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 any dispute resolution process costs, 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 if 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. 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 concludes. 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].
Following are the reasons behind the rising popularity of Litigation Funding:
Key Aspects of Litigation Funding:
An analysis of litigation funding requires an understanding of the foundational aspects of the arrangement, which comprise of:
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.
Investment banks, hedge funds, insurance companies, pension funds tend to 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 can pursue claims it may not have otherwise pursued due to lack of funds. The investor can 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 following steps may be followed to find a third-party litigation financier:
In recent years, TPF has become commodified as it has become an 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.
Litigation Funding can cover legal counsel’s fee, court fee, expert witnesses' cost, 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, financing the agreement provides for:
• The investment the amount which would cover the costs of litigation.
• The control which the investor would exercise over the key decisions about 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 given to the investor, if a favourable award is delivered.
• The agreement's termination: some funding agreements deal with the effects of early termination of the agreement.
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.
Insurance is one of the oldest ways of financing disputes. Insurance packages – namely liability insurance - typically cover all expenses involved in the case, including presenting a claim or defending the claim, the attorney's fee and paying any award or order against the insured.
2. 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 company stakeholders provide financial assistance for pursuing the claim in return for some benefit (financial benefit or gaining control in the management).
Second, equity-based funding is where the funder provides finance required for pursuing the company's claim in return for equity ownership in the company.
3. Sale of Claims
Under this model, there is an outright sale of the claim holder's claim to the funder.
4. Attorneys as Funders
Attorneys may also act as funders in certain cases. Here, the attorney bears some or all the arbitration cost and shares the risk.
5. Portfolio Funding
Portfolio funding is an alternative approach to financing claims that 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 a 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 about litigation should be ensured. If explored properly, litigation funding may help poor litigants recover their money and introduce an incentive for investors to use their funds in an unexplored domain.
5. Crystallex International Corporation v Bolivarian Republic of Venezuela, Case No. ARB (AF)/11/12
6. Bar Council of India v AK Balaji [(2018) 5 SCC 379]
7. Ram Coomar Coondoo v. Chunder Canto Mukherjee (Fort Williams Privy Council, 1878)