India: Litigation Financing

 

Litigation financing is the new emerging stream of legal practice in India, which provides considerable relief to financially challenged litigants. Read this article to get an overview of the origin, legal framework, types, and challenges of litigation financing in India.

Litigation Financing in India: Origin, Legal Framework, Types and Challenges

Litigation financing, also known as third party funding, is a practice by which a third party who is not a party to a dispute, advances funds to one of the litigants, typically to the plaintiff, for the purpose of litigating by paying his legal costs. For this purpose, the financier will share proceeds following a successful case, either through a settlement or judgment.

This is a practice prevailing in jurisdictions like the US, UK, and Australia. This is relatively new in India but gaining traction. Third-party funding serves as a route to access justice where costs of litigation are increasing and businesses are vulnerable to cash flow difficulties.

Origins of Litigation Financing

The principle of third-party funding in litigation had early roots in medieval England, where doctrines of maintenance and champerty were developed with the aim of having an outsider to lawsuits. "Maintenance" refers to the act of assisting another person to prosecute or defend a lawsuit without any legitimate interest therein, while "Champerty" is a form of maintenance wherein the helper also agrees to share in the proceeds of the suit.

These doctrines were introduced during the British colonial period in India. Indian courts have, however largely evolved to permit third-party funding, especially in civil matters, as such funding is viewed as a means of access to justice. The prohibition principle of champerty still subsists, but it only applies when the agreement entered is extortionate or unconscionable.

Legal Framework for Litigation Financing in India

Indian law does not define a specific statutory framework regulating the practice of litigation finance. However, there are various judgments and regulations that indirectly afford legal recourse to the practice:

1. CPC, 1908:

Section 16 of the CPC permits third party financing if the financier has no control over the proceedings or does not unduly influence the outcome of the case. Indian courts have held consistently that the litigation financing agreements are not per se illegal except in cases wherein an agreement proves extortionate or oppressive.

2. Bar Council of India Rules:

Third-party litigation financing is permitted to the parties of a case, but the professionals are barred from funding the litigation for their clients under professional conduct rules by the Bar Council of India. Thus, while the advocates are not entitled to be funders, third parties can lawfully fund the litigation.

3. Court Precedents:

In Bar Council of India v A.K. Balaji the Supreme Court allowed the concept of litigation funding and went on to opine that there is no restriction on third parties which includes non-lawyers funding the litigation and getting repaid after the outcome of the litigation.

4. State Laws:

The litigation financing agreements are recognized in some states, such as Maharashtra and Gujarat. A few states have made requisite amendments to Order XXV Rules 1 and 3 of the Civil Procedure Code subject to restrictions in order for third party funders to participate in litigation.

Types of Litigation Financing

1. Commercial Litigation Financing:

This essentially pertains to disputes between businesses where a third-party financier will finance cases involving breach of contract, intellectual property claims, shareholders' disputes, etc.

2. Class Action Financing:

In class action lawsuits especially in consumer disputes or mass torts, very often a case is funded by a third-party financier due to its potential to give one voice to several litigants who would otherwise not be able to advance their case.

3. Insolvency-Related Litigation:

Third-party funding is ever on the rise in insolvency proceedings, especially when creditors have valid claims but lack the financial muscle to take people to court.

4. Arbitration Financing:

As arbitration becomes popular in India for all kinds of commercial disputes, many financiers emerged from the woodwork to finance arbitrations. Since arbitral awards are normally at handsome heights, financing litigation appears very alluring in this field for the funders.

Steps to Secure Litigation Financing in India

Litigation finance is a funding approach for paying legal costs from third-party funders, who expect a stake in the financial recovery in the event the case succeeds. Below is a guide on how to secure litigation finance through third party funders:

• Consult a Lawyer: A litigant who believes that he/she was unfairly treated on a contract and would like to take the dispute to court would often meet his lawyer to advise on whether the case is strong enough to qualify for outside funding. The attorney assesses the likely prospect of winning and advises whether funding for litigation might be advisable.
• Identify Potential Funders: The attorney then helps the litigant find funders who have experience and specialty in the case at hand with of course good prospects of winning.
• Submit a Funding Proposal: The litigant and his attorney create a summary of the case which describes the facts, issues of law involved and the amount of money the litigant hopes to recover due to the lawsuit. They present this plan with such key documents such as contracts or financial statements, to the prospective funders for review.
• Funder’s Review and Risk Assessment: The funder examines the case details whether the opponent of the litigant has enough funds to pay in case they win and how long the case would take in court. The funder determines if the case has value for the risk and reviews any problems that could impact their investment or collection on a judgment.
• Negotiate the Funding Agreement: The funder agrees to fund the litigant's case, but wants, say, 30% of any money the litigant wins. Lawyers typically negotiate so that the terms are equitable. They also agree upon how much control the funder will have (usually none) and other key terms, such as the percentage of the proceeds the funder will get and when either party can exit the deal.
• Sign the Funding Agreement: Both parties sign the contract that details the financial terms, obligations, and confidentiality terms to protect litigant’s legal strategy. The signed contract becomes the official document that governs the relationship between the litigant and the funder throughout the lawsuit.
• Litigation Management: As and when the litigant's case progresses, he and his lawyer remain in charge of how the case is conducted. The funder is kept apprised but is not involved in decisions about the legal strategy. The funder communicates with the legal team of the litigant and does not interfere with the movement of the case.
• Case Conclusion: In the event that the litigant succeeds, they give to the funder the pre-agreed percentage, for example, 30% of the awarded amount, and take home the rest. In the event the litigant loses, there’s no money to be recovered. According to the contract, litigant doesn’t owe anything to the funder unless the funder had secured a partial recovery based on milestones.

 

Challenges and Risks in Litigation Financing

• Bar on contingency fee for Lawyers: Under the Indian Bar Council rules, lawyers cannot enter into contingency or conditional fee arrangements. This means that funders cannot enter into an agreement with legal professionals.
• Backlog of cases: India's judicial system has huge backlogs of more than 51 million cases. The delay in courts enhances the financial risks on the funders due to the lengthening period for years, though recent reforms of the commercial courts do exist.
• Regulatory Uncertainty: Because there is little well-defined legislation that governs third-party litigation financing, it is also unclear how courts may view this kind of arrangement in the future. Uncertainty might also discourage future investors and litigants from entering into funding arrangements.
• Control and Influence: A critical issue here is the control of funders may overrule the litigation and undermine the independence of the legal process. Indian courts have always maintained that the litigant must retain control over decision making.
• Ethical Concerns: Another issue is the introduction of financial motivations in litigation financing, which raises issues regarding potential subordination of fairness and justice concerns to pecuniary interests. This field also comes vulnerable to a variety of abuses on the edge of thin lines between facilitating access to justice and potential commercial exploitation.
• Enforceability of Funding Agreements: Enforcement of litigation financing arrangements may, therefore, be difficult in cases where they are determined to be unconscionable or extortionate. The Indian courts may refuse to enforce terms that are considered unfair or exploitative.
• Awareness: Awareness is also less, as most awareness of litigation financing remains relatively untold outside of metropolitan areas. It is something which less litigating parties either do not know about or are unwilling to use.

 

Recent Developments and Future Outlook

The future of litigation finance in India appears to be bright, given the forays of international players who are setting shop in the country and domestic law firms considering third-party funding. Some interesting trends that seem visible include:

1. Growth in Arbitration Funding:

Given the eventual positioning of India at the New Delhi International Arbitration Centre, the third-party funders are actually displaying interest in funding arbitration proceedings.

2. Emerging Domestic Funders:

Indian legal and financial firms are slowly entering the litigation finance market. Even though international organizations lead the pack over time, there seems to be homegrown operators gaining momentum particularly in commercial and insolvency proceedings.

3. Role of Institutional Support

Indian legal structures are in the evolution process, and institutional arbitration bodies and courts are gradually embracing practices that allow third-party funding agreements. So, increased institutional support will create further growth.

Conclusion

Litigation financing is the new emerging stream of legal practice in India, which provides considerable relief to financially challenged litigants. Though challenging, particularly with its regulatory and ethical issues, this practice is slowly gaining its acceptability. Judicial endorsement and increased commercial disputes promise a great future for litigation financing in India. With the amendments that change the legal landscape, policymakers would need to lay a solid foundation that scales the interests of the parties in the funding table, the litigants themselves, and, last but not least, the justice system.

 

For further information, please contact:

Gautam Khurana, Managing Partner

India Law Offices, New Delhi

e: g.khurana@indialawoffices.com

t: +91 11 24622216

 

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