Litigation financing foray_ Indian legal system offers a billion-dollar opportunity


Mumbai: Depositors whose money got stuck after a bank ran into troubled waters or home buyers who had bought a house but are now stuck as the real estate developer went bankrupt or a town facing an environmental hazard after a large company set up an industrial unit in the vicinity.

It’s not that Indian legal system never offered protection to these groups, but more often than not odds are stacked against anyone fighting a big corporate, state or central government. And that’s true across the world, perhaps more so in India.

The developed democracies like the US, UK and Australia have come up with way of fighting the government and corporate might in court: big money backing the small guy during litigation.

Litigation funding, where funds buy out or enter into an agreement to split profits later on, is coming to India. ET was the first to report on December 16 that five of the largest global litigation funds: Australia-based Omni Bridgeway, UK-based Innsworth Capital, Marsh and Profile Investment, and UAE-based Phoenix Advisors are together creating an India focused litigation financing platform. These global players and Singularity Legal, a Mumbai based firm, have created Indian Association of Litigation Funders (IALF).

Globally, among cases these firms have financed are those involving Volkswagen, Mastercard, Oracle, Salesforce, Petrofact.

This would mean that these funds could side with small depositors, home buyers or the town facing the full might of the big corporation with big money.

Many industry experts say that global litigation funds coming to India could be the biggest opportunity in the Indian legal system since the Indian Bankruptcy Code.

How does Litigation funding work? Before one gets into the specificity of litigation financing or litigation funding, one has to step back and observe how the legal system works.

Whenever there is a grievance between two individuals – parties in legal terminology—they can approach a court. Now, this is typically an A v/s B contest we have seen so many times on our TV and movie screens.

Litigation funds however, bring a twist in this tale. They are what the lawyers call a “third party.” The third party in this case looks at the case and if they find the odds in favour of the small guy, they pump in the money. That is, they take care of all the legal costs and rope in the best layers and the best outcome.

The litigation funds want fraction of monetary rewards if the case goes in their favour. The principle on which litigation financing is based is called champerty, which is legally a bargain struck between someone who’s filing a suit and an unrelated individual or firm. The latter bears litigation expenses.

In developed markets such as the UK and the US, some of the litigation funds, similar to venture capital (VC) and private equity (PE) raise capital from investors. In the UK alone, as per the media reports, the litigation funds have raised about $ 2 billion.

Litigation funds would also work exactly the way like any PE or VC fund and hope to increase their returns on capital or return on investment. With one obvious difference: While those with financial acumen are in the driving seat in a PE or VC fund, lawyers or legal experts would drive where the litigation fund should deploy money to maximize their returns.

Legality: If litigation funding is such an attractive proposition, why are these global funds coming to India so late?

This is a pertinent question and the answer is legality and opportunity.

While the British ruled India for a couple of centuries, the common law torts and crimes of maintenance and champerty were never in force as special laws in India. These principles, which had Christian roots, were found to be inconsistent with the Hindu and Mohammedan law prevalent at that time in India. Consequently, a fair agreement to supply funds to carry on a suit in consideration for a share in the litigation proceeds has never been considered void, illegal or against public policy in India.

When compared with other colonies of the erstwhile British Empire, like Australia,

Singapore, Hong Kong, Canada and USA, there is a stark difference. Courts/ legislatures in these jurisdictions have allowed litigation finance by fully or partially repealing the torts of champerty and maintenance, or distinguishing litigation finance contract from a contract for champerty. Unlike that, and much like in jurisdictions such as Germany, Austria, Netherlands or Switzerland, litigation finance has never been prohibited in India, an internal note by IALF reads.

“The quantum of the financier’s share in the litigation proceeds has always been a matter of vital importance in judging the fairness or otherwise of a financing agreement. However, courts have recognized that uncertainties of litigation are proverbial; and if the financier bears the risk of losing his money, he can well be allowed some chance of exceptional advantage. In other words, while judging the fairness or otherwise of a champertous agreement, one has to have regard not merely to the value of the property claimed but to the commercial value of the claim,” said Prateek Bagaria, partner, Singularity Legal, the Mumbai based fund that is part of IALF.

This will also be a test for the IALF platform in a way. It’s less likely that the large corporations or the government that will stand against litigation funds will not challenge or at least not contemplate challenging the legality of this. Mainly because this has never been explored earlier.

Many legal observers ET spoke to avow that this is an interesting idea, but the way Indian system works; litigation funding will have to go through the rigour of litigation itself first.

“Look at bankruptcy code for instance. Did the promoters who were sucking the banks dry for decades just accept that lenders could take away their company and assets if they don’t repay debt?” asked a senior legal expert. “Some of them are even filing cases while they are in jails. If you take on established interests expect some backlash, that’s how India works,” he said

Opportunity: Incidentally the biggest disruption in recent times—Covid pandemic—and one of the biggest changes in Indian legal system—Indian Bankruptcy Code (IBC) — is also the biggest opportunity for litigation funds.

Industry trackers always cribbed about how the Indian legal system was slow and how nothing gets done in the country. Even inserting and enforcing arbitration clauses in contracts was a challenge.

But with new regulations coming in and growing interest of global investors in India, and rising aspirations of Indian companies to go international—things are changing.

Beginning in 2015, India has seen rapid reforms to its commercial litigation, arbitration and insolvency regimes, an IALF official told ET.

This includes introduction of a summary judgment regime in the Indian civil procedure, similar to the ones in Singapore, UK or DIFC, limiting the ability to appeal in commercial disputes, promoting time bound arbitration, requiring tribunal to deliver decisions within 12 months from close of pleadings and removing the regime for automatic stay of award upon challenge for annulment, shifting the burden on the award-debtor to seek a stay of execution.

But most important of them all consolidation of various procedure for insolvency,liquidation and bankruptcy into one consolidated Insolvency and Bankruptcy Code, 2016 (“IBC”).

Legal experts say that the Covid pandemic and the disruption it would cause—triggering arbitration and legal battles—is also an opportunity. And here, the funds may not just back the individual who’s fighting against a corporate but can back one company fighting another.

“The pandemic has brought about methods of easing this backlog with online dispute resolution, and hopefully the implementation of artificial intelligence in smaller claims – such as in China. India is making similar progress. For us, India is in our DNA – literally. We are 3 hours away, involved in cross-border matters between the UAE and India, principals and investors in the firm are of Indian origin, and our mandate is to be a systemic part of the

transformation in the legal systems that surround us,” an official with Phoenix Advisors said. “Arbitration practitioners witness a growing need for solutions allowing their clients to externalize the related risk and these costs. Increasingly, and this is crystallizing with the COVID19 Pandemic, large companies think “risk/reward” allocation of their available financial means , and are seeking intelligent litigation funding solutions.

In the case of a large well-funded company, resorting to TPF (third party funding) amounts to a business decision,” Alain Grec, Director & co-founder, Pro􀂦le Investment said.

Industry trackers say that globally litigation funds typically see a 300% return on their invested capital but most of them tend to deliver around 150% return on capital. And that’s what these funds are hoping to achieve even from India.

Way forward: IALF is already charting out a strategy to make a mark in India. For that the platform has been bringing some of the best brains in the country on board.

Along with Singularity Legal some of the global consultants including FTI Consulting and Grant Thorton too are part of IALF platform. In the coming years, it aspires to have as its members: third- party funders, law firms, practitioners and arbitral institutions, who will abide by IALF’s Rules of Membership, Codes of Conduct and Guidelines.

IALF further aspires to act as a forum for hearing complaints against member funds. In this manner, the members of the IALF will set themselves up as progressive, knowledgeable and ethical service-providers whom clients can readily engage, an internal note circulated by the platform read.

“At present, most investment grade litigation finance opportunities in India arise out of international disputes and enforcement actions, as well as the domestic arbitration and enforcement market. As the use and understanding of litigation finance increases in India, we expect to see much wider adoption by corporates and financial institutions, seeking to leverage the value in their contingent claims to better manage their risk, cash-flow and balance sheets,” said Tom Glasgow, Chief Investment Officer – Asia, Omni Bridgeway.

So, what does the future actually hold for Indian litigation funds?

“Following formation of the IALF and some of its initial work to build the right infrastructure / environment for third party funding to be used, I think we will see a sharp and steep rise in the number of disputes, specifically the number of funded disputes. Litigation funds will create opportunities to Indian businesses to pursue good claims where they may otherwise have not bothered. I think we will also see a quick evolution of the Indian LF market as companies look to take assignment of claims as well as funding them. Also, the secondary market is really starting to develop in the UK. Once LF has become more established in

India, I think we will soon see the development of the secondary market in India,” a global head of litigation funding and ATE for Marsh said.

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