According to the new concept, financiers pay legal fees and other costs of commercial lawsuits, arbitration or shareholder disputes, and in return, get a share of the award from a settlement or a win.
By Abhilash Kumar Singh
Over the last decade, the concept of litigation funding has gained ground as a result of greater globalisation and liberalisation of funding regimes across jurisdictions. In fact, litigation funding is now considered the new normal for capital infusion for furthering resolution of disputes, in both domestic litigation as well as international arbitration. As a consequence of this advancement, it is now more important than ever for lawyers to have the best understanding of the concept of litigation funding.
If one has to describe litigation funding, it refers to third-party financing of some or all of the legal expenses that are associated with one or more legal disputes in exchange for a certain share of the proceeds recovered from their resolution.
The first and foremost attribute of litigation funding is that such transactions are non-recourse. In other words, in the event that there is no recovery made from the dispute, the disputing parties are under absolutely no obligation to repay the funder for his investment.
Nevertheless, litigation funding has gained traction amongst investors in the last couple of years. From their viewpoint, litigation funding is a good investment that stays unaffected by any other business cycle. Hence, in a time of economic downturn when other investments may not yield benefits, litigation funding seems to be unaffected. In fact, as a general consensus, litigation finance is known to provide high returns to investors. This is primarily driven by low investment compared to significantly higher returns for investors, as they often end up with multiples of the initial investment made.
As on date, there is no legislation that regulates third-party funding for litigation and/or arbitration in India. However, the Supreme Court in Bar Council of India vs AK Balaji clarified: “There appears to be no restriction on third-parties (non-lawyers) funding the litigation and getting repaid after the outcome of the litigation….Third-Party Litigation Funding/Legal Financing agreements are not prohibited.”
In a country like India where there is liberalisation of economic policies and doors are thrown open to foreign investments, disputes and differences are bound to arise between parties. In fact, it is this upward trend in economic activities that has led to India becoming one of the most upcoming hubs for commercial arbitration. As a result, it cannot be denied that India eventually would need a comprehensive and progressive legal framework that would support convenient dispute resolution, providing for maximum judicial support for arbitration and minimal intervention.
However, it is well-established law in India that advocates are expressly barred from funding any sort of litigation and/or arbitration when representing a party in a dispute. This, in turn, could raise eyebrows for funders who seek contingency fees of legal counsel as a critical factor to determine an investment decision.
Some of the world’s top litigation financiers like Australia’s Omni Bridgeway and a unit of US insurance broker Marsh Insurance Company plan to tap the Indian market by funding the legal costs of disputes that embroil companies. The concept of litigation finance is widely prevalent in Australia, the UK and the US where such financiers pay legal fees and other costs of commercial lawsuits, arbitration or shareholder disputes and in return, get a share of the award from a settlement or a win.
In India, however, this is a little known concept, with cases few and far between. While companies stand to gain by safeguarding themselves against costs of fighting big ticket claims, financiers and their investors stand a chance to get higher returns on their investment when a decision favours those they are backing.
Omni Bridgeway, the world’s second largest litigation financier with more than $1.5 billion in funds under management, and Abu Dhabi based Phoenix Advisors said they plan to set up India operations soon. Omni is already in talks with prospective clients. “We are talking to various Indian corporates about their case load and how we can help derisk that or monetise that,” Tom Glasgow, Omni’s chief investment officer for Asia, reportedly said.
To ensure growth in the Indian market and increase confidence among Indian consumers, funders have come to form the Indian Association for Litigation Finance (IALF), a body that will self-regulate and promote knowledge about litigation finance in India. Funders such as Omni Bridgeway, Phoenix Advisors, Profile Investment and other service providers like Singularity Legal, Marsh, PSL Advocates and Solicitors, FTI Consulting and Grant Thornton are also involved.
Prateek Bagaria, Founder, Singularity Legal LLP, has stated: “Indian law has been a frontrunner in accepting litigation finance since 1876. To add to this, international disputes have seen a huge growth in India today. Massive scams such as those in PMC and Laxmi Vilas Bank reflect the kind of large disputes that have brewed up in India. Therefore, the Indian market couldn’t be more ready for the funders to tap into this lucrative jurisdiction and to fund Indian disputes and parties. Through IALF, the funders, service providers, practitioners and arbitral institutions will set themselves up as progressive, knowledgeable and ethical service providers whom clients can readily engage.”
On the other hand, Tom Glasgow, CIO, Omni Bridgeway, stated: “Indian parties are frequent users of offshore arbitration and litigation and there are many opportunities to help them derisk, improve their prospects of success and generally leverage the value in their claims.” He said his company is a founding member of the International Legal Finance Association, a global, independent, non-profit trade association promoting service for the international legal finance industry. As a member of the Working Group charged with building the framework for the Indian Association of Litigation Funders, they are hoping to bring the same international best practices and education to the Indian market.
While litigation funding is not prohibited in India, there may be rules arising under contract law regulating this to prevent unequal bargains. As this is a matter of contractual arrangement and one party, typically the claimant, would always have greater need, the investor may exploit them.
In the decision in Ram Coomar Coondoo and Anr vs Chunder Canto Mookerjee (Privy Council), it was observed by the court that while litigation funding may promote access to justice, such agreements need to be “carefully watched”. When found to be extortionate, unconscionable and inequitable or made not with the bona fide object of assisting a claim believed to be just, effect ought not to be given. Hence, some regulations governing litigation funding may be framed. Another issue which should be kept in mind is confidentiality. Confidentiality of the information pertaining to litigation should be ensured.
—The author is Advocate, Supreme Court of India