This article discusses the scope and growth of litigation finance in India
Concept of Litigation Finance
Third-Party Litigation Funding (TPLF) is a mechanism wherein a third person or entity provides financial assistance to a litigant during the pendency of the process of litigation for a predetermined return, contingent on the outcome of the litigation. In other words, the third party has a vested interest in the outcome of judicial or arbitral adjudication but is a stranger to the litigant’s claim itself. The litigant remains unfettered with the litigation risks of losing a claim or damages imposed as TPLF operates on a non-recourse basis wherein the third party bears a considerable chunk of that burden. However, the litigant has to undergo a stringent process of due diligence to avail funding.
TPLF Heyday
It has gained immense traction as a funding regime not only to abate liquidity concerns of small enterprises which are up against resource-abundant corporate giants; but also as a cost-effective means of a risk markdown for stable enterprises. It also seems to be an effective alternative for investments in economic slumps as it remains ingenuous of market turbulence. TPLF is mainly of two types namely ‘pure funding’ and ‘commercial funding’. Where pure funding is purely motivated by financial encouragement to support the claims of a party, commercial funding takes on a more brutal connotation wherein substantial control is exercised on the litigation process by the funder to derive maximum profit. Regardless of the type, the yield is high for a relatively low investment although the cost and time frame of such return on investment may be uncertain.
Legal Evolution of Third Party Litigation Funding in India
The international scenario for Litigation Funding can be sourced to common law jurisdictions of the United States, United Kingdom, and Australia. Countries like Germany, Hong Kong, and Singapore have also removed hurdles vis-à-vis TPLF for easier access to natural justice.
The concept of TPLF is not novel but is gaining momentum in India triggered by the COVID-19 pandemic due to considerable obliteration of business and resources alike. TPLF does not have an explicit legislative regulatory backing in India though the legal pronouncements seem to unanimously uphold the validity of such bargains as long as they are not unconscionable, extortionate, or against public policy.
The recent case of Bar Council of India v. AK Balaji clarifies that there is no bar on non-lawyers to engage in legal financing agreements. However, advocates are expressly barred from participating in similar agreements inferred by a conjoint reading of Rule 18, 20, 21, & 22 of the Bar Council of India Rules.
States like Madhya Pradesh, Maharashtra, Gujarat, and Uttar Pradesh have amended the provisions[1] of the Civil procedure Code 1908 to expressly account for cases financed by third parties. Inversely, however, in Maniankutty v. Venkiteswaran[2], the Court ruled out the contention that the court has no power to award costs against persons who are third-party to a suit.
Third Party Litigation Funding: The Recent Trend in India
The recent legislative incumbent of Insolvency and Bankruptcy Code (IBC) has shoved TPLF into the mainstream particularly considering the arbitration award monetization in Hindustan Construction Company and Patel Engineering. In March 2019, a third-party finance deal was sealed between a group of investors and Hindustan Construction Co.
Moreover, the Delhi-based startup LegalPay set on a course to democratize such third-party financing as an alternative asset class that has a short investment cycle. This week itself, LegalPay launched its off-the-beaten-track interim finance healthcare-focused fund for retail investors wishing to invest in legal and debt financing asset classes. Interim Finance under the IBC is short-term finance (for 6-12 months) granted to companies that are undergoing the Corporate Insolvency Resolution Process (CIRP) under the IBC. The startup targets MSMEs undergoing CIRP. The introduction of the fund could hail a trend where small retail investors could participate and invest in alternative asset classes which were traditionally monopolized by ultra-high net worth individuals.
The Way Forward
The Engineering, Procurement, and Construction (EPC) sector seems to be in the spotlight of TPLF. It is not erroneous to say that TPLF seems to dwindle the scales towards the weighty claims and resourceful litigants. A third-party funder does not invest its time and resources unless a feasible and viable opportunity presents itself.
However, with the compounding effect of COVID-19 on economic activity, TPLF presents investors with novel avenues for retail investors to consider TPLF as an investment option that is not tethered to market fluctuations. As per the Report of ILC[3], the legal framework in India does not prohibit TPLF, and such funding may be left for the market forces to be determined.
Self-regulation and legislation are prerequisites for TPLF to find legitimacy and traction in India. The Indian Association for Litigation Financing (a consortium of law firms, individual practitioners, and third-party financers) is one such step towards the self-regulation of TPLF in India. Recently incorporated on February 11, 2021, it aims to expand on the premise of TPLF and to disseminate information thereof. This may be considered as the pioneering regulatory framework for litigation finance, particularly for MSMEs.
As for legislation, TPLF demands a robust legislative backbone that considers disclosures, compliances, and judicial scrutiny over code of ethics and public policy. TPLF is still stumbling in finding a jurisprudential foundation in India.
Conclusion
Extensive and proper dissemination of information will become a crucial factor to invoke a sense of trust owing to the high-risk profile of litigation claims. The litigation process is characterized by delays in judicial process and uncertainty. The high rate of turndowns of prospective litigants post due diligence due to lack of credibility or feasibility of return on investment also remains one of the many factors that MSMEs have to consider and counter.
There remains no inkling of a doubt that TPLF has cemented its existence in Indian jurisprudence. TPLF opens a consortium of opportunities to make justice increasingly accessible without the imposition of a financial burden on the litigant. By extension, it could well be considered as an incubator for investment opportunities to channel retail investors in the game of trading much on the lines of Real Estate Investment Trust Funds in India. India has only recently embarked on the long journey of litigation funding where regulatory and legislative enactments are indispensable to realize its full potential in India. TPLF finds relevance in the current COVID-19 era which has witnessed unprecedented economic disruptions leading to a dearth of funds to contest murky litigation. The Government should proactively mold and regulate the TPLF ecosystem and take advantage of the opportunity that TPLF provides.
[1] Order XXV Rule 1 & Rule 3
[2] Para 7
[3] Insolvency Law Committee, February 2020, p-20.
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