Why the Indian Legal System needs Litigation Funding

Introduction

The emergence of Third-Party Litigation funding in India could turn out to be the cardinal tool for shepherding justice that has yet to have taken hold in the sub-continent. Third-Party Litigation Funding (TPLF) is a form of non-recourse financial support for funding the litigation, mediation, or arbitration costs of a litigating party, in exchange for a part of the damages awarded from the completion of the litigation if the case is won. TPLF has undergone constant change over the years of its practise and has seen gradual acceptance world-wide even though it was met with disdain and restrictions initially.

TPLF has been sought after by cash-strapped companies who were struggling to continue operations as well as fighting multiple legal battles. TPLF allows companies to essentially create a win-win situation for themselves. If the funded litigation is successful, the company receives a sizeable percentage of the awards and if the litigation is unsuccessful, the company will have not incurred any expenses either way, as the duty to pay for legal representation and other costs was on the funder and not the litigant. The Opponents for TPLF have called out for the banning of this practise as it can give rise to the abuse of the legal process and a possible increase in frivolous lawsuits. Although there has been negligible growth in India in regards to the TPLF market, it is well-established in other common-law countries across the world such as the U.K., Australia, U.S., Canada, etc.. The industry has seen year-on-year growth from its genesis during the 1990’s to be currently evaluated at over USD 50 billion- USD 100 billion worldwide. With a plethora of hedge funds and private equity firms exploring new investment classes that does not revolve around the global equity markets, it seems India is poised for an explosion of TPLF in the ensuhing decade.

What’s so special about TPLF?

TPLF as a practise helps alleviate the risk associated with the unpredictable nature of litigation. In the commercial realm, a legal battle against a MNC (Multi-National Corporation), who will have surplus cash reserves and a team of dedicated legal counsels, has to be deliberated thoroughly as the litigation would be long and arduous which would be much more burdensome on a smaller entity if it chooses to pursue justice. In essence, the costs connected to litigation is no different than the costs needed for any other business activity and while there are entities that invest or provide loans for any other activity, there has been a lack of funding available for the costs and risks of litigation.

TPLF in other countries

United States

The present scenario of TPLF in the U.S. is that a small number of companies provide funding to large corporates who prefer not risk their own assets and rather use their capital in the day to day running of their business. Juridica Capital management Ltd., is the largest firm operating in the U.S. and primarily invests in large commercial claims (Antitrust, Intellectual Property, commercial contract breach, etc.). It usually invests around $3 - $10 Million into claims of value of at least $25-100 Million. Another behemoth in the TPLF industry is Burford Capital Limited, who provides support for significant corporate litigation, arbitration and other disputes.

United Kingdom

In addition to the funding of large commercial litigation, the U.K. demonstrates that TPLF can cover such areas such as personal injury and family matters. Companies operating in the UK litigation funding market include IM Litigation Funding, Harbour Litigation Funding Ltd., and Juridica Investment Limited. While these companies could, until recently, be characterized as "alternative investment firms". Arkin v. Borchard Lines was the landmark judgement that intimated that third-party funding should not only be tolerated but also encouraged as a useful tool for facilitating access to justice.

Canada

The Canadian Legal system can be seen to have incorporated legal ideas from both their Australian and U.S. counterparts, wherein the costs of litigation is redistributed by the court at the end of the litigation by means of cost-shifting. It also borrows the principle of contingency fees from the US which permits lawyers’ fees to be tied to the success of the particular client’s case.The TPLF market in Canada, similar to the U.S., is only a few decades old and has largely only been seen in the context of class-action suits.

Legal Barriers for TPLF in India

So far, the development of TPLF in India has largely been negligible and only recently with the launch of LegalPay in January of 2020, the first Third-party litigation funding firm in India, has there been any growth in this field in the Indian sub-continent. Though not prohibited by any Indian laws, the development of the TPLF market has been hindered by the public policy principles of maintenance and champerty, vestigial doctrines that remain from the British era. However, the Supreme court has held that the strict interpretation of maintenance and champerty are not applicable in India and are not violate of public policy per se. It ought to be taken into consideration that the country that created these public policy doctrines have since abolished their use in a strict application.

In India, champertous agreements are only considered illegal if advocates are involved as decided in Dr. V.A Babu Legal v. State of Kerala. Agreements that are unreasonable or unjust to the other party or that have an insidious motive behind it like that of gambling in litigation or in order to oppress another party are considered to be champertous.

Another impediment to TPLF could be the time it takes for a case to be disposed of and an award to be granted to a party. Indian courts are infamous for having cases that drag on for generations. In a study conducted on 2 million cases that were filed between 2010 and 2016, it was found that it took an average of 15 months for a case to be disposed. This seems to be encouraging for TPLF firms, however, it must be noted that these cases included cases of all types and not the particular type of cases that TPLF firms would usually invest in, so a slim inference can only be drawn from the data.

In the case of Bar Council of India v. A.K Balaji, the Supreme Court observed that “there appears to be no restriction on third-parties (non-lawyers) funding the litigation and getting repaid after the outcome of the litigation.” This seems to clarify the Apex courts’ position on the legality and permissibility of TPLF in India.

Conclusion

The global pandemic in 2020 undoubtedly would have increased the demand for third-party litigation funding. Facing extreme financial constraints, companies are more cautious about spending on litigation. The pandemic has also increased the volume of legal disputes and has resulted in a large number of companies shutting down operations in lieu of increasing financial burdens. Investors, with the volatility of the markets fresh in their memories, will be looking for a new alternative asset class, one that would be unaffected by trends in the global markets. Third-party litigation funding could prove to be just that. Fundamentally, TPLF seeks to address the problem of how can companies manage and even turn the costs and risks of litigation to a source of income. The institution of a legal framework, concerning the regulation and rules a TPLF firm must abide by would go a long way in legitimizing the business in the eyes of the general public.

NOTE: For lawyers and law firms.

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~Authored by Noel.