access and distortion of legal results for the undercapitalized. Finance for litigation unlocks the value of legal claims by supplying claimants with funds before their cases are resolved. It is gradually becoming a common funding solution that seeks to equalise access to the legal system. TPF’s potential as a tool to break down economic barriers in access to justice helps explain Courts’ and legislatures interest in supporting, and eventually formally legitimizing, TPF.
- A favourable decision benefits the financiers as well: Investors are motivated by worldwide market volatility and uncertainty to look at other investment opportunities that are not directly related to or influenced by the financial markets. Sharing in the monetary gains of a successful legal claim in exchange for funding the costs of the litigation
,is viewed as a low-investment and high-return arrangement by the third-party financiers.
Key Aspects of Litigation Funding: best law firms in india
An analysis of litigation funding requires an understanding of the foundational aspects of the arrangement, which comprise of:
- Parties which receive the funding:
Typically, the plaintiffs or the claimants receive third-party funding, as they are the parties who may receive a monetary award in the event of a favourable outcome. However, the defendants or those defending the civil suits may also receive funding from external investors.
- Parties which fund the litigation
Investment banks, hedge funds, insurance companies, pension funds tend are all possible investors. Typically, litigation financiers have ready-to-invest funds at hand. Ad-hoc arrangements or crowd-funded platforms may also support litigation financing.
- Which disputes tend to be financed by third parties?
Litigation financing is typically reserved for disputes involving monetary awards given that the purpose of the investment is generally to share in the award. Some disputes where monetary awards may be given are: commercial contracts, international commercial arbitration, class action suits, tortious claims like medical malpractice and personal injury claims, anti-trust proceedings and insolvency proceedings.
- Aim of Litigation Financing
Litigation financing proves to be purposeful for both the investor and the party being funded. The financed party is able to pursue claims it may not have otherwise pursued owing to lack of funds and the investor is able to explore a relatively under-utilised avenue of low risk investment.
- Possible structures of Litigation Financing
There are three typical structures which are generally adopted for litigation financing. These are:
- The litigant holds the proceeds from its claim(s) in a trust, in which the third-party funder is one of the beneficiaries;
- The litigant assigns the proceeds from its claim(s) to the third-party funder; or;
- The litigant assigns the claim(s) in itself/themselves to the third-party funder.
Steps to Avail Litigation Financing
The following steps may be followed in order to find a third-party litigation financier:
- Enquiry – Preliminarily, The party seeking funding enquires about third-party financiers in order to know who they can approach.
- Case Assessment- After the preliminary enquiry from the party, the case is assessed by the potential investor to determine the value of the investment.
- Expression of interest– If the investor deems the case an investment worth undertaking, an expression of interest is shown by the investor in funding the case
,and proposal of terms of funding including, including exclusivity and confidentiality is provided to the financed party.
- Further Due Diligence and Final approval of the case- The investor conducts proper background checks both on the party and the case to assess risks of financing the litigation.
- Funding Agreement is entered into between the party and the funder.
- Monthly reporting and invoicing of legal costs and the progress of the case are done.
- Case Conclusion: the award is distributed between the funder and the funded party
In recent years, TPF has become commodified as it has become increasingly lucrative business. For example, 2016 saw the launch of Advok8 a start-up aiming to create a market for TPF by assisting litigants in raising funds for their lawsuits through technology-enabled crowd-funding.
Costs covered under Litigation Funding-
Litigation Funding can cover legal counsel’s fee, court fee, cost of expert witnesses, pre-deposit, adverse costs order, and other dispute-related expenses. A survey conducted between November 2015 and February 2016 found that litigants spend up to INR 80,000 on legal costs per year. The ‘Access to Justice Survey’ was conducted by Daksh (a Bengaluru-based NGO engaged in analysing the performance of the judiciary) in partnership with National Law University, Delhi by interviewing 9,329 litigants in both civil and criminal matters in 305 lower courts spread across 170 districts in 24 states.
Generally, the financing agreement provides for:
• The investment amount which would cover the costs of litigation.
• The control which the investor would exercise over the key decisions pertaining to the dispute.
• The scope of the decision as to a settlement, which in principle rests with the funded party and must comply with certain conditions set by agreement with the third-party funder;
• Share of the monetary award which would be given to the investor, if a favourable award is delivered.
• The termination of the agreement: some funding agreements deal with the effects of early termination of the agreement.
Challenges to Litigation Funding in India best law firms in india
- Funding companies usually want a return on their investment within five years. However, the Indian litigation system is susceptible to delays and cases may take more than 5 years to be resolved. Even arbitration proceedings, which are completed in a shorter time frame, the claimant has to approach the courts for execution and bureaucratic red-tape may withhold investors’ money for a long period.
- In India, lawyers are not permitted to act on a contingency basis. However, investors prefer that the lawyers too have a stake in the monetary reward; such an arrangement may incentivise lawyers to make more effort.
Alternative Funding Models best law firms in india
Insurance is one of the oldest ways of financing disputes. Insurance packages – namely liability insurance – typically cover all expenses involved in the case, including the expense of presenting a claim or defending the claim, the attorney’s fee and paying any award or order against the insured.
- Corporate Financing
Under this model, there are mainly two ways of obtaining the fund. One is through corporate finance where the parent company grants a loan to its subsidiary to enable the subsidiary to pursue the claim. The other is where the shareholders, creditors or other stakeholders of the company provide financial assistance for pursuing the claim in return for some benefit (financial benefit or gaining control in the management).
Second, is equity-based funding where the funder provides finance required for pursuing the claim by the company in return for equity ownership in the company.
- Sale of Claims
Under this model, there is an outright sale of the claim by the claim holder to the funder.
- Attorneys as Funders
Attorneys may also act as funders in certain cases. Here, the attorney bears some or all the cost of the arbitration and along with sharing the risk.
- Portfolio Funding
Portfolio funding is an alternative approach of financing claims which many funders are actively pursuing due to diversified risk. It enables law firms and lawyers to take on large-scale commercial disputes typically indicative of higher risk without adding risk to the firm.
Litigation funding is not explicitly prohibited in India; however, there may be rules arising under contract law regulating litigation funding to prevent unequal bargains. As this is a matter of contractual arrangement and one party, typically the claimant, would always have greater need, the investor may exploit them. In the decision of Ram Coomar Coondoo, it was observed by the court that while litigation funding may promote access to justice, such agreements need to be, “carefully watched”. Hence, some regulations governing litigation funding may be framed. Another issue which should be kept in mind is confidentiality – Confidentiality of the information pertaining to litigation should be ensured. If explored properly, litigation funding may help poor litigants recover their money as well as introduce an incentive for investors to use their funds in an unexplored domain.
- Crystallex International Corporation v Bolivarian Republic of Venezuela, Case No. ARB (AF)/11/12
- Bar Council of India v AK Balaji [(2018) 5 SCC 379]
- Ram Coomar Coondoo v. Chunder Canto Mukherjee (Fort Williams Privy Council, 1878)