The requirement and demand for litigation funding have exponentially risen in India during the pandemic with struggling economic and legal structures deterring individuals and companies from resorting to legal means to settle disputes, writes KUNDAN SHAHI.

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SEVERAL companies are insolvent or either staring at bankruptcy amid the economic downturn, caused by Covid-19. Even law firms with ample cash reserves have a bleak outlook and could face a financial crunch. 

In this dire situation, legal financing (also known as ‘lawsuit funding’) has become all the more relevant since it offloads the risks associated with dispute resolution for various stakeholders. 

Third-party litigation funding plays a significant role in alleviating the difficulties of a financially weak party as legal proceedings are often long-drawn and costly affairs, thereby providing a level playing field.

How litigation funding works

Litigation funding makes access to justice easy for those unable to cover legal costs and improves corporate accountability. For example, a big industrial house refuses to pay or pays significantly less for services provided by an MSME. If the MSME drags the company to the court, a third party can step in and bear the risks and cost of litigation.

The knowledge that the plaintiff (the MSME) cannot be forced into accepting a lowball offer because it possesses the necessary financial resources to effectively contest the dispute in court will compel the defendant (the big corporation) to offer the agreed-upon fees for the services availed.

Prior to legal financing, the funder carries out an extensive legal, financial and operational diligence of the dispute in question and the parties involved. The funder, generally, also assess the merits, complications, risks, defendant’s financial capabilities and the litigation counsel’s experience in handling the particular kind of disputes. 

This entire process is carried strictly in compliance with the non-disclosure agreement the funder will sign with the concerned party. The funder is a passive investor who does not influence or control the choice of counsel, legal teams, or their legal strategies.

The scope of legal costs covered by litigation funders varies. While some funders may choose to pay the costs involved in instituting the suits itself (court fees) and see the entire legal proceeding to its very end, others may choose to invest only in late-stage cases in which the finality and timeline of the dispute is relatively more certain.

Litigation funding is carried out on a non-recourse basis, implying the plaintiff is only obligated to pay the funder a certain pre-agreed fixed sum out of the legal compensation received following a favourable verdict. The plaintiff does not owe any amount to the funder if the case is lost or no compensation is received.

Relevance of litigation funding in environment, social and governance issues

Legal financing can pressure large corporations to bear costs of negative externalities caused by their business-related actions. Large industrial houses are notorious for flouting environmental, social and governance (ESG) norms. Litigation funding can help in the efficient reallocation of such costs to parties that have failed to adhere to ESG guidelines. 

Legal financing plays a critical role in helping the vulnerable and the minorities, who lack financial means to claim their legal and constitutional rights. Third-party funding can assist in upholding the rights of such ‘Davids’ by providing them with the financial resources to stand up against the ‘Goliaths’, or large corporations, which blatantly ignore the rights of marginalised people.

The scope of litigation funding is vast enough to create a mass impact on society as a whole. Therefore, litigation funders are also actively exploring funding opportunities in cases involving whistleblowers, sexual harassment, class action lawsuits and data privacy breaches. 

Funding of such non-commercial cases directly helps human rights activists and lawyers fighting for the weak and the poor. Apart from improving access to justice and establishing the rule of law, legal financing also facilitates class-action lawsuits in ESG violations.

Relevance of legal financing for lawyers and law firms

Litigation funding ensures timely payment of fees of lawyers and law firms as the funder, not the plaintiff, is obligation to pay it. Therefore, lawyers and law firms do not have to follow up or worry about their clients becoming insolvent during the course of the proceedings and can rather concentrate on contesting the claims to the best of their abilities and ensuring justice for their clients.

Litigation funding in India

Most countries, including India, lack a regulatory regime for third-party funding. However, the Supreme Court gave in-principle approval to legal financing in the case of Bar Council of India vs A.K. Balaji (13 March, 2018) while reiterating the prohibition on contingency fees arrangements for lawyers. 

Additionally, certain states, including Maharashtra, Karnataka, Gujarat and Madhya Pradesh, have amended Order XXV, Rules 1 and 2 of the Civil Procedure Code, 1908, to give recognition to the role of litigation financers and the circumstances under which funders can be made a party to a suit. 

The report of the High-Level Committee to Reviw the Institutionalisation of Arbitration Mechanism in India Report, 2017 has also looked favourably upon litigation funding. The Committee, headed by retired Justice BN Srikrishna, had touched upon the importance of third-party funding in making India a preferred destination for arbitration. 

While analysing the relevant factors for making a jurisdiction arbitration-friendly, the Committee discussed the existence of robust third-party funding structures in jurisdictions such as Singapore, Hong Kong, and France.

There are a very few international funders active in India and their ticket size is more than $1million. Such international funders, generally, prefer cases outside Indian jurisdictions and have focussed their attention and resources mainly on claim buyout opportunities. This has resulted in their preconceived bias against the efficiency and competitiveness of the Indian judicial system.

Consequently, the litigation financing needs of the domestic mid-market segment in India have been largely ignored. While informal lenders who provide financial resources to contest disputes have always been there, a formal market structure for legal finance is largely missing in India except for a single funding company that has recently become actively operational in the market. 

Internationally, litigation funding is a widely accepted practice that is encouraged. Former New York Supreme Court Justice Eileen Bransten had ruled that “litigation funding allows lawsuits to be decided on their merits and not based on which party has deeper pockets”. 

In the UK, former Supreme Court President Lord Neuberger stated that “litigation funding is the lifeblood of the justice system” while emphasising that advice and representation of competent lawyers must be sensibly affordable to ordinary people and businesses. He opined that access to justice is a practical requirement without which the society is at the risk of fragmentation.

Along with core litigation funding, other financing opportunities available for funders to actively explore include ‘interim financing’ opportunities under the Insolvency and Bankruptcy Code, 2016, which can be a game-changer to ensure distressed companies continue to operate till the approval of a resolution plan. These financing opportunities, in the long run, shall prove to be an extremely beneficial symbiotic relationship between society and businesses as a whole.

(Kundan Shahi is the Founder and CEO of LegalPay. The views expressed are personal.)