A third party who independently provides funds to parties for a dispute in exchange of a fraction of monetary rewards that is recovered from the proceedings is called Litigation Financing. It is also referred as Third Party Funding (TPF). This type of funding adjudges the value of legal claims even before they can be recovered before a court or tribunal. Lot of times right to justice is impeded because meritorious claims are delayed by high costs of litigation. Litigation funding helps parties understand the full potential of their claims and dissuade long-drawn-out litigation process. As funders analyse the claims using different methods to know its actual worth.
This funding not only gives confidence to parties to approach best of legal talents but also to not settle for something which is anything less than the worth of their claims.
However funders benefit from this new asset class as it can earn enormous returns in comparison to other investment options within the same time frame.
Litigation funding has become a rather common way in jurisdictions like USA, UK and Singapore.
Third-party litigation funding is legally recognized in India. The concept of third-party funding is allowed under the Civil Code of Procedure, 1908 in some states (eg, Maharashtra, Gujarat, Madhya Pradesh and Uttar Pradesh) by their respective state amendments to Order XXV Rules 1 and 3 of the Civil Procedure Code, 1908 (CPC). Hence, the authorization of third-party funding in India can be illustrated from the CPC. Although, the remaining states have also not expressed any bar under any legislation against the same.
Litigation Funding has been recognised in India from way back in 18th century and has always been allowed. In fact Privy Council in 1876 in Ram Coomar Coondoo v. Chando Canto Mookerjee (1876-77) 4 IA 23 permitted third party funding on the grounds of promoting access to Justice.
The Supreme Court in Bar Council of India v AK Balaji (2018) 5 SCC 379 has observed that:
“There appears to be no restriction on third parties (non-lawyers) funding the litigation and getting repaid after the outcome of the litigation.”
India still needs to tap into the potential of Third Party Funding. Many corporations are looking at this aspect very seriously. A proper case strategy can help funders get attracted to the case.
Dedicated financiers are fascinated towards new business opening, and that is in form of Litigation Funding. They anticipate on the high-stake legal proceedings, they support the expenses of litigation and yield return from the proceedings. They demonstrate their interest in the disputes which are associated to Commercial Contracts, Commercial Arbitration, infrastructure, tortious claims like medical malpractice and personal injury claims, anti-trust proceedings, insolvency proceedings, and other like claims that mainly have an estimated chance of winning significant monetary awards. When clients suffer loss they also don’t receive anything.
The Financiers investment seems to be based on computations of winning the pecuniary awards. Hence, the claimants in order to be credited a substantial settlement or award (if they win), make the best recipient of the Third Party Funding (TPF).
Thus, for the flourishing boost up of the TPF capital, the litigating parties, according to its case, generally advance the funders. In this, the assertion of the party alongside the due diligence on the part of the funders and the value are assessed thoroughly.
The litigating parties have to deliberate over the clause that seems to be complex, based on the command or the authority which the financiers may hold in lieu to the legal representation or the stake that could be demanded from the reward granted by the Court/ Tribunal.
There can be 3 schemes by which arrangement of TPF can be done:
> The funders are allocated the claims by the party in itself.
> The funders are allocated the proceeds of the claims by the party.
> The party could direct the claim in the trust in which the funder is a beneficiary.
As infrastructure companies struggle in India with stressed assets and massive imminent claims, Litigation Financing proves to be beneficial for the respective parties.
Irrespective, of the participation of the entities, the type of the transaction is in the form of contingent contract, where all the profits are dependent on the allotted claims. The one inevitable backdrop is the fact that if the party loses, there will be no return in the investment. In addition to that, the funder might also not obtain any compensation because of the financial distress of the Company.
Meanwhile, it seems strange to arrange the transaction as a loan since the litigant who lost shall have a duty to repay the whole invested amount. Besides, at this point the claims are already fixed, while a debt involves interest rate and a maturity period.
The funder generally focuses on seven essential criteria when assessing the claimant-side of litigation funding prospects:
The scope of the funder’s review will be dependent mainly on the type of case, the significance of the action, the complications of the issues concerned, the set up of the diligence materials and litigation counsel’s capability to concisely articulate its case.
Claimants and their counsel should also understand that the funder along with analysing the merits of the case is also assessing the claimant as well. The involvement of claimants in the dispute gives the funder an idea of the reasonableness with which the parties are likely to discuss the settlement offer.
The funder should also review the experience of the legal team working on the case and engagement agreement with the claimant to understand the economics of the plan and calculate if the interests of the claimant and its law firm are suitably aligned.
Litigation funding offers a preset commitment of capital to pay for fees and expenses in relation to the litigation. Funder will rely on the claimant or counsel if there is an overrun of the anticipated budget.
The size of a potential award will need to be enough to provide the funder with a return to equal the investment risk and cover the charge of running the chances through the funder’s meticulous diligence and transactional practice.
The worst-case scenario for a funder is to fund a litigation that sails through the proceedings, concludes with a successful outcome, but not being able to recover the same.
Funders want to be invested in cases that can have quick resolutions. They are not willing to be part of the cases that have the chances of a prolonged legal battle. As it will increase the uncertainty factor and at the same time impede their chances of earning costs.
It is an interesting concept and practiced globally. Though, it is not prohibited in India but there is a requirement of a dedicated regulation that can govern TPF.
There are arguments that in a country like India many litigants don’t have access to justice because of lack of funds. But, the question that arises is that will the funders be keen on investing in such cases or would they be eyeing on big projects. Well, this depends on the stake and merits of the case.
This is an ever expanding market in India, at the same time it should also be taken care that principles of natural justice are not defeated at any cost. Another, issue that arises is that of confidentiality and the same can be tackled by drafting confidentiality clauses in agreements to enter into a TPF arrangement.
TPF is growing gradually and soon it will take a form of structured system that can be used to the benefit of both the funder as well as the parties concerned, in an organised way. There is a growing interest of international litigation funders in India.