Litigation Funding or “Third-Party Funding” or “Legal Finance” refers to the process of providing financial assistance to a litigant by a third-party funder for the costs and expenses involved in the litigation in consideration for a predetermined return that is contingent on the outcome of such litigation. The funder covers all the costs involved in the litigation including court fees, advocate’s fee, documentation charges, miscellaneous expenses etc. Litigation funding can be availed for matters including civil suits, arbitration proceedings, insolvency proceedings, class action suits, commercial disputes etc.
The global litigation funding investment market was valued at USD 11,473.3 million in 2019 and is expected to grow up to USD 24,067.5 million by 2028, at a CAGR of 8.76% over the forecast period of 2020-2028. The global litigation funding investment market is segmented by end users into BFSI, manufacturing, IT & telecommunications, media & entertainment, healthcare, and others.[1] Historically, litigation funding was prohibited in India due to the rules of champerty[2] and maintenance, which deemed such arrangements as against public policy. However, with the changing global legal landscape and the need for access to justice, litigation funding began gaining recognition in India in the early 2000s. Considering the cost of litigation and the upward trajectory in the number of cases before the Indian Judiciary, litigation funding is a boon for persons and organizations who are unable to bear the enormous expense involved in litigation. This article aims to understand the scope of litigation funding and its applicability in the Indian Judicial landscape.
Process of Litigation Funding:
Firstly, the litigant approaches a third-party and puts forth the requirement for funding the expenditure involved in any fresh or ongoing litigation. The funder then undertakes an extensive due diligence to understand the facts of the case, the probability of a successful outcome, prospective monetary returns, and the possible timeframe for obtaining a final decree from the court. Since the funder is assuming a financial risk, an extensive due diligence is paramount in order to protect the interests of the funder. The parties then mutually agree on terms of the funding, i.e., the capital to be provided by the funder, percentage of returns as consideration to the funder upon successful outcome, etc. Litigation Funding has the flexibility to be offered and maintained throughout all stages of the legal process, extending until the resolution of final appeals and the enforcement of the judgment. The duration of funding, however, is subject to a mutually agreed-upon timeframe between the involved parties.
Litigation funding provides the litigation funder with the chance to invest in a particular claim based on its potential, allowing for potential investments in multiple claims concurrently. Typically, litigation funding operates on a non-recourse basis, i.e., the funder assumes the entire burden of the cost. Litigation funding offers a plethora of benefits to litigants who are otherwise economically challenged to go through with the process of litigation for their claims.
Benefits of litigation funding:
- Access to justice: Litigation can be expensive, making it inaccessible to many individuals and small businesses. Third-party funding allows them to pursue their legal rights without the burden of financial constraints.
- Leveling the Playing Field: Litigation funding helps bridge the gap between financially unequal parties. It ensures that meritorious claims are not abandoned due to lack of resources, thereby promoting fairness in the legal system.
- Risk Mitigation: By sharing the financial risks associated with litigation, third-party funders provide litigants with a safety net. They absorb the costs of the litigation, including court fees, legal expenses, and adverse costs, reducing the financial burden on the litigants.
- Promoting Meritorious Claims: Litigation funders carefully evaluate the merits of a case before providing funding. This evaluation process filters out weak claims and promotes only those with strong chances of success, thereby discouraging frivolous litigation.
The Indian Scenario of litigation funding:
In India, litigation funding is permitted in certain states such as Madhya Pradesh, Maharashtra, Gujarat, Andra Pradesh, Tamil Nadu, Orissa, and Uttar Pradesh, through state amendments to Order XXV Rules 1 and 3 of the Civil Code of Procedure (CPC), 1908. In other states of India where amendments have not been enacted yet, a valid agreement in accordance with the Indian Contract Act, 1872 that facilitates litigation funding is still enforceable. The Privy Council had recognized and addressed the concept of the litigation funding for the first time in 1876 in the case of Ram Coomar Coondoo v. Chunder Canto Mookerjee[3] whereby it was observed that “Their Lordships think it may properly be inferred from the decisions above referred to, and especially those of this tribunal, that a fair agreement to supply funds to carry on a suit in consideration of having a share of the property, if recovered, ought not to be regarded as being, per se, opposed to public policy. Indeed, cases may be easily supposed in which it would be in furtherance of right and justice, and necessary to resist oppression, that a suitor who had a just title to property, and no means except the property itself, should be assisted in this manner.
But agreements of this kind ought to be carefully watched, and when found to be extortionate and unconscionable, so as to be inequitable against the party; or to be made, not with the bona fide object of assisting a claim believed to be just, and of obtaining a reasonable recompense therefor, but for improper objects, as for the purpose of gambling in litigation, or of injuring or oppressing others by abetting and encouraging unrighteous suits, so as to be contrary to public policy, – effect ought not to be given to them.”
In the case of Re. G, Senior Advocate[4], a question arose as to the misconduct of a lawyer on the grounds of funding a litigation and the Hon’ble Supreme Court observed that “Now it can be accepted at once that a contract of this kind would be legally unobjectionable if no lawyer was involved. The rigid English rules of champerty and maintenance do not apply in India, so if this agreement had been between what we might term third parties, it would have been legally enforceable and good.” This judgement of the Apex Court iterates the legality of litigation funding in India provided that the the same is facilitated by third parties.
In 2018, the Hon’ble Supreme Court reiterated its stand on litigation funding in the case of Bar Council of India v. A.K. Balaji & Ors.[5] and held that “in India, funding of litigation by advocates is not explicitly prohibited, but a conjoint reading of Rule 18 (fomenting litigation), Rule 20 (contingency fees), Rule 21 (share or interest in an actionable claim) and Rule 22 (participating in bids in execution, etc.) would strongly suggest that advocates in India cannot fund litigation on behalf of their clients. There appears to be no restriction on third parties (non-lawyers) funding the litigation and getting repaid after the outcome of the litigation.”
Therefore, it can be inferred from the above judgements that only lawyers are not permitted to fund the litigation of their clients and there is no restriction on litigation funding by third parties in India.
Recent Trends in litigation funding in India:
The Insolvency and Bankruptcy Code (IBC) 2016, has brought litigation funding to the forefront, especially because arbitration awards can now be monetized in India. In March 2019, a group of investors led by Blackrock, an investment management firm, struck a third-party financing deal with Hindustan Construction Co. Ltd (HCC) in which HCC transferred its rights to arbitration claims and awards for INR 1750 crores. Similarly, Patel Engineering Ltd. sold its interest in litigation claims to Eight Capital Group for INR 2,168.5 crores. These instances have set the precedence for corporate finance experts in India to consider litigation funding as a viable source of financing for companies. Recognizing the potential for the growth of litigation funding in India, a group of third-party funders and service providers like law firms, practitioners and arbitral institutions have formed the Indian Association for Litigation Finance in 2021 to self-regulate litigation funding in India and disseminate valuable information and create awareness about it for the people to learn the business of litigation finance.
Though litigation funding is rapidly gaining prominence as an alternative source of funding, the following are the major challenges involved in its effective implementation:
- Absence of regulatory framework: Though the legality of litigation funding stems from the Civil Procedure Code, 1908, there is no specific law that governs the process of litigation funding thereby leading to ambiguity in its implementation. Clarity in the legal framework is essential to ensure transparency, ethical practices, and protection against potential abuse of both funders and claimants.
- Confidentiality and Privilege: The involvement of third-party funders may raise concerns regarding attorney-client privilege and the confidentiality of legal proceedings. It is crucial to establish clear guidelines to address these concerns and protect the integrity of the attorney-client relationship.
- Potential Conflict of Interest: Litigation funders have a financial interest in the outcome of the case. This may create conflicts of interest and raise questions about the impartiality of the funded party and their legal representation. The terms agreed between the parties must provide for effective safeguards in order to prevent any conflict of interest.
- Costs and Fees: The terms and conditions of litigation funding agreements, including the funding costs and fees, need to be transparent and fair to ensure that the interests of both the litigant and the funder are adequately protected.
Litigation funding has the potential to revolutionize the Indian legal system by promoting access to justice and levelling the playing field. While the legal framework surrounding third-party funding is still evolving, the recognition and acceptance of this practice is steadily growing. With the implementation of clear regulations and ethical guidelines, litigation funding can become an integral part of the Indian legal landscape, ensuring that no meritorious claim goes unheard due to financial constraints.
[1] “Litigation Funding Investment Market: Global Demand Analysis and Opportunity Outlook 2028” A report by Research Nester.
[2] an agreement in which a person with no previous interest in a lawsuit finances it with a view to sharing the disputed property if the suit succeeds.
[3] (1876-77) 4 IA 23
[4] AIR 1954 SC 557
[5] (2018) 5 SCC 379
